Financier’s Dealings Disclosed

If written as a libretto, the life of Leonard I. Green--the wealthy impresario of corporate takeovers and chief executive of the Los Angeles Opera--certainly would not be titled “The Merry Multimillionaire.”

Recently, the 68-year-old founder and namesake of the West Coast’s biggest leveraged-buyout firm has endured trying times. He faced a boardroom coup by his partners, is under Internal Revenue Service scrutiny for a Cayman Islands tax shelter and is locked in an excruciating divorce battle with his third wife that has exposed his personal finances as well as the unvarnished dealings of a takeover artist.

He finds himself explaining an old federal insider-trading charge, settled years ago, that has come to light with a more recent claim by his estranged wife that he gave an improper stock tip to a friend. The latest allegation is a fabrication by an estranged wife who has “viciously spread hurtful, false rumors about Mr. Green,” said his Los Angeles attorney, Dale F. Kinsella.

In an interview last week, Green expressed regret over his personal and professional troubles.

“I wish it didn’t happen,” he said. “I wish I didn’t make hasty decisions, particularly in my marriage, that I did. And so I’ll pay for it, then we’ll go on--and should go on--and enjoy life.”

His wife, Jude Green, 49, who also has been married three times, declined to comment for this story.

Leonard Green, considered a pioneer of the friendly takeover, co-founded a New York investment house that specialized in leveraged management-backed buyouts before forming Los Angeles-based Leonard Green & Partners in 1989.

Since then, his firm has raised $1.8 billion in investment capital through three funds, managing money for such blue-chip institutional investors as the California Public Employees Retirement System, the University of Texas Endowment, Citicorp and Wells Fargo.

Eschewing highflying technology stocks, Green’s firm delivered annualized returns of 80% during most of the 1990s by picking successful takeover targets from sleepers in unglamorous industries such as retailing. Green estimated the funds’ current returns at 40% to 50%.

The firm has built its reputation quietly. But the partnership has been dragged into Green’s divorce proceeding, which includes a breach-of-contract suit by her and a $25-million defamation suit by him.

The cases, which have been merged into one proceeding before Los Angeles Superior Court Judge Richard E. Denner, fill dozens of files at the downtown courthouse.

The court records, along with hundreds of pages of previously undisclosed documents obtained by The Times, present a stark picture of a financial house in turmoil, a respected financier under government scrutiny and a high-society marriage on the rocks.

Green and his wife have fought over his private Gulfstream II jet, use of the Aspen, Colo.-area vacation house, the ownership of two paintings by John Singer Sargent and Marc Chagall and her monthly fur and jewelry allowance.

Records also show that the IRS is auditing Green’s 1997 and 1998 returns in connection with a trust that claimed a nearly $20-million loss as a result of trades in foreign bank stock through an offshore company.

They also lay bare the details of a boardroom struggle within Green’s own firm over his decision to invest $300 million of client funds in the financially troubled Rite Aid drugstore chain despite his partners’ misgivings about the company’s financial standing and a potential conflict of interest involving Green.

The dispute led to a succession agreement that restricted Green’s participation and share of the profit from the next investment fund.

Green’s business partners said they have since made peace with the firm’s namesake and want to stay out of his personal affairs.

“Jude and Leonard are involved in a very acrimonious divorce,” said partner Jonathan D. Sokoloff. “It’s between the two of them and it doesn’t involve Leonard Green & Partners.”

A spokeswoman for CalPERS, which has $250 million invested in Green-managed funds, said its money managers remain confident in the partners’ abilities.

“Whatever personal issues may be involved are not impacting the performance ... of the firm,” Patricia Macht said.

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Differing Accounts of Their Courtship

Green filed for divorce in June 2000 from Jude (pronounced Judy), whom he met on an Aspen skiing trip in 1994.

Jude, a physical therapist from Michigan, caught his eye the day before Thanksgiving in the lobby of the Little Nell Hotel, where she worked part time in the jewelry store. They had dinner two nights later; by the end of the year, Green had taken her to New York and Hawaii and professed his love for her.

“I’m not that experienced with women,” Green said, adding that he was vulnerable at the time because he was going through a divorce. “I met this woman who seemed to be totally enthralled with me and had two really nice children and I felt, ‘Gee, it would be nice to have that kind of family.’”

In a court filing, attorneys for Jude Green put it differently: “As with his business targets, Leonard Green instituted a ‘takeover’ of Jude Green’s life, pursuing her as he would any other corporate acquisition.”

They married July 27, 1995--two days after Jude’s divorce from her second husband was final. Green gave her a 10-carat diamond ring that cost $225,000. The couple held a second ceremony--a $250,000 black-tie reception at the Hotel Bel-Air--before jetting off to spend a “very lavish week in Rome and Vatican City,” court papers say. They took golfing trips to Spain and attended operas in San Francisco; New York; Milan, Italy; and St. Petersburg, Russia.

