Lazard Freres Places Buyout Fund on Hold –

In the midst of a bitter legal battle over the ouster of its real estate fund chief, Arthur Solomon, Lazard Freres & Co. has postponed efforts to launch its new leveraged buyout fund, according to people close to the situation

The LBO fund, which featured a target between $500 million and $750 million, originally was slated to go out before institutional investors last spring, sources said.

Those plans reportedly were waylaid because of the flap surrounding the high-profile dismissal of Mr. Solomon, an 11-year Lazard veteran, and his lieutenant, Murry Gunty, a principal from the real estate team, in early April.

Last month, Mr. Solomon filed an arbitration claim with the New York Stock Exchange alleging the firm breached “its fiduciary responsibility” and put its interests before those of its investors.

Personnel Turbulence Prompts Caution

At issue, said sources, is whether the planned fund-which is managed separately from the real estate funds by partners Tom Lynch and David Tanner-would have trouble raising money in the face of the allegations made by Solomon. “The firm has been accused of violating its fiduciary duties and putting itself ahead of the investor-what could be more damaging to the firm’s reputation when it tries to go raise a new fund?” one Lazard veteran asked.

When asked about the firm’s plans for raising the new buyout fund, a Lazard spokesman said: “Our first fund, which we are still investing, has exceeded every expectation we’ve had. And we will launch our second fund in due time.”

Nevertheless, onlookers said the situation surrounding the real estate opportunity fund has put a cloud of uncertainty over the control systems in place at Lazard with regard to its principal investing operations, and what happens to the fund in the event certain individuals leave. “[The Solomon incident] has really turned into a black eye for Lazard, especially as it tries to raise its new fund,” admitted one Lazard insider.

The fallout at Lazard in general has been damaging for investment banks that operate principal funds, other investment bankers noted. “All these guys get together at pension fund forums and exchange information,” one banker at another firm pointed out. “The investors used to just assume that their interests were aligned with the individuals running the funds. Now, though, investors are starting to ask more questions.”

Although the complete details surrounding Lazard’s decision to fire Mr. Solomon are still debatable, industry insiders pointed to the under-performance of several Lazard investments, particularly in the assisted-living sector, as one reason. They also point to Mr. Solomon’s resistance to having more formal controls put on the group’s investment strategy.

Lazard officials cited “fundamental differences over strategy, operations and future direction of the firm’s real estate funds” as the cause for his termination.

However, in a complaint dated May 17, Mr. Solomon contends the only cause for his termination was his “insistence that Lazard put the interests of the pension fund investors first and foremost.”

The claim goes on to say that “it was these increasing conflicts over the firm’s willingness to disregard its fiduciary responsibilities” and “[putting] its own economic interests ahead of the best interests of investors” that compelled Solomon and his colleagues to try earlier this year to amicably spin off the investment funds they managed.

Mr. Solomon and Mr. Gunty have been replaced by Lazard’s Damon Mezzacappa and Matt Lustig.