DOJ Suit Targets Gamco CEO Gabelli
Liz Moyer, 03.08.06, 4:04 PM ET

New York -
Mario Gabelli, chairman and chief executive of fund company Gamco Investors, is the target of a U.S. Justice Department suit alleging fraud in the purchase of radio spectrum licenses in the 1990s.

The government is actually joining a civil suit originally filed in 2001 by a lawyer under the False Claims Act, which allows individuals with special knowledge of a fraud to file a case on the government's behalf. The suit seeks hundreds of millions of dollars in damages.

The suit alleges that Gabelli--also chief investment officer of Gamco--and certain associates created false companies to acquire the licenses, using rules that advantaged small companies and entrepreneurs, without intending to use them to build communications services.

"The licenses were acquired by Gabelli-controlled surrogates as speculative investments to be sold at a profit at a later date," the complaint says. "Acquisition of discounted telecommunications licenses as an arbitrage opportunity is not a legitimate purpose and conflicts with federal telecommunications 'anti-trafficking' laws."

Gabelli executives did not immediately respond to request for comment, though Gabelli has denied the allegations in the suit.

Federal Government
Moves to Join Fraud Suit Against Investor Mario Gabelli

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The Federal Government has moved to join a False Claims Act lawsuit charging Wall Street investor Mario Gabelli, Chairman and CEO of Gamco Investors Inc., with fraud in the purchase of radio spectrum licenses in the 1990s.

The False Claims Act lawsuit, originally filed under seal in 2001, charges Mr. Gabelli with creating sham corporations which masqueraded as small businesses in order to capture $160 million in discounts and credits from the federal government. Under Federal Communication Commission rules, small and very small companies bidding on radio bandwidth have to stand "not merely as fronts for other companies, but as active entrepreneurs."

How The Fraud Worked

Mr. Gabelli is accused of creating and funding at least 10 sham corporations. One corporation was fronted by a Gabelli friend who was an aerobics instructor and who had no experience in the telecommunication industry. Another was fronted by Trent Tucker, a former New York Knicks basketball player and a Gabelli client who in testimony said he thought he was a passive investor in the scheme. Other placeholder owners included a New Jersey accountant who had referred clients to Mr. Gabelli, an 82-year-old retired administrative assistant of a Gabelli associate, and the property manager of one of Gabelli's vacation homes.

According to the complaint in the case, Mr. Gabelli, who runs a New York investment firm with more than $27 billion in assets and whose personal shares in the company are worth more than a billion dollars, falsely claimed the partnerships he created and largely financed were independent small businesses. By making this claim, Gabelli and his partners appeared to qualify for $90 million in federal discounts as well as $70 million in financing breaks on federal loans. After winning the lucrative radio licenses at discount, Mr. Gabelli and partners sold the licenses, netting $206 million in profit, most of which went to Mr. Gabelli. Under the False Claims Act, Mr. Gabelli and associates face potential treble damages of over $480 million, as well as a possibility that they will be required to disgorge, back to the government, $206 million in net profit from resale of the radio licenses.

The Feds and the False Claims Act

The lawsuit against Mr. Gabelli is being filed under the False Claims Act, a Civil war-era law designed to discourage and ferret out fraud against the Federal Government. The False Claims Act allows private citizens with special knowledge of a fraud to come forward and file a case on the Government's behalf. The Government can then join the case or, if it does not, the private citizen may prosecute it on his or her own. In this case, the lawsuit was initially filed by Russell C. Taylor III, a lawyer working at a firm associated with the fraud. If the case is successful, Mr. Taylor could be awarded between 15 and 25 percent of the amount recovered, with 75 to 85 percent of the award going to the Federal Government.

"This case demonstrates very clearly why the whistleblower award provisions of the False Claims Act are effective and necessary," said Jim Moorman, President of Taxpayers Against Fraud, a nonprofit organization devoted to promoting increased use of the False Claims Act.

