Real Lace

by Birmingham, Stephen;

  Sean McDonnell had been responsible for the firm’s acquisition of F. P. Ristine & Company, a distinguished Philadelphia house. He also had undertaken to unscramble the company’s accounting department, and to revamp the entire back-office procedure. To do this, a firm had two choices. One could either install one’s own computers and programmers to develop an entire “in-house” computer system. Or one could simply mark the trades initially, and send everything over at the end of a business day to an outside computer house. McDonnell & Company decided on this latter course. At the time, in 1968, there were many firms that were specializing in doing accounting for brokerage firms. Sean McDonnell chose one called Data Architects, Inc., of Waltham, Massachusetts. At the time, his choice was hailed by the Wall Street Journal as a “sophisticated” one. Then, on June 4, 1968, the McDonnell family received terrible news. Sean McDonnell had had a heart attack while jogging in Greenwich, and was dead at the age of thirty-three. The golden promise was gone. On top of bad management, the firm had encountered terrible bad luck.

  For a time, the firm became, and behaved like, a riderless horse. No one seemed to be in control. The Data Architects computer system to handle the McDonnell accounts was still unfinished, and it suddenly seemed to be unfinishable. McDonnell & Company bitterly blamed Data Architects, saying that the computer firm “just didn’t understand the brokerage business.” Data Architects blamed McDonnell, saying that it had become impossible to get anyone at McDonnell to make a decision, as proposals were shunted from one desk to another with no one doing anything. Sean’s death was blamed for the entire situation. In retrospect, however, the choice of Data Architects may not have been as sophisticated as was at first assumed. Data Architects was a firm that the McDonnells had been very close to. It was underwritten in the heyday of underwritings in the early 1960’s—when any company with the words “Data” or “Computer” or “Scientific Measurement” in its name created excitement in the marketplace—by the Wall Street firm of D. H. Blair & Company. D. H. Blair & Company were very friendly with McDonnell & Company, and the McDonnells and their partners had ended up owning approximately 50 percent of Data Architects.

  Normally, it might seem, a firm like McDonnell & Company would investigate all the available computer firms before making a choice, and might have found that only one or two were equipped to handle their problems. Instead, the McDonnells went immediately to Data Architects, which was, so to speak “in the family”. The capability of Data Architects left a lot to be desired. McDonnell & Company had a fiduciary responsibility to its customers; one could argue that the company was unwise to select a firm in which there was so great a potential conflict of interest.

  Nineteen sixty-eight continued to be a year ot disasters. For the eight-month period ending August, 1968, McDonnell & Company had reported a profit of $1.8 million. By December of that year that profit was entirely wiped out. The printing and stationery bill alone was one million dollars for the year. The firm seemed on the brink of collapse. Murray McDonnell, in a desperation move, brought in Paul D. MacDonald, another friend, to head up his operations, and, under MacDonald, a drastic program of retrenchment was begun. Early in 1969 the firm closed and sold twenty-three of its twenty-six offices, leaving only the three “showcase” ones at 250 Park Avenue, 120 Broadway, and Paris. All McDonnell salesmen who were not producing at least $50,000 a year in commissions were fired. Salaries of all employees in the $30,000-to-$50,000 range were slashed by 10 percent. The sumptuous executive dining room was closed. The limousines which had carried McDonnell executives here and there about town were sold—except Murray’s own, which, he explained, he personally paid for. The firm sold one of its three seats on the New York Stock Exchange for $413,000. As a result, by mid-1969 McDonnell & Company was worth half what it had been worth two years earlier.

  The cuts, sales, and firings were intended to cut the company’s overhead, and get it back on its feet. By November, 1969, Murray McDonnell, who admitted “I’ve been through hell,” was confident that things would work out for his company, and that there was at last light at the end of the tunnel. To a financial reporter from the Wall Street Journal, visiting Murray in his comfortable downtown office, Murray McDonnell presented a cheerful, confident front. The reporter caught his mood of optimism and headlined his story: “Riches to Rags—How Bad Management, Bad Luck, Nearly Ruined a Big Brokerage House.”

