Where Were The Alarm Bells?

Alarm bells should have been clanging in October 2006 when Deutsche Bank was negotiating to acquire a 45 percent stake in Aldus Equity, attracted by its blue-chip roster of pension fund clients, including the New York State Common Retirement Fund and two large New Mexico institutional investors.

Early that month, four Aldus Equity partners, Richard Ellman, Thomas Henley, Matthew O’Reilly and Marcellus Taylor, terminated the employment of Saul Meyer, the firm’s founding partner and acknowledged rainmaker, who had built up the PE advisory firm to include more than $2 billion in assets under management.

At the time, the press portrayed Meyer’s firing as resulting from an internal disagreement over the economics of the firm. However, in a recent interview, Taylor told Buyouts that he and the other partners removed Meyer from the firm “because they were concerned by his secretive meetings with politically connected placement agents and because we were not being given a say in the firm’s investments.”

Deutsche Bank apparently did have misgivings about going ahead with the Aldus Equity deal. According to minutes from an Oct. 19, 2006, investment committee meeting of the New Mexico Educational Retirement Board, Frank Foy, CIO of the fund, reported that Deutsche Bank had informed him that it had broken off discussions with Aldus Equity over its investment in the firm three weeks earlier. The New Mexico Educational Retirement Board at the time was trying to negotiate a consulting contract with Aldus Equity.

But between Oct. 1, when Meyer was fired, and the Oct. 19 meeting, at which Meyer and his partners appeared before the New Mexico investment committee to explain the blowup, Meyer had been reinstated, and the discussions between Deutsche Bank and Aldus Equity had resumed, according to records of the meeting.

On Jan. 25, 2007, Deutsche Bank announced it had signed a definitive agreement to acquire a minority stake in Aldus Equity. One source familiar with the situation said Deutsche Bank paid less than $10 million for the stake when the deal closed in July 2007. According to Taylor, Deutsche Bank actually valued Aldus Equity at as much as $64 million, assuming it reached certain performance numbers over the next three years. Taylor said he collected $1 million from the deal, and that he stood to make an additional $10 million after the earn-out period, had he not resigned beforehand. Taylor also told Buyouts that he believes Deutsche Bank “fully intended to acquire 100 percent of Aldus through a put/call agreement. They had a 10-year window to buy the other 55 percent.”

Taylor, who resigned from Aldus Equity in August 2007, recently acquired Chicago-based United Investment Managers, a fund of funds that invests in emerging managers.

Of course, we now know that there was a lot more to the story than mere bickering among a firm’s partners over the division of money. On April 30, 2009, Meyer was arrested and charged with one count of securities fraud in violation of the Martin Act, a Class E felony. According to Meyer’s guilty plea, between January 2003 and February 2009, he paid Hank Morris, a pension fund crony, 35 percent of the management fees that Aldus collected from the New York State Common Retirement Fund in exchange for receiving investment money from the pension fund. The same day Meyer was arrested, Deutsche Bank terminated its stake in the firm, meaning that it “exercised its option to sell back its stake in Aldus Equity,” said a source close to the situation. And in May, the New York State Comptroller Thomas DiNapoli filed suit against Aldus Equity, its principals, including Meyer, Matthew O’Reilly, Marcellus Taylor, and others, for wrongful conduct, including fraud, bribery, breach of contract and conspiracy. DiNapoli seeks the rescission of its contract with Aldus Equity, reimbursement of more than $5 million in fees and other damages.

So why would Deutsche Bank go through with an investment in an advisory shop whose founder had been ousted by his own partners only a few months earlier? Our source close to the situation said that after the termination and reinstatement of Meyer, Deutsche Bank renegotiated the terms of its deal with Aldus Equity to give itself additional protections. Our source also said that Aldus Equity gave Deutsche Bank assurances that the situation at the firm was “all sorted out.” Deutsche Bank also spoke with most of Aldus Equity’s clients to get a sense of their view of the Aldus Equity situation. The response was favorable, said the source, and at the time Aldus Equity did end up keeping all its clients.

Still, Buyouts is left to wonder about the quality of due diligence at Deutsche Bank, given the major red flag that arose just months before its purchase of Aldus Equity. Whether Deutsche Bank later had a hand in blowing the whistle on Aldus Equity isn’t clear at this point. But we hope so.

Deutsche Bank declined to comment for this piece.