Inside an investment banking battle royale

This is an audio transcript of the Behind the Money podcast episode: ‘Inside an investment banking battle royale’

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Michela Tindera
Recently, my colleague Sujeet Indap has been spending a lot of time inside a courtroom in downtown Manhattan.

Sujeet Indap
It has been like quite a spectacle.

Michela Tindera
Sujeet is the FT’s Wall Street editor. And the case he’s been watching pits the two founders of a powerful investment bank against their former star banker.

Sujeet Indap
In the courtroom, these otherwise high-powered Wall Street finance people who have been effectively at war for literally a decade, they are finally getting the chance to confront each other in court and settle this blow-up from 10 years ago.

Michela Tindera
Yep, you heard that right, 10 years of bad blood. This trial — Sujeet told me — has been offering a rare peek inside the inner workings of a firm that’s brokered the sales of some of the biggest companies in the world.

Sujeet Indap
I mean, investment bankers are very discreet people, though . . . How they actually work is mysterious. What happens in boardrooms is mysterious. What advice they give to clients is mysterious. And then how they manage their firm and all their personalities within the firm, the case has thrown a harsh light just on these internal rivalries and dynamics.

Michela Tindera
This decade-long conflict has raised major questions about how power and pay are metered out within this pocket of high finance.

Sujeet Indap
Every major firm is grappling with this issue of how do you retain talent, motivate talent, but then how do you also get them to fit into a culture? And from the banker’s point of view, how do you meet your own personal goals in a large group? Or do you have to go start your own firm or go to a smaller place? And those are universal dilemmas. And this case is really the scenario when all that doesn’t go right.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re going inside the drama of the high-stakes legal battle between Perella Weinberg Partners and Michael Kramer.

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The story behind this conflict begins with two well-known and well-pedigreed bankers. Their names are Joe Perella and Peter Weinberg.

Sujeet Indap
Joe Perella is one of the pioneering figures in mergers and acquisition advice. He, along with a handful other people, invented this business in the ’70s and ’80s.

Michela Tindera
So Perella is a finance trailblazer. Peter Weinberg is a finance legend. He’s part of the family that ran Goldman Sachs for many years. And so, after already successful careers in finance, Perella and Weinberg decided to team up and go into business together in 2006.

Sujeet Indap
They wanted to start a boutique firm, which would focus mostly on mergers and acquisitions. So just giving companies advice, they weren’t gonna be doing IPOs and debt offerings, just M&A. And that was increasingly becoming a popular model. And they both obviously had great reputations and last names and notoriety.

Michela Tindera
Wall Street power couple.

Sujeet Indap
Yeah. Power couple, exactly. Royalty in their own way. And between their relationships and the people they would hire, they would be able to compete on the biggest transactions in America and around the world.

News clips
There is a deal today in the luxury handbag business. Coach has agreed to buy Kate Spade. The price: $2.4bn.

Breaking news: a $117bn deal in the beer industry, including debt and cash. SABMiller and Anheuser-Busch InBev agreeing to merge. SABMiller has asked the UK’s take on . . . 

Michela Tindera
Those are just a couple of headlines from big deals that Perella Weinberg Partners or PWP have worked on over the years.

Sujeet Indap
And from the client’s point of view, often these transactions are the most important thing they’ll ever do — selling your company or making a big acquisition. And so the bankers are providing advice on valuation and then negotiation tactics and helping the CEO think through what their challenges are. And so the advice that they get is very important. So they will pay a lot of money for good advice.

Michela Tindera
Now around the time that Perella and Weinberg are getting things up and running, they decided they also need to get into what’s known as the restructuring business. That’s whether you’re trying to fix up companies that have run out of money or are teetering on the edge of bankruptcy. To do that, they turn to someone that they don’t actually know very well — Michael Kramer.

Michael Kramer voice clip
In investment banking, as many of you know, its average workweek is probably in the 80 to 100 hours a week, if not more, so I jump feet first into it. I mean, my career started by . . . 