The Greens were most visible within the Los Angeles Opera. A founding director, former president and now chairman and chief executive of the organization, Leonard Green oversaw a doubling of donations from $8.5 million in 1998 to a projected $17.7 million this fiscal year. The Greens donated $200,000 in 1999 and more than $1 million for the 2000-01 season, court records show. In 1998, Leonard Green helped recruit tenor Placido Domingo as artistic director.

Jude Green served as chairwoman of the 1998 Opening Night Gala. She was involved in initial planning for a 2000 gala honoring Domingo until her husband, citing their marital situation, removed her as chairwoman, a court exhibit shows.

“Since your letter indicates that you have declined to resign, I must regretfully remove you from that position on this date,” Green wrote on L.A. Opera stationery in August 2000.

Nonetheless, Green was ordered to provide his wife prized seats for opening night by Los Angeles Superior Court Judge Jane L. Johnson, who initially handled the divorce case.

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Divorcing Couple Battles Over Aircraft and Art

The couple also fought in court over access to Green’s jet, with each side producing experts to hash over the aircraft’s “historic use”--even arguing over the meaning of that term. Johnson eventually denied Jude Green access to the plane.

Jude Green accused her husband of removing paintings by Toulouse-Lautrec and $10,000 worth of Cuban cigars from their Bel-Air home before he filed for divorce. He said the artworks were just posters and that he had taken only about 40 cigars worth $20 each.

Leonard Green claimed in court that “Le Grand Cirque” by Chagall and “The Rialto” by Sargent were his property because he bought the paintings with $3.4 million of his own money. He balked at her demands to pay $500,000 a month for spousal support, including an $83,000 allowance for furs and jewelry. He argued that the $1.3 million in jewelry he gave her during the marriage was a token of past affections and a “durable capital investment with lasting value, not a daily living expense.”

In May 2001, Johnson sided with Leonard Green, ruling that Jude’s demands were a gross exaggeration and cutting her monthly support to $63,873, minus reimbursements.

As part of one filing, Jude disclosed that the IRS was examining the couple’s 1997 joint return. Among the exhibits are the first few pages of a March 1999 opinion from KPMG, Green’s accounting firm, sketching details of an offshore transaction involving the Neerg Trust.

Additional documents show that the government audit has been expanded to include 1998. The IRS is examining the validity of a $20-million capital loss realized by the trust through a complicated redemption transaction undertaken days after the trust was formed July 9, 1997. The revocable trust is controlled by Green. (“Neerg” is “Green” spelled backward.)

The transaction uses an apparent wrinkle in U.S. tax law that allows the cost basis, or purchase price, of stock bought by a foreign corporation to be reassigned to a related entity, according to the KPMG opinion. When the second entity sells the stock, it can deduct the proceeds from the transferred cost basis and claim a loss.

Such a transfer is “not free from doubt and there are no authorities which are directly on point,” the KPMG opinion said. The firm advised Green that he stood a “better than 50% chance” of withstanding an IRS challenge.

Robert S. Schriebman, a Rolling Hills Estates tax attorney who has advised the U.S. Senate Finance Committee and written several books on battling the IRS, reviewed the outlines of the transaction at the request of The Times and pronounced it “phony.”

Schriebman said the transaction would have trouble withstanding IRS scrutiny because it has no inherent economic effect other than to avoid taxes.

Green confirmed the IRS examination and said KPMG approached him “and about 100 other people” with the investment strategy. He said he did not remember the details or the size of the loss.

“I’ve been audited before and come out pretty clean on most of my returns, so I’m not concerned about it,” he said.

Court filings and depositions in the divorce proceeding also reveal that Green was sanctioned by the Securities and Exchange Commission for alleged insider trading.

The SEC accused Green, then a partner of a New York-based investment group, of buying 700 shares of a trucking company in March 1974--months before it was to be acquired by the group for a higher stock price. The agency’s civil complaint, filed in 1976, alleged that Green bought the stock while “in possession of material, non-public information.”

Without admitting guilt, Green signed a 1977 stipulation forfeiting his $3,613 profit and prohibiting him from “purchasing, selling, recommending or inducing the purchase or sale” of securities based on inside information.

Green said he was unjustly accused, since at the time he bought the stock the takeover appeared unlikely. “If I had the money to fight it at the time, I would have,” he said, calling it a “very disturbing experience.”

Jude Green is claiming that her husband engaged in insider-trading activity involving Thrifty Payless and Rite Aid drugstores, one of his firm’s biggest success stories.