"Often agencies that have been defrauded never realize they have been ripped off. That seems to be the case with this fraud. It was only after the whistleblower moved forward with the case on his own, and only after the developed evidence was revealed by the court and covered by The Wall Street Journal, that the Government realized it had been taken. Because of the work of the whistleblower and his lawyers, the government now understands it was defrauded. Happily, they have decided they needed to join the case in order to protect taxpayers."

Mr. Moorman notes that the U.S. Government joins fewer than 100 False Claims Act cases a year. "When the Government joins a case like this, after initially declining to join, it means they are impressed by the case that the whistleblower's legal team has developed, and that they feel they have a responsibility to pitch in and help land the case. In these kinds of situations, it is almost certain that the whistleblower and the government will win."

Mr. Gabelli's Other Legal Problems

Along with a False Claims Act lawsuit, Mr. Gabelli is under fire from two of his own company's major shareholders who have sued him for taking too large a salary, and for preventing them from selling their shares in his holding company, Gabelli Group Capital Partners Inc. The lawsuit places Mr. Gabelli's income in 2004 at $55 million, which does not include any fees from the Gabelli Group. That compensation, according to DolmatConnell and Partners, which analyzes executive compensation, was 18 times higher than the average compensation for the heads of nine other investment services with $200 million to $500 million in revenues, a category that includes GAMCO.

In both the False Claims Act lawsuit and the lawsuit filed by two of his major shareholders, Mr. Gabelli has claimed that the goal of the private litigants is simply to extort money from him and his firm. With the Federal Government now moving to join the False Claims Act case, that charge is going to be harder to make stick.

The whistleblower in this case is represented by Phillips & Cohen, a law firm specializing in false-claims cases, and Williams & Connolly, a corporate-defense firm that has joined the plaintiff's side in this particular case. Mr. Gabelli and his associates are represented by the law firms of Skadden Arps Slate Meagher & Flom and Covington & Burling.

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September 25, 2005
'Super Mario' Has a Super Headache
By ANDREW ROSS SORKIN, NY TIMES

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IN 1976, Mario J. Gabelli, then a red-headed 34-year-old research analyst, took one of his regular trips to Branford, Conn., to meet with Frederick J. Mancheski, then chairman and chief executive of Echlin Inc., an auto parts company he covered. But on that visit, Mr. Gabelli had something to sell: himself.

"He came in one day and said he was thinking of starting his own firm to manage money," Mr. Mancheski, now 79, recalled in a recent interview. "I told him I thought he had the know-how and he asked me if I'd be interested in investing in it. I was the first backer." He sent him a $50,000 check.

Mr. Gabelli, now 63 with a shock of white hair, has gone on to become one of the nation's most successful and powerful mutual fund managers; his company, Gamco Investors, formerly Gabelli Asset Management, has huge stakes in some of the world's largest media companies, including Time Warner and Viacom. Barron's once listed him among the "world's greatest stock pickers." By following a value-investment philosophy not that different from Warren Buffett's, he has come to be known on Wall Street as "Super Mario."

Mr. Gabelli made his name and fortune by being a vocal champion of shareholder rights, often railing in the press against companies to push them to follow his agenda. He has said he "got the idea from the Pilgrims of the 17th century, who would put you in the stocks when you committed a crime to serve your appropriate tour of duty and expose you to public ridicule."

But today his own $28 billion empire, based in Rye, N.Y., is under attack, accused of an assortment of corporate abuses. And his accuser is perhaps his unlikeliest foe: Mr. Mancheski.

Although he is the second-largest investor in Mr. Gabelli's private holding company, Mr. Mancheski has filed suit against it, contending that Mr. Gabelli and his firm's directors "are guilty of looting the assets of the company, breaching their fiduciary duties to its shareholders and oppressing its minority shareholders."

The suit offers a rare glimpse inside Mr. Gabelli's mutual fund kingdom, uncovering reams of previously confidential documents and highlighting other records that suggest his business may be run like so many of the companies that he has long criticized as disenfranchising shareholders.

