Gruntal Financial Corp.

Product Details

Historical Context

The company was founded as Sternberger & Fuld in 1880 by Maurice Sternberger, who entered a partnership with Ludwig Fuld. Sternberger bought a seat on the New York Stock Exchange in 1881 for $20,000. They were joined in 1884 by a third partner, Samuel Sinn, and the firm became Sternberger, Fuld & Sinn, with an office at 52 Broadway in lower Manhattan. There is little documentation to tell the exact nature of the firm's business, but Wall Street men of the time were known as merchant bankers. They would visit the city's merchants and businessmen in the morning to purchase IOUs, which they would stick under their hats. About noon they would walk uptown to the large banks to sell them. Hundreds, perhaps thousands, of similar small partnerships were formed, each specializing in certain kinds of investments.

Benedict H. Gruntal joined the firm in 1890 as a clerk at the age of 17 and worked his way up to cashier. He became a partner in 1900, shortly after obtaining a seat on the New York Stock Exchange--likely a wedding gift from Sternberger for marrying one of his daughters. Gruntal's net worth was only $5,000 when he paid $40,500 for the seat. Soon after, the firm moved to 60 Broadway and was renamed Sternberger & Sinn.

When Sternberger & Sinn closed in 1918--its eponymous partners having retired--the firm immediately reopened as Gruntal, Lilienthal & Co. Benedict Gruntal's brother, Edwin A. Gruntal, bought Lilienthal's seat for $300,000 in 1928.

The firm became Gruntal & Co. in 1931, with the Gruntal brothers, Morris Hartig, and Samuel Wechsler as partners and offices still at 60 Broadway. It was one of the oldest houses with membership on the New York Stock Exchange when it acquired the bond-trading firm Speyer, Alexander & Co. in 1933. Benedict Gruntal sold his seat on the exchange in 1937 but remained a general partner until his death in 1968 at the age of 95. Hartig became the managing partner. In 1938 Gruntal & Co, opened its first branch office, in the Hotel McAlpin at Herald Square. During the early 1940s the firm opened several other branches, including one on West 47th Street in Manhattan's diamond district. By 1955 Gruntal had 10 general partners and had added a branch office in New Haven, Connecticut. The firm, now at 50 Broadway, merged with Stearns & Co. in 1963. Its net worth exceeded $3 million, and it had its own clearing operation.

Gruntal doubled in size by purchasing the assets of the investment/brokerage firm Steiner, Rouse & Co. in 1974. Howard Silverman, who became managing partner that year, pursued a strategy of further growth through acquisition of other regional brokerages. After the acquisition of Philadelphia-based E.W. Smith & Co. in 1982, Gruntal had 23 offices in 7 Atlantic Seaboard states. Its revenues came to $102.1 million in fiscal 1983 (the year ended August 26, 1983), and net income was $7.4 million.

In December 1983 the company went public as Gruntal Financial Corp., offering about 30 percent of its outstanding stock at $8.50 per share. The $23.3 million raised by this sale was used to finance acquisitions intended to make Gruntal & Co., a subsidiary, a full-service investment organization. At this time Gruntal primarily provided securities brokerage and trading services and related financial services in support of its broker-dealer activities. It also participated in the underwriting of corporate and municipal securities and the sale of tax-advantaged investments. Regional Clearing Corp., also a subsidiary and member of the New York Stock Exchange, provided securities execution and clearing services to Gruntal and other broker-dealers.

Unfortunately, Gruntal also accumulated heaps of publicity because of a succession of scandals. In 1994 the company fired two managers whom it accused of stealing at least $3 million. The alleged scheme involved the transfer of funds to fictitious accounts, according to the company, and to various accounts established by co-conspirators. The two suspects fled to Ireland but returned and pleaded guilty the following year. The scandal widened still further in 1996, when Edward Bao, formerly executive vice-president of the firm, was indicted by a grand jury in connection with the scheme. The Securities and Exchange Commission charged that $14 million had been embezzled. Gruntal agreed to pay $6.2 million in fines and $5.5 million in customer restitution, among the biggest penalties ever imposed on a Wall Street firm. Some of the money went to settle other improprieties in the firm's trading and managed account divisions. Bao pleaded guilty in 1997 to falsifying the firm's books and records.

Gruntal also reaped embarrassing publicity in 1995, when a synagogue in New York's suburban Westchester County said it had lost $650,000 from its capital campaign through investments in highly speculative securities. The Jewish center contended that it was misled by Gruntal into thinking the securities were virtually risk free and that it had been charged more than $100,000 in commissions. A spokesman for the company said the accusations were "completely unfounded," but six months later an arbitration panel of the New York Stock Exchange upheld the synagogue's complaint and ordered Gruntal to refund the money lost.

In a less publicized case, Ted H. Westerfield, a former Gruntal & Co. account executive, was convicted in 1996 of paying $35,000 in kickbacks to a bond analyst who sent junk-bond business his way. In 1997 a federal judge ordered Westerfield, who was sent to prison, to pay nearly $345,000 in restitution.

In still another embarrassing incident, the Equal Employment Opportunity Commission in 1997 upheld charges of sexual harassment by six current and former Gruntal female employees. According to the allegations, two branch managers at a company office in Manhattan had harassed the women with sexual gestures, groping, and lurid suggestions between 1993 and 1996. Gruntal agreed to pay each woman $125,000 but did not admit guilt. One of the managers had resigned in 1996 when he learned he was to be fired; the other was assigned to nonsupervisory work.

Silverman was ousted as CEO in 1995 after allegations of improper personal trading emerged in a wrongful dismissal lawsuit filed by a former Gruntal manager. He accused Silverman of cheating retail customers by having his own traders buy municipal bonds below the market and then selling them to the accounts of Silverman and another Gruntal executive. Silverman was replaced by Robert Rittereiser, formerly head of another brokerage firm, E.F. Hutton & Co. One of his first acts was to implement a policy forbidding traders and brokers from capturing for themselves, without disclosure, the spread in the trades they were doing for their customers. He was also said to be putting restraints on some of the company's more aggressive cold calling brokers.

In February 1997 Gruntal was sold to a management group led by Rittereiser in a leveraged buyout valued at about $235 million in securities.

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