In 1992, Green’s firm paid $40million for Thrifty Drugs. It then merged Thrifty with Payless Drugs, which it acquired in 1994 for $1.2 billion. The privately held combination created the largest drugstore chain in the Western U.S. with more than 1,080 outlets.

In April 1996, Thrifty Payless went public; six months later it was sold to Camp Hill, Pa.-based Rite Aid for $2.3 billion. The transaction netted investors at Green’s firm, which had a controlling interest in Thrifty Payless, a total of $420 million in equity.

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Green’s Suit Claims Wife Defamed Him

In the defamation suit against his wife, Green contends that her insider-trading allegation damaged his reputation and harmed business relations with his partners. It also added pressure to sign a succession agreement that cut him out of future investor funds, Green said.

It was Green himself who warned his partners in September 2000 that he expected his wife to make an accusation about insider trading during the divorce, depositions in the defamation case show. The partners concluded that the claim was untrue after two associates interviewed Jude Green in her Bel-Air home and checked trading records, depositions show.

But the episode further deteriorated relations between Green and his younger associates. They already were pressuring him to step down over his decision to sink $300million of investor funds into a Rite Aid investment in late 1999, when the drugstore was teetering and its bankers were unhappy.

“Rite Aid was having a financial crisis similar, for example, to what’s going on today with Enron,” partner Peter Nolan testified in a November deposition.

Green said he was on a weekend golfing trip in Southampton, N.Y., in late 1999 when he received an emergency phone call from a Rite Aid executive saying that bank loans were due and the chain needed more equity. Green began working with the firm to provide a $300-million infusion of money through the purchase of preferred stock.

Amid pressure from Rite Aid executives to make an immediate announcement of the investment, Green discussed the financing plan with his partners during a telephone call to Los Angeles the next Monday, depositions show. The partners protested.

“I voiced a concern about the company’s numbers and its financial performance, and ... about the speed at which we were making the investment,” Nolan testified. He had another worry: whether Green had a personal conflict of interest because he owned 1 million shares of Rite Aid in a trust.

“If someone’s out making an investment decision in a company, that’s a factor that needs to be vetted, which we did not vet,” Nolan testified.

The telephone exchange became heated and Green hung up, according to depositions.

“Leonard basically terminated the discussions and signed a commitment letter,” testified partner John G. Danhakl.

As his percentage of the partnership fee, Green earned a $460,500 payment for placing the Rite Aid investment, court filings show. He said he did not recall a discussion about a conflict of interest and pointed out that all the partners owned shares in Rite Aid.

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Rite Aid Management Shakeup, SEC Probe

Shortly after the decision, news broke about trouble with the company’s books, a discovery that prompted an SEC investigation. Rite Aid management was thrown out and Green was briefly appointed chairman.

The financier, who retains a seat on the board, said he understands that the SEC probe is continuing. An SEC spokesman declined to comment.

The acrimony within Green’s firm continued to escalate.

“As the stock dropped and as the problems became more apparent, and as we started getting more heat from our investors, the tension among the partners increased,” Danhakl testified.

The flashpoint came in early 2000, when Green called a meeting to discuss his partners’ unhappiness with the investment. Green recalled the session as a “frank discussion about the investment and the way the partnership should conduct itself relative to communication with the outside world.”

In depositions, his partners characterized the meeting as a tongue-lashing that persuaded them it was time for Green to go.

“I think we wanted him out of there,” testified Danhakl, who later confronted Green and asked him to step down. Green said he refused because the request was inappropriate.

But the clash ratcheted up pressure within the firm to negotiate a succession agreement with Green, who was in his mid-60s and publicly acknowledged taking a lesser role in the firm.

The talks eventually involved two advisors to CalPERS, who acted on their own to quiet dissension between Green and the partners, some of whom had stopped talking to the firm’s founder.

The CalPERS advisors “said that the investment community ... knew of the problems within the partnership, which included the insider-trading accusation,” Green testified in a deposition. He added that the advisors believed that the firm’s “ability to raise a new fund would be in question unless something was put to bed.”

Final terms were hammered out during the firm’s 2000 Christmas party, held in its Westwood offices. The agreement eliminates Green’s standing 30% partnership share for the next investor fund, and instead pays him a flat $1.5 million a year for the next six years--a change he has said will cost him millions.

The agreement also restricts Green’s participation in the fund and contains a noncompete clause, copies show.

“I did not want this to happen,” Green said.

The partners say Jude Green’s accusations had nothing to do with their decision to press for the succession agreement. Leonard Green is demanding that the terms be renegotiated, according to testimony.

Meanwhile, the value of the firm’s Rite Aid investment has fluctuated.

When the succession agreement was finalized, the stock value fell below the $300 million invested. When the depositions were taken two months ago, it was nearly double. Today, Green estimates it is even or slightly above. His partners declined to give a more precise number, just that it represents a “meaningful profit.”

