Gruntal & Co., L.L.C.

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Gruntal & Co., L.L.C.

14 Wall Street
New York, New York 10005
U.S.A.
(212) 267-8800
Fax: (212) 962-1810
Web site: http://www.gruntal.com

Private Company
Founded: 1880 as Sternberger & Fuld
Employees: 2,000
Sales: $441 million (1996)
SICs: 6211 Security Brokers, Dealers and Flotation Companies; 6289 Services Allied with the Exchange of Securities or Commodities, Not Elsewhere Classified

Gruntal & Co., L.L.C. is a brokerage house whose principal activity is trading stocks, bonds, and options. Its activities also include the underwriting and distribution of stocks and bonds, corporate and municipal finance, transactions in all types of tax-advantage investments, government securities and commodities, the underwriting and sale of mutual fund unit trust securities, investment banking, financial planning, life insurance and annuities, and other related services. Given the bull market of the 1990s, a series of scandals did not keep the firm from expanding and prospering during this period.

Private Partnership, 1880-1983

The company was founded as Sternberger & Fuld in 1880 by Maurice Sternberger, who entered a partnership with Ludwig Fuld. Sternberger bought a seat on the New York Stock Exchange in 1881 for $20,000. They were joined in 1884 by a third partner, Samuel Sinn, and the firm became Sternberger, Fuld & Sinn, with an office at 52 Broadway in lower Manhattan. There is little documentation to tell the exact nature of the firm’s business, but Wall Street men of the time were known as merchant bankers. They would visit the city’s merchants and businessmen in the morning to purchase IOUs, which they would stick under their hats. About noon they would walk uptown to the large banks to sell them. Hundreds, perhaps thousands, of similar small partnerships were formed, each specializing in certain kinds of investments.

Benedict H. Gruntal joined the firm in 1890 as a clerk at the age of 17 and worked his way up to cashier. He became a partner in 1900, shortly after obtaining a seat on the New York Stock Exchange—likely a wedding gift from Sternberger for marrying one of his daughters. Gruntal’s net worth was only $5,000 when he paid $40,500 for the seat. Soon after, the firm moved to 60 Broadway and was renamed Sternberger & Sinn.

During Gruntal’s early years as a partner, he developed a friendship and business relationship with a young stockbroker named Albert M. Lilienthal. Sponsored by Sternberger, Lilienthal purchased a seat on the New York Stock Exchange in 1908 for between $51,000 and $80,000. Since he was only 23, the seat was probably a gift from his father. When Sternberger & Sinn closed in 1918—its eponymous partners having retired—the firm immediately reopened as Gruntal, Lilienthal & Co. Benedict Gruntal’s brother, Edwin A. Gruntal, bought Lilienthal’s seat for $300,000 in 1928.

The firm became Gruntal & Co. in 1931, with the Gruntal brothers, Morris Hartig, and Samuel Wechsler as partners and offices still at 60 Broadway. It was one of the oldest houses with membership on the New York Stock Exchange when it acquired the bond-trading firm Speyer, Alexander & Co. in 1933. Benedict Gruntal sold his seat on the exchange in 1937 but remained a general partner until his death in 1968 at the age of 95. Hartig became the managing partner. In 1938 Gruntal & Co, opened its first branch office, in the Hotel McAlpin at Herald Square. During the early 1940s the firm opened several other branches, including one on West 47th Street in Manhattan’s diamond district. By 1955 Gruntal had 10 general partners and had added a branch office in New Haven, Connecticut. The firm, now at 50 Broadway, merged with Stearns & Co. in 1963. Its net worth exceeded $3 million, and it had its own clearing operation.

A New York Times feature in 1970 on Harold T. Warshay, president of Gruntal’s institutional department, indicated that a broker’s life is anything but glamorous. Warshay had made large-block stock trades a significant part of the company’s total trading, but only by a tedious daily telephone canvass to find prospective buyers of poor-performing “distress merchandise.” “On a typical situation,” he said, “we’ll check out a dozen banks in New York, half a dozen in other parts of the country, and 50 to 60 insurance companies as well as our mutual fund contacts.” He calculated that fewer than 5 percent of the calls were successful.