Sujeet Indap
Mike Kramer was from California. He had gone to a state school there called Cal State Northridge and didn’t have, like, the traditional Wall Street background. So restructuring bankers — especially those who came of age in the ’90s, like Mike Kramer — tended to have scrappier backgrounds because it was a newish area, the companies were troubled and they were smaller often, and it was just a messy, messy world.

And so Mike Kramer was different than Joe Perella, who had gone to Harvard Business School, and Peter Weinberg, who was Harvard Business School as well and part of this Goldman Sachs royalty. Wall Street can be a clubby place. So oftentimes people have gone to the same set of colleges, if not high schools. And for those people who have broken in from somewhere different, sometimes it takes longer for them to gain acceptance.

Michela Tindera
Despite how different his education and training was from his bosses, Kramer quickly became a huge asset to PWP — thanks to the booming business of restructuring.

Sujeet Indap
Distressed debt has become a huge asset class on Wall Street. We had the financial crisis, which created a lot of companies running out of money and needing to refinance or go bankrupt. And then more broadly, there was just more interest in distressed debt. And for people who were experts in that process, the bankers like Mike Kramer, there was a huge opportunity to keep growing that business.

In many ways, the hiring of Mike Kramer was a big success for Perella Weinberg, in that he was important in restructuring. He ended up generating a lot of fees and deals and revenues, and was among the highest-paid people at the firm, given he was generating a lot of business.

Michela Tindera
So Kramer becomes one of PWP’s star performers. Now, I want to pause here for a sec because this is important to point out.

Sujeet Indap
There’s an old expression on Wall Street: every night, an investment firm or hedge fund has their most important assets walk down the hallway and take the elevator and go home to sleep every night.

Michela Tindera
And Sujeet, what exactly do you mean by that?

Sujeet Indap
So investment banking is a relationship business, especially for the star performers at the top of a firm. And because they have the actual relationship with the clients and are the ones who are pitching business and selling the business and then executing the deals, if they were ever to leave, the relationships that they have often go with them. And if they do go, that can leave a big hole in the business.

Michela Tindera
This is also why Wall Street firms often have such strict employment contracts with their workers.

Sujeet Indap
And typically what they say is, if you want to start your own firm or work in another firm, you have to sit out for six months or maybe a year. And at the same time, you can’t try to poach some of your colleagues. And the point of this is to protect that investment that the firm thinks it’s made in its talent.

Michela Tindera
So, in short, these employees are super important to their firms. So now that we know all that, let’s get back to Kramer, Perella and Weinberg and jump to 2014.

Sujeet Indap
As Mike Kramer prospered at the firm, he increasingly got some more management responsibilities. And as he got that, he tended — according to Perella Weinberg Partners — to rub his colleagues the wrong way. Some found him to be divisive or sharp-elbowed, or they just didn’t quite get along with him. And so while he was succeeding and generating value for the firm, his leadership and management broadly at the firm with other partners had become a sore point.

So in 2014 — particularly as we get to the latter half of the year — the firm and Mike Kramer are trying to figure out a way to move forward in some fashion. And so Peter Weinberg and Mike Kramer are increasingly having meetings. And Peter Weinberg has given the message to Mike Kramer that you’re valued here as a banker, as a revenue producer, as a client guy. But you’re probably not going to have a future in management here. And so at that point, Kramer has to decide what he wants to do. Is that deal good enough for him?

Michela Tindera
What Sujeet is saying here is that Kramer, Perella and Weinberg are at a crossroads. And Kramer is trying to figure out what’s next for him. And that’s when we get to a very important date — Presidents’ Day of 2015.

Sujeet Indap
So on Presidents’ Day, the 16th of February, Mike Kramer gets a voicemail along with three other colleagues saying they have been terminated for cause by Perella Weinberg.

Michela Tindera
What does that mean?

Sujeet Indap
It means they’ve been fired and they’ve been fired for misconduct. And the reason they were given was, Perella Weinberg said they had learned of a plot to start a rival firm that would “lift out” — that’s the phrase that’s often used — lift out the existing restructuring group at PWP and start a new firm run by Mike Kramer, which Perella Weinberg says was a clear violation of Kramer’s employment agreement, his partnership contract.

Michela Tindera
OK, can you just tell me, I mean, how big of a deal is this? And what would it mean for the bank if Kramer left PWP?

