nytimes.com
A Son of the Ultrawealthy, Caught Up in the Pursuit of Profit
By LESLIE EATON
his article was reported by Landon Thomas Jr., Charles V. Bagli and Leslie Eaton and was written by Ms. Eaton.
Just about a decade ago, Spy magazine ran an article poking fun at billionaires so cheap that they would cash a check for 13 cents. (Yes, Donald Trump was one.) But most readers did not know the piece's real punch line: the pseudonymous author was himself a scion of one of New York City's very richest families.
In real life, he was Edward Julius Stern — Eddie to nearly everyone. He is a son of Leonard N. Stern, who almost cornered the market in pet supplies before becoming warehouse king of New Jersey and then, as moguls will, devoting himself to philanthropy.
The younger Mr. Stern, 38, made headlines last week when he settled a complaint brought by another real estate developer's son: Eliot Spitzer, attorney general of New York.
Mr. Spitzer contends that Mr. Stern used illegal trading tactics to take in profits at the expense of mutual-fund investors. Mr. Stern neither admitted nor denied the charges, but agreed to pay $10 million in fines and provide $30 million in restitution to investors, a sum that equals all the money he is supposed to have made through the scheme.
The case opens an odd window onto the lives of New York's ultrarich, and hints at the pros and cons of having a last name that might just as well be spelled $tern.
Through a spokesman, Ron Simoncini, the Stern family declined to be interviewed for this article. But friends expressed surprise that Mr. Stern would have gotten himself into this kind of hot water. "I thought he was the ultimate mensch," said Eddie Borges, a Los Angeles talent agent who worked with Mr. Stern back in his days at Spy.
It is also clear from documents filed in court by Mr. Spitzer that Mr. Stern would almost certainly not have been able to do the kind of trading through Bank of America that led to his problems if an eager broker from the bank had not been attracted by the family's billions.
Those billions originally came from Hartz Mountain, a company famously founded by Max Stern, who arrived in New York from Germany in 1926, accompanied by a boatload of singing canaries. The birds were a hit with customers at Wanamaker's, and eventually Hartz Mountain became the country's biggest purveyor of pet supplies, including bird seed, goldfish flakes, dog chews and, of course, flea collars.
Along the way, Leonard Stern, who joined the family business at age 21 in 1959, developed a reputation as an aggressive, tough-talking, risk-taking titan, who battled competitors with tactics that did not always meet with the approval of federal regulators. He spent more than $50 million to settle various antitrust lawsuits and government investigations; several former Hartz Mountain executives went to prison for perjury and obstruction of justice.
Tough, tenacious tactics also characterize Hartz Mountain's real estate business, whose reach extends from from gritty industrial properties to the glamorous SoHo Grand Hotel. The business is now run by Edward Stern's brother, Emanuel.
In New York, Leonard Stern has kept a lower profile than many other gazillionaires, though he does live in a six-story mansion on Fifth Avenue and has the mandatory (for a mogul) blond second wife, Allison. She is a trustee of the Wildlife Conservation Society, the parent organization of the Bronx Zoo, and is credited with organizing this year's black-tie fund-raiser. But, friends and acquaintances say, the Sterns are usually quiet about their philanthropy, though Mr. Stern's name is on at least one building, the Stern School of Business at New York University.
Young Eddie Stern, though he now looks like a typically aggressive member of a famously aggressive clan, always seemed unpretentious and pleasant, those who knew him said. He graduated from Haverford College in 1987 with a degree in art history, then spent a year traveling on a fellowship. At Spy, Kurt Anderson, one of the magazine's founding editors, described him as "sweet and unassuming," and "not at all like a billionaire's son."
He became a well-regarded member of Community Board 7 on the Upper West Side. Ronnie Eldridge, a former City Council member, said that when she met him, she did not realize that he was a member of the wealthy clan. "He was a very unpretentious, earnest young man," she said.
After Spy, Mr. Stern went on to become a business manager at The Village Voice, which his father bought in 1985. Leonard Stern's regime proved unexpectedly popular with the cantankerous Voice staff, including the investigative reporter Wayne Barrett.
"He was totally supportive," Mr. Barrett said. "There were times I was taking shots at people very close to him and he'd give me the old wink."
But after Edward Stern married Dr. Stephanie Beth Rein, a physician, in 1991, he decided to join the main family business, Hartz Mountain, and eventually became president of its pet business. The Sterns live with their children in a penthouse on Central Park West, but until now have kept a lower profile even than Mr. Stern's brother or his sister, Andrea C. Stern, a photographer.
In 2000, the family decided to sell the pet business, and the deal closed in 2001, leaving the Stern family with about $100 million in cash.
That, at least, is what Bank of America estimated, according to an internal memo contained in Mr. Spitzer's court filings. Written by a broker who had been cold-calling Eddie Stern in early 2001, the memo describes the Stern clan as "the 11th richest family in NYC," worth about $3 billion. And other internal bank documents made it clear that the bank coveted that rich client for itself.
To achieve that goal, the bank was willing to accede to requests that the memo concedes were "a bit unorthodox." One of Mr. Stern's requests was that he be allowed to move money rapidly into and out of various mutual funds, a practice called market timing.
Market timing is not illegal, but it is usually strongly and strictly discouraged by mutual funds because it drives up the funds' costs and lowers their long-term returns. For Mr. Stern, however, they made an exception — without disclosing it to regular mom-and-pop customers, which is why the executives who agreed to this may be in trouble with regulators.
The bank went a step further — it gave Mr. Stern and his traders access to a computer system that allowed them to keep trading mutual fund shares after the 4 p.m. cutoff time at that day's price, which is illegal according to state and federal securities laws. He later struck an even more generous deal with a Phoenix firm, Security Trust Company, allowing him to trade until 9 p.m.
According to Mr. Spitzer's complaint, these deals allowed Mr. Stern to act on information released after the market's closing bell, while other investors had to wait until the next day to make their trades.
That strategy may not have been legal, but it was successful — for a while. Canary Capital Partners, the trading outfit that Mr. Stern named after grandpa's first product, racked up double-digit gains, even as the overall stock market dropped in 2000, 2001 and 2002.
Attracted by the returns, rich investors from outside the family had begun putting money into Canary — the investment pool grew to $730 million — and Mr. Stern sent them cheery annual letters. Bank of America did well, too; in 2001 alone it received more than $655,000 by handling the Stern account.
But by last spring, things had changed. "Strategies that had worked well for a number of years have not worked recently," Mr. Stern wrote in May. So he had decided to give the outside investors their share of the fund. He ended his letter, "We hope you considered the ride to be a good one, and thank you again for your support."
Two months later, Mr. Stern received a subpoena — someone had tipped the attorney general to his activities. Mr. Stern cooperated with the investigation, which continues.
Odd as it may sound, some of those who know him suggest that he may not have realized that his trading may have veered beyond aggressive and into improper. "I know him well and my strong feeling is he was an outstanding person who did not think he was breaking any laws," said Michael H. Steinhardt, the retired money manager. "He didn't keep it hidden; people knew what he did. Like all of us who try to achieve superior returns, he was trying to find some niche." |
