The Company He Keeps

As a businessman, he's been mixing with a sketchier crowd. Rudolph W. Giuliani sprinted through October as if he were running for national office. He was, of course, campaigning for other Republican candidates--popping up, over a period of ten days, in Detroit; Schaumburg, Ill.; Portland, Ore.; Seattle; New York City; Mystic, Conn.; Concord, N.H.; Providence, R.I.; and Stamford, Conn. Wherever he went, Giuliani was the main attraction. The crowds didn't want to hear much about election 2006; they wanted to know if Rudy was planning to run for president in 2008. "I'll make the decision sometime next year," he announced in New Hampshire. Is the outcome in doubt?

Giuliani is the closest thing in America to a mythic hero. His reputation was forged in the refiner's fire of Sept. 11, which burned away the dross of what had been a successful but contentious two terms as New York City's mayor, a guy who reduced crime, yet picked fights with squeegee men and jaywalkers. In the aftermath of the attacks Giuliani rose to become a transcendent figure of compassion and strength whose courage was acknowledged by Queen Elizabeth II, who gave him an honorary knighthood, and Time magazine, which made him its "Person of the Year" in 2001. That image has helped Giuliani become the most popular politician in the U.S.; recent polls show him leading all contenders--Republicans and Democrats--who are contemplating a run at the White House.

Since leaving office in early 2002, Giuliani has been winning more than political capital. While battling prostate cancer (he won that war) and raising hell in a very public divorce (he is now married to Judith Nathan, his third wife), he has been banking millions of dollars a year. His Leadership (Talk Miramax Books, 2002) figured in an estimated $3 million in advances for two books. He earns as much as $8 million a year on the speaking circuit (FORBES hired him to speak at a conference last year). Giuliani Partners, a management consultancy that oversees Giuliani Security & Safety and Giuliani Capital, has nabbed tens of millions of dollars in contracts and deals.

Rudy is hardly the first ex-pol to cash in on his name. The revolving door between the government and the private sector has always moved briskly. Giuliani Partners was set up to make money and "do good," says Michael D. Hess, a partner and a former Giuliani administration official. "I think people are attracted to the organization because of the image of leadership and trust and integrity," says Steven D. Oesterle, a partner and managing director of the firm. Question is, have Giuliani's moneymaking efforts buffed or tarnished the gold-plated name?

There have been white-shoe clients. Giuliani Partners has advised the likes of insurer Aon (nyse: AOC - news - people ), CB Richard Ellis, the real estate services firm, and Entergy (nyse: ETR - news - people ), the giant New Orleans utility. Nextel Communications (nyse: S - news - people ) paid Giuliani Partners 1.2 million stock options with an exercise price of $4.50. The firm says it sold out at a profit, but before the shares rose to $33 in August 2005, when Nextel was bought by Sprint. It also points to its work for U.S. Foodservice, helping the unit of the disgraced Dutch grocery chain Royal Ahold overcome its accounting and legal headaches.

But there have also been plenty of scuffed-shoe customers. Giuliani Partners and its units have repeatedly become entangled in petty deals that seem unworthy of someone with national aspirations. It has accepted fees from companies with over-the-counter penny stocks, made alliances that have gone nowhere or made little financial sense and engaged with businesses and individuals who have come under scrutiny by regulatory and law enforcement officials. Such associations are astonishing for this tough, Brooklyn-born prosecutor who nailed gangsters like Paul Castellano and white-collar felons like Marc Rich, Ivan Boesky and Michael Milken. It's the sort of carelessness that suggests either poor judgment or inattention. "We do this very careful due diligence," says Hess. "We would never get involved in anything that is at all shady or risky or questionable."

Entire article:

As a businessman, he's been mixing with a sketchier crowd.

Rudolph W. Giuliani sprinted through October as if he were running for national office. He was, of course, campaigning for other Republican candidates--popping up, over a period of ten days, in Detroit; Schaumburg, Ill.; Portland, Ore.; Seattle; New York City; Mystic, Conn.; Concord, N.H.; Providence, R.I.; and Stamford, Conn. Wherever he went, Giuliani was the main attraction. The crowds didn't want to hear much about election 2006; they wanted to know if Rudy was planning to run for president in 2008. "I'll make the decision sometime next year," he announced in New Hampshire. Is the outcome in doubt?

Giuliani is the closest thing in America to a mythic hero. His reputation was forged in the refiner's fire of Sept. 11, which burned away the dross of what had been a successful but contentious two terms as New York City's mayor, a guy who reduced crime, yet picked fights with squeegee men and jaywalkers. In the aftermath of the attacks Giuliani rose to become a transcendent figure of compassion and strength whose courage was acknowledged by Queen Elizabeth II, who gave him an honorary knighthood, and Time magazine, which made him its "Person of the Year" in 2001. That image has helped Giuliani become the most popular politician in the U.S.; recent polls show him leading all contenders--Republicans and Democrats--who are contemplating a run at the White House.