Gruntal doubled in size by purchasing the assets of the investment/brokerage firm Steiner, Rouse & Co. in 1974. Howard Silverman, who became managing partner that year, pursued a strategy of further growth through acquisition of other regional brokerages. After the acquisition of Philadelphia-based E.W. Smith & Co. in 1982, Gruntal had 23 offices in 7 Atlantic Seaboard states. Its revenues came to $102.1 million in fiscal 1983 (the year ended August 26, 1983), and net income was $7.4 million.

Expansion in the 1980s

In December 1983 the company went public as Gruntal Financial Corp., offering about 30 percent of its outstanding stock at $8.50 per share. The $23.3 million raised by this sale was used to finance acquisitions intended to make Gruntal & Co., a subsidiary, a full-service investment organization. At this time Gruntal primarily provided securities brokerage and trading services and related financial services in support of its broker-dealer activities. It also participated in the underwriting of corporate and municipal securities and the sale of tax-advantaged investments. Regional Clearing Corp., also a subsidiary and member of the New York Stock Exchange, provided securities execution and clearing services to Gruntal and other broker-dealers.

Gruntal added seven new offices to its 11 existing ones in fiscal 1984, in Pennsylvania, Florida, and Washington, D.C. It established a full-service division for futures trading in commodities and a proprietary index futures fund. The firm also added insurance products with specific tax and investment advantages to its financial planning activities and expanded its company-sponsored real estate syndication program. In addition, Gruntal increased the size of its corporate-finance department in an effort to expand its abilities to manage under-writings, render financial opinions, and advise clients with respect to mergers and acquisitions. Sterling Capital Management was a new money management division formed in September 1984 to direct both pension fund and individual accounts.

Gruntal nearly doubled its revenues by paying $3.1 million in notes and warrants to acquire the Herzfeld & Stern securities and investment banking unit of Josephson International Inc. in 1985. This unit had been losing $8 million a year, but two months after the purchase it was turning a profit. One of Gruntal’s first steps was to farm out Herzfeld & Stern’s clearing operation to an independent firm, a move that resulted in $4 million in savings. The acquisition strengthened Gruntal in the field of corporate finance, although retail brokerage remained its biggest revenue producer, with the trading department a strong second.

In fiscal 1987 Gruntal had net income of $8.4 million on revenue of $218.8 million and had more than 600 account executives operating out of 32 offices stretching from Maine to Florida. Brokerage transactions with retail customers continued to account for the greatest percentage of the firm’s revenues.

Gruntal Financial Corp. was acquired by Home Insurance Co. in 1987 for about $145 million. Home Group Inc., the parent of Home Insurance, had a $4 billion investment portfolio and said it wanted to move into money management, planning to develop mutual funds for Gruntal to sell. It also expected Gruntal to sell insurance and planned to steer corporate finance business in Gruntal’s direction. Silverman, president and chief executive officer of Gruntal, said the purchase would allow his firm to focus on the areas of managed money, mutual fund, and fixed income products, investment banking, and underwriting. Gruntal established a coast-to-coast presence during 1988-89 with the opening of offices in the Midwest and California. In 1990 it founded The GMS Group, L.L.C., a fixed income investment firm servicing both individuals and institutions.

Challenges of the 1990s

Home Group, subsequently renamed AmBase Corp., sold its Home Insurance subsidiary, including Gruntal, in 1991 for $970 million to an investment group led by Swedish-based Trygg-Hansa SPP Group Inc., the largest insurance company in Scandinavia. Home Insurance, with Gruntal, then became part of Home Holdings Inc., a consortium directed by Trygg-Hansa. Home Holdings later became a private company in which the Swiss insurance firm Zurich American took a large stake. By this time Gruntal had become the nation’s 14th largest full-service brokerage firm, with more than 1,800 employees and capital of over $170 million—a tenfold increase in 10 years. The company also had established its own small institutional equity shop—a “research boutique.” By mid-1994 Gruntal had $2.5 billion in assets and 35 offices in 10 states.