They show, among other things, that Mr. Gabelli has spun a complicated web of private and public businesses that he has used to pay himself and his sons hundreds of millions of dollars in salary and management fees. In some cases, the compensation goes far beyond what has ever been made public in the company's filings.

It is certainly no secret that Mr. Gabelli, a graduate of Fordham University and Columbia Business School, is well paid. His publicly disclosed income for 2004 was $55 million - "enormous by any standard," said Rachel Barnard, an analyst at Morningstar - and in 2002, he took home $87 million in cash when the firm's net income was only $53.3 million.

Nor is it a secret that outsiders have previously raised questions about his governance. Morningstar, while acknowledging that his company's stock has outperformed the Standard & Poor's 500-stock index by a wide margin since 1999, has nonetheless consistently given his funds a near-flunking "D" grade for stewardship. The low mark was based in part on Mr. Gabelli's lavish compensation and tight control over the business.

But Mr. Mancheski's lawsuit, which was filed with David M. Perlmutter, another of the firm's original investors and a former lawyer for the company, takes the allegations much further. Of course, the goal of the lawsuit is to force Mr. Gabelli to pay the men tens of millions of dollars that they say they are owed. And the men, both of whom are already wealthy, may have been motivated to make some of the lawsuit's most strident accusations in hopes of being able to extract a generous settlement from Mr. Gabelli. Mr. Mancheski and Mr. Perlmutter own nearly 10 percent of Mr. Gabelli's private company.

Mr. Gabelli declined to be interviewed for this article. A spokesman for him called the suit "tantamount to greenmail" and suggested that the men were trying to "reap huge additional gains at the expense of the other shareholders." Nonetheless, the judge overseeing the case, in State Supreme Court in Westchester County, has denied Mr. Gabelli's requests to have it dismissed. The case is expected to be tried later this year, unless a settlement is reached first.

TRYING to understand Mr. Gabelli's empire is like trying to solve a complex jigsaw puzzle whose pieces have been scattered. There is the widely known publicly traded Gamco Investors, which houses the famous family of mutual funds that is the crown jewel of his business. Then there is a private company, called Gabelli Group Capital Partners, or G.G.C.P., that owns majority control of Gamco and operates several other ancillary investment businesses.

Mr. Gabelli is the majority owner of G.G.C.P. and therefore also has majority control of Gamco. While Gamco reports its earnings, compensation for executives and other information to the public, G.G.C.P. does not. As a private company, it doesn't have to.

As a result, investors in Gamco would never know, for instance, that Mr. Gabelli takes the equivalent of two salaries: one from Gamco and another from G.G.C.P., a curious idea since G.G.C.P.'s main business is, well, Gamco. Documents from the case show that beyond Mr. Gabelli's public salary at Gamco, he pays himself 20 percent of G.G.C.P.'s pretax revenue as a "management fee," which he shares with his sons Marc and Matthew, both of whom serve on G.G.C.P.'s board. The G.G.C.P. management fee alone has produced more than $20 million for Mr. Gabelli and his sons since 1999.

In addition, Mr. Gabelli is the chairman and chief executive of another public company, called Lynch Interactive, a multimedia company that shares office spare with Gamco. Mr. Gabelli's son Marc is the chairman of the Lynch Corporation, the one-time parent of Lynch Interactive, a public company that shares office space with G.G.C.P. Filings show that Lynch Interactive and the Lynch Corporation have paid Mario Gabelli over $7 million since 1999.

All of this raises a question: How can one person be in so many places at one time? To be sure, senior executives often have roles outside of their company on boards of other businesses or charities, but it is rare to see the same executive with the title of chief executive for three separate businesses, two of them publicly traded entities. According to Mr. Gabelli's employment contract with Gamco, he is required to spend "the substantial majority of his working time" operating that business.

Mr. Gabelli's generous compensation poses a particular problem for Mr. Mancheski and Mr. Perlmutter. Both contend that as minority shareholders in G.G.C.P., they can only watch helplessly as Mr. Gabelli has paid himself handsomely with what they say is at least partly their money. While Mr. Mancheski accepts that he had agreed to Mr. Gabelli's initial pay formula, he questions its suitability for the leader of a company that has grown so large.