Since leaving office in early 2002, Giuliani has been winning more than political capital. While battling prostate cancer (he won that war) and raising hell in a very public divorce (he is now married to Judith Nathan, his third wife), he has been banking millions of dollars a year. His Leadership (Talk Miramax Books, 2002) figured in an estimated $3 million in advances for two books. He earns as much as $8 million a year on the speaking circuit (FORBES hired him to speak at a conference last year). Giuliani Partners, a management consultancy that oversees Giuliani Security & Safety and Giuliani Capital, has nabbed tens of millions of dollars in contracts and deals.

Rudy is hardly the first ex-pol to cash in on his name. The revolving door between the government and the private sector has always moved briskly. Giuliani Partners was set up to make money and "do good," says Michael D. Hess, a partner and a former Giuliani administration official. "I think people are attracted to the organization because of the image of leadership and trust and integrity," says Steven D. Oesterle, a partner and managing director of the firm. Question is, have Giuliani's moneymaking efforts buffed or tarnished the gold-plated name?

There have been white-shoe clients. Giuliani Partners has advised the likes of insurer Aon (nyse: AOC - news - people ), CB Richard Ellis, the real estate services firm, and Entergy (nyse: ETR - news - people ), the giant New Orleans utility. Nextel Communications (nyse: S - news - people ) paid Giuliani Partners 1.2 million stock options with an exercise price of $4.50. The firm says it sold out at a profit, but before the shares rose to $33 in August 2005, when Nextel was bought by Sprint. It also points to its work for U.S. Foodservice, helping the unit of the disgraced Dutch grocery chain Royal Ahold overcome its accounting and legal headaches.

But there have also been plenty of scuffed-shoe customers. Giuliani Partners and its units have repeatedly become entangled in petty deals that seem unworthy of someone with national aspirations. It has accepted fees from companies with over-the-counter penny stocks, made alliances that have gone nowhere or made little financial sense and engaged with businesses and individuals who have come under scrutiny by regulatory and law enforcement officials. Such associations are astonishing for this tough, Brooklyn-born prosecutor who nailed gangsters like Paul Castellano and white-collar felons like Marc Rich, Ivan Boesky and Michael Milken. It's the sort of carelessness that suggests either poor judgment or inattention. "We do this very careful due diligence," says Hess. "We would never get involved in anything that is at all shady or risky or questionable."

Perhaps Rudy Giuliani the businessman delegates too much. At the firm, he relies on a tight inner circle: Most of the nine partners are veterans of the Giuliani administration. One former executive, onetime NYPD Commissioner Bernard Kerik, has been a conspicuous embarrassment. Kerik joined Giuliani Partners in 2002 and headed the security unit, then known as Giuliani-Kerik. President Bush in 2004 nominated Kerik to head up the Department of Homeland Security. Kerik withdrew his name on the pretext of having once hired a nanny who may have been an undocumented alien. He resigned and sold his shares of Giuliani-Kerik. In June Kerik pleaded guilty to two misdemeanors, admitting that while he was a public official he accepted $165,000 in apartment renovations from a contractor. He also admitted that he failed to report a $28,000 loan from a real estate developer and agreed to pay $221,000 in fines.

Still, Giuliani has continued to permit those closest to him to drag his name into potentially compromising situations. Example: the agreement with Lighting Science Group, a Dallas firm whose shares trade on the o-t-c bulletin board. The deal came to Giuliani last year through Roy W. Bailey, the former finance chairman of the Texas Republican Party and current Giuliani Partners managing director. "I have known Roy for 20 years," says Ronald Lusk, Lighting Science's chief, who agreed to pay Giuliani Capital, for help in raising money and finding clients, $150,000, plus a warrant to purchase 1.6 million shares at 60 cents.

Shares of the company, which proposes to finance LED (light-emitting diode) lights for parking garages, recently traded for 25 cents. Lighting Science and Giuliani Capital have also set up a joint venture to split whatever energy savings parking garages eke out on their utility bills from LEDs the company gives them gratis. This is the third incarnation of Lusk's enterprise (it lost $412,000 on $137,000 of revenue for the six months ending June 30): It started out as a nursing home operator, then morphed into a data management business that wound up in bankruptcy court in 2002 before finding new life in lights. "We like the technology," says Oesterle.

Friendship also dragged Giuliani into Command Security, another o-t-c bulletin board stock, which rents out security guards and lost $100,000 on $85 million of revenue in the year ended Mar. 31. Bruce Galloway, Command's chairman and chief backer, also runs the $45 million (assets) Galloway Capital Management in New York. To snag Giuliani, Galloway turned to a business associate, Richard Chwatt, co-owner of Jericho State Capital in Boca Raton, Fla. "Richard Chwatt's wife is very, very dear friends with [Rudy Giuliani's wife] Judith Nathan, and that's how we got the relationship," says Galloway. Not so, says, Giuliani's Hess: "The business, I do know, did not come about through the social relationship of the two women."