  With a little smile, Murray said to the reporter, “I’ve got to be optimistic,” and he pointed to the photographs of his wife and nine children arrayed on his big desk. No one drew the parallel, but it was a little like the early optimism about the scope of the potato blight in 1845.

  Murray also seems to have displayed a certain lack of sensitivity, or public-relations sense. In 1969, when the firm was going through its most agonizing throes, with mass firings and salary reductions taking place, his employees and associates cannot have been pleased to read that Murray McDonnell was off in Saratoga, paying nearly a quarter of a million dollars for a thoroughbred race horse.

  Chapter 24

  TO THE BITTER END

  Murray McDonnell was not a stupid man. He was, and is, a shrewd and inventive trader, a good salesman, and has drawn praise for the ability with which he has handled the accounts of the Archdiocese of New York. He had also done his best to manage and preserve the family’s money and properties. For example, his “Water Mill Farms” is a horse-breeding farm on Flying Point Road, on the ocean, in Southampton Township, and for a number of years Murray was able to operate “Water Mill Farms” at a tax-deductible loss. Until 1969 the tax laws read that if losses on such things as horse-breeding farms were more than $50,000 a year for five years, the amount in excess of $50,000 was considered as a hobby, not a business, and was not subject to tax relief. In order to circumvent this, Murray worked out a little gimmick—perfectly legal—with his sister, Anne Ford. Murray would own the farm for a period somewhat less than five years, and then he would sell it to Anne. Anne would then own it for a little less than five years before selling it back to Murray. Back and forth “Water Mill Farms” would go, and all its losses were always tax-deductible. In 1970, however, the law was changed to read that if an activity, such as a horse farm, shows any taxable profit, no matter how small, in any two out of five years, it is presumed to be a business, so Murray’s gimmick is no longer quite so useful.

  In 1969, Anne Ford—by then remarried, to Deane Johnson—attempted to sell some of the acreage at “Water Mill Farms” to a developer, perhaps partially to recoup the losses she was experiencing at McDonnell & Company. There was, however, a considerable furor in the resort community over this proposal, and the land sale was quietly canceled.

  As of June, 1969, Murray McDonnell himself had approximately $1,500,000 in his company. His brother Morgan had about $250,000, his mother had roughly $1,500,000, and his wife had some $2,000,000. Anne Ford Johnson had a share worth about $2,700,000, and other officers in the firm had shares worth approximately $650,000. Added to this were half a million dollars in profit-sharing, $3,300,000 in equity, making the company’s net worth in mid-1969 roughly $15,000,000. Of Murray McDonnell’s share, however, Wall Street rumor had it that $1,600,000 had been recently lent to him by the First National City Bank as an unsecured loan. And, since August of the year before, the company had been running heavily in the red. It was a fact that Murray McDonnell was doing his desperate best to hide.

  Prior to June, 1969, McDonnell & Company had had no corporate finance department. By the fall of 1968 the management of the firm thought it would be wise to establish such a department, and to bring in money experts from other firms, hopefully to help untangle the company from its mare’s nest of woes. At the time, it was said that Murray McDonnell had personally committed a million dollars of his own funds to start this department, and a number of people were approached for contributions. They were all told that they, and the new corporate finance department, would have a major role in the policy decisions of the fi
rm. The corporate finance group came in on January I, 1969. Although Murray in no way indicated that the firm was losing money, he did tell the group, when they asked him why he was so willing to split the profit of the group equally with its members, that he would rather have 5 percent of a viable enterprise than 100 percent of no enterprise at all.

