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Under different circumstances, Joe Perella might admire the entrepreneurial pluck of his erstwhile colleague Michael Kramer.
Mr Perella, 74, is a legend on Wall Street for his role in transforming mergers and acquisitions from a banking backwater into a glamorous, big- money business. He is also known for making dramatic exits from two big banks — First Boston and Morgan Stanley — to set up boutique firms bearing his name.
Yet in February last year Mr Perella apparently learnt that Mr Kramer, 47, was planning to leave his firm — and did not appreciate it.
Mr Perella’s firm, Perella Weinberg Partners, claims in court documents that it discovered a plot by Mr Kramer to quit and launch a rival investment bank with several colleagues. In an echo of Mr Perella’s career, it would have been the second time Mr Kramer had set out his own stall.
Mr Kramer and three of his associates were fired and eventually sued by PWP, which said that they had breached their employment agreements. “Rather than building [their] own firm from the ground up or pay for a complete practice by acquiring another firm [they] decided to steal the practice group that PWP had spent millions of dollars and over seven years of effort to develop,” according to the PWP complaint filed in New York in October.
Mr Kramer and his colleagues have fired back with a countersuit that denies any plan to leave. They also allege that PWP has defamed them and wrongfully seized $60m of equity that the group had rightfully earned by “weaponising” their employment contracts against them.
The Perella-Kramer fight is being watched closely by dealmakers on Wall Street. While disputes often arise among financiers seeking greener pastures, this is a rare instance of a disagreement spilling into public litigation.
A trial would put a spotlight not only on the internal workings of an esteemed investment bank but some bankers fear it could also open an unwelcome discussion on “restrictive covenants”— the industry’s bedrock employment contract provisions.
These include “gardening leave”, a euphemism for allowing employees to be paid after they have left a job to prevent them from immediately starting in a new position with a rival. Non-solicitation and non-competition clauses, whose legality is controversial, could also come under scrutiny.
“Restrictive covenants really are a marvellous tool for thwarting competition,” says Richard Reice, a labour attorney at Hoguet Newman who is not involved in the case. “The simple threat of litigation around these acts as an instrument to inflict pain on counterparties with fewer resources.”
Race for talent
Mr Perella founded Perella Weinberg in 2006, a year after he quit Morgan Stanley during the turmoil engulfing then chief executive Philip Purcell. He hired a small group of Morgan Stanley colleagues and brought in Peter Weinberg, the former chief executive of Goldman Sachs International.
Mr Weinberg’s grandfather, Sidney, is considered to be the architect of the modern Goldman Sachs and several members of the Weinberg family have held senior roles at the bank. PWP raised more than $1bn from families including the Weinbergs, as well as from Middle Eastern funds Istithmar and Gulf Investment Corp.
Like many M&A boutiques, PWP coveted a financial restructuring practice to complement its core merger advisory business. After a boom in distressed debt investing in the 1990s, restructuring had become a lucrative business. The cadre of bankers and lawyers who focused on this niche were suddenly in demand and courted to join small banks such as Lazard and Evercore.
In the distressed debt sector, Mr Kramer was known as a talented banker, albeit one who sometimes butted heads with colleagues. In 2007, PWP acquired Mr Kramer’s restructuring firm, Kramer Capital Partners. Mr Kramer was named founding head of PWP’s restructuring unit and was given a seat on the management committee.
Mr Kramer started his career in 1989 at Houlihan Lokey in Los Angeles as a data entry worker but rose quickly and became a partner at 28.
“Mike started as an intern and then made it to partner faster than anyone in the history of Houlihan Lokey. He’s one of the hardest workers I’ve ever come across,” says a banker who worked closely with him.
At Houlihan, Mr Kramer met Derron Slonecker, Joshua Scherer and Adam Verost, the three colleagues who were also fired by PWP. In 2001, Mr Kramer and Mr Verost left Houlihan for another boutique firm, Greenhill, where they founded a restructuring group. After clashing with Greenhill management, Mr Kramer left in 2005 to start his firm.
Both sides agree that Mr Kramer was a successful dealmaker at PWP. But after seven years, he fell out of favour with the PWP top brass. “While Mr Kramer was a talented and productive partner, he had difficulty working within the firm’s culture and often engaged in divisive behaviour that created strife within the firm,” PWP’s complaint states.
In particular, he had developed a contentious relationship with Mr Weinberg. According to Mr Kramer’s complaint, Mr Weinberg told Mr Kramer that “no one in the partnership wanted to work with him”. The firm even hired a relationship coach to ease tensions. Many sources saw a culture clash. Mr Kramer’s background in the rough-and-tumble world of distressed debt did not mesh with the more genteel atmosphere of traditional M&A.