The drugstore chain, which has seen nearly four years of losses, has since declared a $112-million loss for its fiscal third quarter ending Dec. 1--prompting two rating services this month to downgrade the stock, which tumbled on the news.

Rite Aid shares fell 36 cents Friday to close at $2.15 on the New York Stock Exchange.

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Green Calls Wife’s Claim of Insider Trading a Lie

The insider-trading claim by Jude Green is detailed in sworn depositions.

She testified that her husband told her in October 1995 that he met with Rite Aid CEO Martin L. Grass, who was going to make an offer to buy Thrifty Payless. He cautioned her not to breathe a word to anyone--even her mother, she testified.

That’s why, Jude said, she was shocked when Green allegedly disclosed the merger plans to ski instructor Boone Schweitzer as the three of them rode a ski lift in Aspen.

She said the subject came up again in 1998 when another mutual friend, Marianne Buchholz, divulged during a dinner party that she had made considerable money from 100,000 shares of Thrifty Payless stock she bought with Schweitzer, based on Green’s “red-hot tip” that the company would be acquired by Rite Aid.

Patricia Glazer, Jude Green’s attorney, said her client’s account is accurate and declined to comment further.

Leonard Green said his wife is peddling a “total, absolute lie” in the court papers.

“She took all of these individual facts ... and said, ‘I’m going to make up this story and I’m going to hurt him.’ And she obviously has,” he said.

The chairlift discussion “never took place” and any meeting with Grass took place well after the Thrifty Payless initial public offering, he said. Grass could not be reached for comment.

In a letter to The Times last week, Leonard Green’s attorney, Dale F. Kinsella, wrote: “Jude Green’s claims are utterly and completely false.... Neither Mr. Green nor any of his representatives knew of the buyout or met with Martin Grass during the time period in which Jude Green alleges.”

Both Schweitzer and Buchholz, reached separately in Colorado, called Jude Green’s testimony a “complete fabrication.”

Schweitzer, who now sells real estate, acknowledged that he asked Green to direct some of the stock from the Thrifty Payless IPO to Buchholz--something executives commonly do. Schweitzer said he immediately sold 100,000 shares, netting about $5,000 in profit.

“I think we chuckled because it was kind of a nonevent,” Schweitzer said. “When you buy an IPO, you hope it appreciates as it hits the market, and I guess it [Thrifty Payless] was pretty flat.”

Buchholz, an accountant, said: “I had directed shares, as well as Boone. And that’s where it ends. It’s not insider trading.”

For his part, Green takes a philosophical view of the troubles that the divorce case has brought on his business ventures. He and his partners are fortunate, Green says. They earn high salaries, travel extensively and live in big houses.

“I’m sure this is going to make great reading for people who aren’t as lucky as we are,” he said. “But we can’t complain.”

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(BEGIN TEXT OF INFOBOX)

Leonard I. Green

Age: 68

Occupation: Founder and partner, Leonard Green & Partners, the West Coast’s largest leveraged-buyout firm

Net worth (as of February 2000): $75 million, estimated

Gross monthly income (as of April 2001): $435,876

Monthly expenses (as of April 2001): $211,390, including mortgages on homes in Malibu and Aspen, Colo.; $8,687 for clothing; $1,190 for golf; $1,122 for wine and liquor; $946 for cigars; and $474 for charity

Assets: 30% to 50% partnership stake in three of the firm’s investment funds. Value of holdings: $16 million

The funds own or have stakes in companies such as Big 5 Sporting Goods, Gart Brothers Sporting Goods, Arrow Group Industries, TwinLab, Leslie’s Poolmart, Petco Animal Supplies, Liberty Group Publishing, Diamond Triumph Auto Glass, Dollar Financial Group and Rite Aid

Other assets include an estimated $41 million in cash and securities, $4.75 million in art, $300,000 in automobiles and a $7-million Gulfstream jet.

Savings in retirement plan: $640,000

Income claimed on federal tax returns:

1996: $26 million

1997: $17.05 million

1998: $14.21 million

1999: $7.54 million

Court quotes:

Leonard Green: “I thought Jude’s professions of love reflected a sincere appreciation of who I was, and am, as a person. One of the more painful aspects of our breakup ... is the realization that Jude apparently only professed to love me for my money.”

--May 1, 2001, declaration

Jude Green: “Leonard Green ... aggressively pursued plaintiff and soon thoroughly enmeshed himself in all aspects of plaintiff’s life....As with his business targets, Leonard Green instituted a ‘takeover’ of Jude Green’s life, pursuing her as he would any other corporate acquisition.”

--Jan. 26, 2001, court pleading

Sources: Leonard Green & Partners; Los Angeles Superior Court filings