  A month later, in February, 1969—again at a time when the firm was experiencing large losses—the corporate finance group itself was told that it would be permitted to buy 1,000 shares of McDonnell & Company stock in the form of 750 shares of voting stock and 250 shares of nonvoting stock. When members of the group asked—as well they might—to see the latest figures on the firm, in order to justify the quite substantial investment they were about to make in it, they were told that the auditors were in the process of making an audit, and that no figures were available. The price at which the stock was to be offered, the group was assured, was based upon calculations made by chief financial officer Thomas McKay, and the personal accountants of Murray McDonnell.

  The stock offer was, of course, another frantic attempt to raise money for the company. At about the same time, a memorandum, drafted by the then ailing Mr. McKay, was distributed to all McDonnell employees, suggesting that they, too, purchase stock in the company—and promptly. The memorandum indicated that the value of McDonnell stock was going to be increasing, and that therefore it would be to the employees’ benefit to get in on the ground floor, before the price of the stock went up. According to SEC regulations, if a stock is offered to more than twenty-five people, it becomes an offering, and if the information presented to prospective buyers in that offering is untrue, the buyers can sue. The memorandum did not disclose the fact that in the last quarter of 1968 alone McDonnell & Company had lost $1.8 million.

  There were other complications. According to the rules of the New York Stock Exchange, the ratio of a firm’s liabilities to its capital cannot ever exceed twenty to one. McDonnell & Company had commissioned the accounting firm of Lybrand, Ross Brothers & Montgomery to do an audit of its books, and Lybrand, Ross had come up with the alarming discovery that the firm’s ratio of liabilities to capital was actually more than thirty to one. Discussions were also initiated with Lybrand, Ross to see whether that firm might be able to determine how seriously the mess in the back office was affecting McDonnell & Company’s dealings. This idea, however, was never pursued.

  Meanwhile, the computer system for the firm was still being worked on by Data Architects, and was still not finished. Again, the senior members of the firm must have realized that needed strides were not being made—certainly not being made quickly enough to clear up the mounting spiral of error and confusion in the back office. But Murray and his executives assured their associates and customers that Data Architects had only a few minor “bugs” to work out, and that soon all would be well and running smoothly. And yet an indication of the company’s mixed-up accounting system was its “fail-to-deliver” situation. A fail-to-deliver is, quite simply, a situation in which a brokerage house sells securities to a customer and fails to deliver them. Because of the complexity of exchanging thousands of shares of stock from sellers to buyers, it is considered normal for a firm the size of McDonnell & Company to have fails-to-deliver in the amount of two to three million dollars a day. At McDonnell & Company by 1969 fails-to-deliver were already amounting to between eight and nine million dollars a day.

  Interestingly enough, the lower echelon of employees in the company seems to have been much more aware of the firm’s perilous state than its officers. Many of McDonnell & Company’s customers’ men, feeling that it was their responsibility to protect their customers, were already taking steps, in 1969, to see to it that they kept these customers in the event that the firm went out of business and the men themselves had to move on to other brokerage firms. There was a great deal of talk about interfirm stealing, whereby a salesman manages to get hold of stock registered in one company’s name, and bring it with him, in his customer’s behalf, to another company. How much of that was actually going on is anyone’s guess, but one thing is sure: a lot of McDonnell & Company salesmen in the summer of 1969 were spending their lunch hours looking for other jobs. Murray McDonnell’s family and friends, meanwhile, had become concerned about the number of hours Murray spent at the New York Athletic Club, his favorite watering place.

  In July, 1969, Mr. Harry Lindh was made executive vice president of McDonnell & Company, to replace the late Mr. McKay as chief financial officer. Lindh had come from the firm of Faulkner, Dawkins & Sullivan, where he had also been chief financial officer. “Dreadful” was Mr. Lindh’s only comment after examining the back-office situation. Rumors were by now circulating in Wall Street to the effect that the New York Stock Exchange was interested in what was happening at McDonnell, and it was at this point that Murray had to put up his additional $1.6 million in order to bring the company up to its capital requirements according to Rule Number 325 of the Stock Exchange.

