Inside Rick Lazio's Biggest Wall Street Deal—The Chummy E-Mails

Diverting nearly a billion in retiree benefits into subprime risk? Oh, just watch him work the e-mail.

That didn't work, so the two began a repeated exchange, trying to set a date and location, with Lazio offering to come to D.C. if Millard couldn't "break free a NYC date." Lazio had to find a date that suited other Morgan executives. They finally settled on June 12 at Morgan's offices at 245 Park Avenue, a Thursday, 9:30 a.m. meeting, unusual for Millard, who was usually in Washington at that time. That morning, Millard sent his assistant an e-mail to make sure that his chief of staff, George Koklanaris, was in the Park Avenue lobby "on computer for the Lazio meeting." He was.

The long and secret meeting's purpose was to discuss a contracting process that wouldn't formally begin until July 31, putting Morgan on the inside track to win a bid it was helping to shape. Lazio's e-mail immediately before the meeting scouted out a "nice" conference room. He, John O'Shea, and Morgan alternative investment chief John Garibaldi attended from Morgan. O'Shea's postmortem said Millard "would like our help in shaping his vision," and he pointed out that Millard anticipated "external criticism" for shifting pensioner money to riskier investments, but said it was "mainly politically driven."

O'Shea also predicted in this e-mail, sent to 15 Morgan executives—including Jes Staley, head of asset management and a Morgan king—that Millard would propose a Strategic Partnership, with $500 million allocated each for private equity and real estate. And that would be just a taste: Millard was publicly indicating that as much as $15 billion in PBGC assets would ultimately be up for grabs.

Conversations continued, and on June 30, O'Shea wrote another e-mail to many of the same executives, asking them to review a lengthy document on Morgan's partnership capabilities with PBGC. Seeking input, he was preparing it to be sent urgently to PBGC. All of this was going on a full month before PBGC planned on issuing its public bid for strategic partners.

On July 7, a Lazio superior, Michael O'Brien, e-mailed him and other members of the team asking each to list "the top 2 or 3 pieces of business that you are working on to get closed this year." Lazio replied: "I don't think I have a top 2 or 3 business opportunities to close in 2008. Should I? I would love to make progress on the PBGC opportunity but it's a long shot to get all commitments this year." O'Brien got back: "Your help with PBGC greatly appreciated." In other words, Millard's deal was literally all Lazio had.

Three days before PBGC publicly asked for bids in an "RFP" on July 31, O'Shea sent Koklanaris a 10-page list of "sample RFP questions." He also sent him contact information for Morgan clients "with whom our relationship has grown into one that resembles the type of strategic partnership that we have discussed." The same day, Lazio and Millard once again exchanged e-mails connected to a phone call. On July 30, Millard instructed Koklanaris to make sure the RFP went to six people, including all three eventual winners (Morgan, Blackrock, and Goldman Sachs). Lazio was, of course, on the list.

Rebecca Batts, the PBGC Inspector General who was the first to probe Millard's contracts with the three new "Strategic Partners" grilled Millard about O'Shea's RFP e-mail. Her report, completed shortly after Millard left the agency, noted that the file name of O'Shea's attachment ("v5.doc") suggested it was "the fifth version of an ongoing collaboration," and Millard replied that he didn't know if it was. Questioned about the Morgan RFP suggestions, he "explained that he likely had discussed proposed questions with several firms." Indeed, he made multiple calls to Goldman during the same three July days that he'd been in touch with Lazio and O'Shea.

"We concluded that allowing some bidders to pose sample questions could offer an unfair advantage to some bidders," Batts found. Millard's contact with bidders "allowed some, but not all, to have frequent and in-depth access to a key procurement decisionmaker," casting "serious doubt on the integrity of the process," her report said.

Federal regulations bar any contact between the people making decisions about bids and the bidders themselves during the blackout period between the release of an RFP and the selection of the winners. Katherine Rosa sent out an e-mail marked "URGENT" on July 31 informing other executives: "We can have no more conversation with PBGC on the topic." Nonetheless, Batts found 10 calls between Lazio and Millard before the October 31 selection day, more than any other winner, two originating with Lazio and three others from Millard's cell phone. At the same time that Millard was talking to Lazio, he was e-mailing a firm he would eliminate to say: "The rules of ethics prevent me from having our lunch meeting."

The Morgan team was so confident it would win this bid that O'Shea scheduled a half-hour meeting with Staley for August 21, e-mailing Lazio about it: "Rick, feel free to join. I know you might have mentioned this opportunity with Jes. I want to make sure he is fully briefed. . . . Let me know if this meeting is overkill given any previous discussions you might have had with Jes." Lazio and O'Shea were jockeying for position to reel in credit (and bonuses) two months before a decision would be announced.

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