“People who do well in restructuring are combative over basis points . . . It is not like Morgan Stanley or Goldman Sachs,” says one restructuring banker.
Mr Kramer’s background — he attended California State University, Northridge, then landed the internship at Houlihan — was also different from those of Mr Weinberg and Mr Perella. Both men have MBAs from Harvard Business School and are pillars of New York high finance.
“I can’t think of a person on the planet that would be more appalling to Mike Kramer than Peter Weinberg, a guy who comes from a multi-generational Goldman Sachs family,” says a Wall Street executive acquainted with Mr Kramer.
While PWP believed Mr Kramer was ill suited for a leadership role, they still wanted him to stay at the firm to generate new business. If he resigned, the terms of his contract called for a one-year period where he could not ask PWP employees to leave the firm and a six-month period in which he could not solicit PWP clients. He was barred from competing with PWP for three years.
Mr Kramer says he had been effectively dumped in mid-2014 when it became clear that his status within the firm was eroding. PWP, according to his complaint, had developed an “atmosphere of disrespect and failure to award compensation and leadership roles based on merit”. He thought the rest of 2014 and early 2015 would be spent coming to a resolution where he could stay at PWP, retire — his complaint alludes to managing a farm, winery or family office — or start a firm in which PWP could invest. Two members of the asset management group at PWP who left in 2015, including one who had sued for back pay, created ventures seeded by the firm.
Mr Slonecker and Mr Scherer contend that PWP approached them about assuming Mr Kramer’s position. (When Mr Perella learnt of their allegiance to Mr Kramer, he allegedly called them members of “Kramer’s harem”.)
It came to a head in mid-February, when Mr Kramer and his three colleagues were sacked by voicemail over the Presidents Day holiday weekend. PWP says the firings came just after executives had discovered the group’s secret scheme to leave en masse.
PWP says it learnt of a meeting in January 2015 at Mr Kramer’s home in Connecticut where eight members of the restructuring team gathered. Documents were circulated, including a spreadsheet entitled “NewCo Equity Split” as well as a to-do list for starting a firm.
Mr Kramer says the gathering was innocuous and had been called by junior members of the team who were frustrated at PWP. At no point, he says, did he solicit his team to join a new firm and that any documents that suggest a new firm were not initiated by him.
One PWP team member who attended the meeting was Kevin Cofsky, a managing director who has emerged as a key figure. After Mr Kramer and his colleagues were fired, four remaining members of the PWP restructuring group resigned and quickly joined the others at Mr Kramer’s new firm, Ducera Partners. Mr Cofsky remained at PWP and became a partner in late 2015.
The risk for bankers and their employers if the PWP case reaches trial is that a court ruling could lead to a revision of the standards for employee agreements. Such fears, along with negative publicity, have tended to lead to quiet settlements among warring parties. Bankers agree to gardening leave to sit out for a few months while being paid their base salaries. Departing bankers sometimes finish assignments if they allow their original firm to keep the fees.
One employment attorney says firms have to be conscious of appearing too litigious “because they are constantly both buyers as well as sellers of talent”.
In mid 2014, Robert Steel, a long-time Goldman banker and former chief executive of Wachovia, was appointed PWP chief in a move widely considered to be a precursor to an initial public offering. Since 2014 three rivals — Moelis, Houlihan and PJT Partners — have listed their shares. According to a person familiar with the firm, PWP’s 2015 revenue was close to $500m, a record high and similar to other listed boutique banks.
Whatever the legal merits of its suit, several observers have asked whether PWP’s pursuit of the case could affect its reputation. After Mr Kramer and his colleagues were fired, PWP memos about the moves were leaked to the media, and rather than co-advising with Mr Kramer’s new firm and keeping the fees, PWP allowed clients to end their deal engagements. Notably, PWP lost an $18bn restructuring job for Caesars Entertainment.
Settlement talks so far have been fruitless and both sides are preparing for a trial. Should Mr Kramer and his team prevail, it will resemble one of Wall Street’s most dramatic defections.
In 1988, Mr Perella and Bruce Wasserstein, unhappy with the direction of First Boston, resigned. Within a few days, they had established Wasserstein Perella in a conference room of a midtown Manhattan law firm and quickly snatched several bankers from First Boston. Such moves were easier in those days, Mr Perella told the FT last year.
“You just walked across the street and started doing business,” he said. “The clients came with you. It’s what I call a vertical take-off.”