  While Murray and his partners were trying to placate the Stock Exchange, they fell to arguing among themselves, and with members of the McDonnell family who had interests in the company, over who was to blame and what was to be done. Some blamed Murray, and Murray, it was rumored, blamed others, including Data Architects. Others blamed Lawrence O’Brien, who, though he may have been a passable Postmaster General, seems to have been a bizarre choice to head a brokerage house. His reign, though brief, spanned several of the most disastrous months. In July, 1969, the subordinated debt holders—including Anne Ford Johnson and Murray’s mother—met, and decided to bring in Paul MacDonald to effectively assume control of the firm. MacDonald had been with W. R. Grace & Company, and had managed money for the Church, but his stockbrokerage background was virtually nil. He was known, however, as a “hatchet man” who was good in turn-around situations. MacDonald’s two chief backers were Deane Johnson, the California lawyer who had married Anne and wanted to protect his wife’s interests, and Peter Flanigan, the Nixon aide who wanted to protect the interests of his sister, who was Murray’s wife. Murray resented MacDonald’s “interference,” and there was more quarreling and blame-laying.

  At this point, Murray announced that he had received commitments for financing ranging from three to ten million dollars. It was rumored that this money was to come from a group headed by Dan Lufkin and Louis Marx, the toy manufacturer. Lufkin was a senior partner in the highly successful brokerage firm of Donaldson, Lufkin & Jenrette and was, in addition to a friend of Murray’s, a sort-of relative. His aunt, Mrs. Elgood Lufkin, was the former Marie Murray, whose first husband, John Vincent McDonnell, had been Murray McDonnell’s uncle. In fact, Murray had received no commitments for financing from anyone. As soon as the Lufkin-Marx group had looked into, and seen, the shape that the company was in, they left without any offer of money whatever.

  Harry Lindh’s estimate of the back-office problem was an understatement. It was worse than dreadful. It was totally out of control. Throughout the final months of 1969 the firm continued to lose money, and as, concurrently, the stock market continued to decline in early 1970, McDonnell’s losses continued. The $15 million that the firm had been worth in June, 1969, had completely evaporated by the early spring of 1970, and the company was now $3 million in the red. It owed customers another $8.5 million. Waiting for someone to administer the coup de grâce became a day-to-day affair, and finally, on the afternoon of March 12, 1970, Murray McDonnell announced that McDonnell & Company was going out of business. Employees emptied the contents of their desks into shopping bags. There was the usual anger, the usual secretaries’ tears. A big company does not end with a bang, but with a whimper. McDonnell & Company was declared bankrupt the next morning. It was Friday the thirteenth.

  The McDonnells lost whatever stake they had had in the company, which was considerable. To some people, it seemed that they were a case of shirtsleeves-to-shirtsleeves in less than two generations, and, in a way, they were. Actually, however, the family w
as not really ready for the poorhouse. Most of the McDonnells had, at this point, other resources to fall back on. Still, there was some serious belt-tightening to be done. One of Murray McDonnell’s sisters confided to friends that she might, in a discreet way, take in boarders to help pay for the upkeep on her big Park Avenue apartment. Another sister, Charlotte, announced that she was taking a job at Saks Fifth Avenue as a fashion consultant, and her husband began taking jobs modeling men’s fashions. (Still, a few months later, Charlotte was able to buy a new thoroughbred horse for her Southampton stable.) Anna Murray McDonnell announced that she would have to sell her big Southampton house. Fortunately, she had a ready buyer with ready cash—her granddaughter, Charlotte Ford. Anne Ford Johnson’s divorce settlement from Henry Ford has never been announced, but it is assumed to be comfortably in seven figures. Brother Bish McDonnell is happy that he was able to extract himself from the company before all the troubles began. Anna Murray McDonnell is still able to keep up her big, antique-filled apartment at 660 Park Avenue. “And,” she told friends not long after the holocaust, “no matter what has happened, nothing will ever persuade me to get rid of my butler, Paul.” Paul still stands regally behind his mistress’s chair while dinner is being served, announcing the courses as they appear, in French.