"If I had been advised in 1977 that Mr. Gabelli would pay himself 40 percent of gross revenues generated by him and 20 percent of the company's pretax revenue regardless of how successful the company became, how many additional executives and employees were hired, or how much money that formula produced in any one year, I would not have invested," Mr. Mancheski said in an affidavit. "Although such a compensation formula might have been appropriate for the chief executive of a start-up company with virtually no business, it is a wholly inappropriate formula for the chief executive of a mature and successful company."

So why doesn't Mr. Mancheski just sell his stake in the business?

That is the heart of his problem and, in turn, the basis of his case. He can't.

The tension goes back to when Mr. Mancheski and Mr. Perlmutter first invested with Mr. Gabelli. At the time, there were very few conditions attached to the investments. Mr. Mancheski and Mr. Perlmutter say they believed that at some point they would be able to sell their shares for whatever they were worth or transfer them to members of their family. For more than two decades, neither man had any reason to sell his shares - and Mr. Gabelli has been on a long hot streak.

In 1999, Mr. Gabelli took his company public. It was supposed to be a huge payday for everyone. Mr. Mancheski's original investment in 1976 would have turned into nearly $100 million, if not more. But at the last minute, Mr. Gabelli restructured the offering so that only the company's mutual fund business would be taken public - leaving the company's ancillary investment businesses remaining in the private company, and preventing its minority investors from being able to cash out.

A review of the company's filings with the Securities and Exchange Commission shows that Mr. Gabelli originally filed to take the entire private company public, which would have given all G.G.C.P. shareholders publicly traded stock. But then he changed the arrangement, transferring its operating businesses into a new subsidiary that then issued 20 percent of its stock to the public and 80 percent to G.G.C.P. The reorganization not only kept the company's minority shareholders like Mr. Mancheski from reaping the benefits of the I.P.O.; it also made it possible for G.G.C.P. to avoid having to make public disclosures.

It is not clear whether the purpose of changing the structure of the offering was to disenfranchise Mr. Gabelli's original minority shareholders. Executives involved in the offering suggest that the offering was restructured, in part, for tax purposes and to make the company more attractive to new investors. Still, the byproduct of the restructured offering was to preclude G.G.C.P.'s shareholders from being able to sell their shares.

While Mr. Mancheski and Mr. Perlmutter received nothing directly from the offering - except for the theoretical increase in the value of the company - Mr. Gabelli paid himself a $50 million bonus in cash. At the time of the offering, Goldman Sachs, which was underwriting it, refused to work on the project unless Mr. Gabelli lowered the formula for his compensation. The formula had called for Mr. Gabelli to be paid 20 percent of pretax profits. To placate Goldman, he dropped his demand to only 10 percent of pretax profits and took the $50 million one-time payment.

IN 2003, Mr. Gabelli went to Mr. Mancheski's house for breakfast. Mr. Mancheski said he told Mr. Gabelli that he wanted to sell his shares and transfer others to his children and grandchildren as part of his estate planning. According to Mr. Mancheski, Mr. Gabelli had a surprise for him: he told him that he couldn't. Mr. Gabelli said Mr. Mancheski's shares were restricted and could not be sold or transferred without the approval of the board - and being that he controlled the board, he was not approving their sale to anyone but the company.

Mr. Mancheski was given two choices: he could sell his shares back to Mr. Gabelli, using a predetermined "book value" formula that Mr. Mancheski says would leave him with only about a third of the more than $100 million that he says his stake is worth, based on the share price of Gamco. Or he could hold on to them until he dies, at which time they are required to be sold back to Mr. Gabelli at the same price anyway. Neither choice is that appealing.

"Mario's a stubborn guy," Mr. Mancheski said.

Money manager Gabelli under fire over pay
By ALLAN DRURY
THE JOURNAL NEWS
(Original Publication: January 17, 2006)

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