Unfortunately, Gruntal also accumulated heaps of publicity because of a succession of scandals. In 1994 the company fired two managers whom it accused of stealing at least $3 million. The alleged scheme involved the wire transfer of funds to fictitious accounts, according to the company, and to various accounts established by co-conspirators. The two suspects fled to Ireland but returned and pleaded guilty the following year. The scandal widened still further in 1996, when Edward Bao, formerly executive vice-president of the firm, was indicted by a grand jury in connection with the scheme. The Securities and Exchange Commission charged that $14 million had been embezzled. Gruntal agreed to pay $6.2 million in fines and $5.5 million in customer restitution, among the biggest penalties ever imposed on a Wall Street firm. Some of the money went to settle other improprieties in the firm’s trading and managed account divisions. Bao pleaded guilty in 1997 to falsifying the firm’s books and records.

Gruntal also reaped embarrassing publicity in 1995, when a synagogue in New York’s suburban Westchester County said it had lost $650,000 from its capital campaign through investments in highly speculative securities. The Jewish center contended that it was misled by Gruntal into thinking the securities were virtually risk free and that it had been charged more than $100,000 in commissions. A spokesman for the company said the accusations were “completely unfounded,” but six months later an arbitration panel of the New York Stock Exchange upheld the synagogue’s complaint and ordered Gruntal to refund the money lost.

In a less publicized case, Ted H. Westerfield, a former Gruntal & Co. account executive, was convicted in 1996 of paying $35,000 in kickbacks to a bond analyst who sent junk-bond business his way. In 1997 a federal judge ordered Westerfield, who was sent to prison, to pay nearly $345,000 in restitution.

In still another embarrassing incident, the Equal Employment Opportunity Commission in 1997 upheld charges of sexual harassment by six current and former Gruntal female employees. According to the allegations, two branch managers at a company office in Manhattan had harassed the women with sexual gestures, groping, and lurid suggestions between 1993 and 1996. Gruntal agreed to pay each woman $125,000 but did not admit guilt. One of the managers had resigned in 1996 when he learned he was to be fired; the other was assigned to nonsupervisory work.

Silverman was ousted as CEO in 1995 after allegations of improper personal trading emerged in a wrongful dismissal lawsuit filed by a former Gruntal manager. He accused Silverman of cheating retail customers by having his own traders buy municipal bonds below the market and then selling them to the accounts of Silverman and another Gruntal executive. Silverman was replaced by Robert Rittereiser, formerly head of another brokerage firm, E.F. Hutton & Co. One of his first acts was to implement a policy forbidding traders and brokers from capturing for themselves, without disclosure, the spread in the trades they were doing for their customers. He was also said to be putting restraints on some of the company’s more aggressive cold calling brokers.

Rittereiser indicated that Gruntal would go back to basics. Interviewed by Investment Dealers’ Digest in 1996, he said, “The idea is not to be corporate-finance-driven, but investor-driven. The idea will be to keep simple, stay liquid, and trade traditional products.... Build a retail trading and institutional business without having to concentrate on manufacturing product on the advice and distribution side.” Rittereiser acknowledged that by not creating and marketing its own mutual funds and other offerings Gruntal would lose income, but he said the company would also cut its costs.

In February 1997 Gruntal was sold to a management group led by Rittereiser in a leveraged buyout valued at about $235 million in securities. The company’s parent Home Insurance Co. received preferred stock valued at $225 million and the management group preferred stock valued at $10 million. The eight managers, who did not put up any of the cash for the buyout, would take an eventual 60 percent stake in the underlying equity of the new company as they retired the preferred stock, while Home Insurance would get the remaining 40 percent. Gruntal, which was said to have earned more than $20 million in 1996 on revenue topping $400 million, was restructured as a limited liability company, Gruntal & Co., L.L.C. Executives said the buyout could pave the way to eventually taking the firm public or merging it with another company.

Rittereiser said Gruntal planned to add 100 to 200 account executives in about a year and would build up its corporate financing operations while continuing to focus on research and stock trading. The company had some $2.8 billion in assets and capital of about $195 million.