Sujeet Indap
Well, it’s pretty shocking that a very senior employee can just be terminated like that. Kramer and the others who got fired did not see it coming. It was very much to him being blindsided. For PWP, this would definitely be painful. Kramer was the leader of the restructuring group, which was a significant part of the business. So if he left, you’re losing one star performer. But they were also concerned, because he was the leader of the group and worked with many of the top professionals in that group, that they would follow him if he started a new business.

Michela Tindera
Kramer’s shut out by the firm instantly. But this is only the beginning of the battle that quickly turns public.

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News clip
All right. One of Wall Street’s major boutique investment banks, Perella Weinberg, is losing talent, scrambling to raise money and possibly about to face a lawsuit from a big-time former employee.

Michela Tindera
Not long after Mike Kramer’s fired, he files a lawsuit against Perella Weinberg Partners. He says when he was fired, he lost some $40mn of equity in the firm, and he wants his fair share back. By the end of the year, PWP countersued. They say that Kramer breached his contract and he was plotting to leave the firm, and he needs to pay up. In leaving, they say he damaged the bank’s business. When Kramer left, they had to hire new bankers to replace him and his team, and they say he wasn’t entitled to bonuses that he had gotten just before he was fired. And this kicks off the next decade of court filings, testimony and hefty attorney fees.

So, Sujeet, you’ve now been following this case for a decade yourself. Help me understand what does Perella Weinberg say happened? Is it true that Kramer was trying to go off and start his own firm?

Sujeet Indap
So in Perella Weinberg’s telling, in that week leading up to Presidents’ Day 2015, Kramer and Peter Weinberg had dinner in Connecticut, one of the nights that week. After the dinner, Peter Weinberg was under the impression that Mike Kramer was resigning and would leave Perella Weinberg shortly thereafter. Kramer has said, in fact, he had not made a final decision about staying or going at PWP. In any event, Weinberg went back to work that week trying to keep the restructuring group together.

Michela Tindera
So what did Peter Weinberg say he learned when he got back to work? What came out of those conversations?

Sujeet Indap
In the course of one of those conversations, one banker tells Peter Weinberg — and then later the rest of PWP management — that Kramer and a bunch of other senior restructuring bankers had been plotting or considering starting their own firm. Once Peter Weinberg finds out about those conversations, gets this indication from this other banker in the group that others in the restructuring department had been plotting this firm, allegedly, he starts doing more digging and ultimately comes to the conclusion that Mike Kramer has violated his employment agreement by plotting this new firm and makes the decision to fire him.

Michela Tindera
OK, but Kramer denies ever plotting to leave and set up his own thing. So let’s talk more about his side of things. What has he said to these accusations?

Sujeet Indap
Kramer had said that in fact, he was not instigating anything. There was wide discontent in his group around how PWP was allegedly treating the other members of the restructuring group. And those other members were getting restless about their futures, they didn’t think they had an opportunity to make more money or advance. And in fact, they were airing these grievances with Mike Kramer and he was strictly in listen mode. He not only didn’t solicit them, it was their idea to go to him. And he even testified that he was telling his colleagues in the restructured group, in fact, you should stay at PWP. There were good opportunities there.

Michela Tindera
Ultimately, though, after Mike Kramer’s fired from Perella Weinberg, he does strike out on his own. And he brings some PWP colleagues with him.

Sujeet Indap
Very quickly or a few months later, he incorporates a new firm called Ducera Partners, at which point, almost 10 people from his former group at Perella Weinberg have joined the firm.

Michela Tindera
Still for 10 years, each side goes back and forth and neither agrees to a settlement. So, Sujeet, I mean, why couldn’t they settle?

Sujeet Indap
Both sides feel like the other one is in the wrong. Perella Weinberg feels very strongly that Mike Kramer betrayed them — they’ve said that in court. And they don’t believe they owe him any compensation and that they have the right to keep his equity. And then on the flip side, Mike Kramer believes he was treated shabbily and inappropriately. He had not violated his agreement. In fact, he had been trying to, in his words, find like, a peaceful resolution or negotiation at Perella Weinberg, whether that was leaving, whether that was staying in some other capacity. And in fact, he thinks the $40mn-plus at the time that was on the table, which he had earned, belongs to him and wants his day in court to get that.

Michela Tindera
So you went to trial, as you were saying, things were pretty tense in there. What did you learn from watching all this play out?

Sujeet Indap
I think of . . . you know, what’s been interesting about court is that we have seen like the human drama in these firms. I mean, there’s been at least 10 bankers who have testified. And you see how much time they spend on thinking during their day and not just about client work, but their position in the firm, how much do they get paid, about power, about their other rivals in the firm, how much the other person next to them is making. And you just get a sense of how much just, like ego is attached to these jobs and how much emotional involvement there is and how you’re perceived at the firm in the form of your pay and your power.

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Michela Tindera
So at the moment, for this case, the only things left are closing arguments and then the judge’s decision. So walk me through what are the possible outcomes and what do you think will happen.

Sujeet Indap
It could be that there is a no-harm-no-foul scenario where everyone just keeps what they have. So the idea would be that Kramer could be found to have not damaged PWP by leaving, and therefore wouldn’t have to write them a check, as PWP has requested. On the flip side, what could also happen in that scenario is that PWP gets to keep the equity that is seized because the judge rules that Kramer, in fact, did improperly plot a new firm and have these meetings in violation of his contracts. And so we end up in this situation 10 years later that everyone just ends up where they started.

Michela Tindera
And how likely do you think it is that it could end up in this no-harm-no-foul scenario? Is that what the way it seemed like it is leaning? 

Sujeet Indap
Yeah, it’s hard to say exactly how the judge will rule, but I’ll point to two things that happened in court. The judge was very focused on asking PWP in certain moments, what was the real damage of Kramer leaving, because if he had left in a way that was in line with what his contract said, all those things PWP said — having to start a new group and hire new bankers — they would have had to do that anyway. So what is that incremental damage?

At the same time, he questioned how Kramer could be involved in these meetings where there was discussions of a new firm and proposals were flying back and forth. And Kramer said all that was driven by the junior bankers, but the judge noted Kramer perhaps could have tried harder to separate himself from those conversations. And for that reason, you could get a sense that he didn’t think one side was totally right and one side was totally wrong.

Michela Tindera
So is there such a thing as an amicable break-up on Wall Street?

Sujeet Indap
Unsurprisingly, bankers do leave their firms, and often the bank is not happy about that. So the question is why — when that happens — does it not usually lead to a lawsuit? And the reason for that is both sides know it’s in their best interest to strike a deal up front so they can split existing client revenues in some fashion so clients are not hurt. They also don’t want to damage their reputation in the marketplace, both sides.

Firms are hiring new bankers, they want bankers to come. And if they have a reputation of being difficult on the way out the door, that can hurt their recruiting efforts. And by the same token, for bankers who are leaving their firms, they don’t want the reputation that they are difficult or not willing to compromise. So these are dealmakers and they find a deal, and it’s usually good for them and good for the marketplace. And even if they’re a little bit unhappy or maybe more than a little bit happy, they know it’s in their best interest not to end up in court.

Michela Tindera
That’s a good point. If I’m a banker like Mike Kramer, rising up through the ranks and I want to go and start my own firm, what’s like a lesson that I could take from learning about this case?

Sujeet Indap
So the irony of this case and where it stands now is that obviously, Mike Kramer started his own firm, and many people think he’s the kind of guy who should have his own firm. He’s very strong-willed, he’s very talented, and he should just be in charge of something. And so that means there was just kind of irony at the end, which is that in fact, these two sides in this dispute, Perella Weinberg and Kramer have finally something in common. Kramer has his own firm, Ducera Partners, and he’s the boss. And all these issues about motivating the bankers underneath him, how to grow the firm and make it cohesive and try to keep everyone in the fold — that now suddenly is his job. And so maybe there is some amount of commonality, finally, between Perella Weinberg and Mike Kramer.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. It’s produced by me, Saffeya Ahmed and Katya Kumkova. Sound design and mixing by Sam Giovinco and Joseph Salcedo. Original music is by Hannis Brown. Topher Forhecz is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.