For a year's work--revising the employee manual, introducing new clients, having Giuliani host a breakfast at Manhattan's Yale Club--Giuliani Security & Safety will earn $2.1 million. Chwatt was rewarded for making the introduction: Jericho State Capital got $90,000 and a warrant for 350,000 shares exercisable at $2 (shares now trade for $2.60), and will receive $7,500 a month and a warrant for 150,000 additional shares if the contract is renewed, which is "likely," says Galloway.

Giuliani Capital, a magnet for many deals with niggling companies and Giuliani Partners' largest unit, hasn't exactly blown the braces off Wall Street. Acquired from Ernst & Young in November 2004 for $9.8 million, the investment bank was already a bit of a shambles, recording a loss of $28 million on $17 million in revenue in the five months before the sale. By the end of last year the bank had improved a dismal situation--losing $1.4 million on $48 million in revenue. Oesterle points out that absent transition expenses, the firm would have been profitable.

Some Giuliani alliances, announced with great fanfare, have fizzled to virtually nothing. Back in 2003 the firm announced that it would advise Bear Stearns (nyse: BSC - news - people ) Merchant Banking on $300 million in security-related investments. The goal, Giuliani said, was "helping companies as they seek to supply products and services that will make the U.S. and the world a safer place." But three years on, the results of the alliance are modest: a single investment, which is in trouble.

In November 2003 Bear Stearns Merchant put down $100 million in a $210 million leveraged buyout of CamelBak, a Petaluma, Calif. maker of a hands-free canteen, popular with Marines in Iraq and weekend warriors. In the fiscal year ended June 30, 2004 it recorded $31 million in operating profit (earnings before interest, taxes, depreciation and amortization). In March 2004 Giuliani Partners announced it was becoming a "strategic investor" in CamelBak; it now describes its investment as "de minimus." Bernie Kerik, then a Giuliani Partners vice president, hopped on CamelBak's board. It was the start of a steep decline. In 2005 Bear Stearns Merchant got CamelBak to pay owners a $24 million dividend, saddling the company with unsustainable debt; in fiscal 2006 operating profit dropped to $18 million. This year CamelBak replaced its chief executive and broke loan covenants; its second-lien bank debt fell in price to 80 cents on the dollar. Standard & Poor's recently pointed to CamelBak as an example of how lbos, combined with debt-funded dividends, put companies "in danger of going belly-up." Says Oesterle, "We have not shared in any of the dividends."

The most controversial deal ever made by Giuliani Partners was struck in mid-2004 with Applied DNA Sciences, then backed by Richard Langley Jr. Its main asset was a licensing deal with a Taiwanese outfit that could supposedly outsmart counterfeiters by inserting plant genes into products such as cosmetics and pills. In 2002 the company had done a reverse merger with ProHealth Medical, an o-t-c bulletin board stock, that resulted in Langley's RHL Management getting 5.5 million shares. For a while Langley worked as Applied DNA's vice president in charge of p.r. He left that job but was still the company's largest shareholder when Giuliani Partners signed on to help develop and market the technology. The firm accepted $2 million and promises of stock; Applied DNA's shares traded for as much as $1.89. But in March 2005 USA Today reported on Langley's sordid past: In 1999 he had pleaded guilty to conspiracy to commit wire fraud and commercial bribery in connection with a penny stock called Pollution Controls International. Court documents show Langley had tried to bribe a law enforcement official posing as a broker willing to pump up Pollution's shares. It also turned out that Applied's investment bank, Vertical Capital, had twice been fined by the National Association of Securities Dealers. Giuliani Partners quietly deep-sixed its contract but still collected $1.3 million through June 30, 2005. "It was more administrative problems that caused us to terminate with them," says Hess. Applied DNA's stock now trades for 10 cents.

Giuliani threw in his lot with a questionable chain, We the People USA, which sells do-it-yourself services for bankruptcy, divorce, wills and trusts. It all started with a walk-in visit to a store by Michael Hess, who was so impressed he eventually arranged for Ira Distenfield, the chain's owner at the time, to meet his boss. "Who in America would not want to sit down with Rudy Giuliani?" asks Distenfield. The tête-à-tête led to a 2003 consulting agreement and a press release. "We the People helps individuals navigate the complex and often daunting legal system," Giuliani said.

Those navigating skills caught the attention of Deirdre Martini, the U.S. Trustee--a Department of Justice affiliate that upholds the integrity of the bankruptcy process--in New York. In 2004 Martini sued We the People for engaging in deceptive conduct that put its clients' homes at risk. The company settled the case, agreeing to change its business practices. That didn't end it. U.S. bankruptcy trustees, affiliates of the Department of Justice, have filed at least 13 lawsuits across the nation against We the People and its franchises for the unauthorized practice of law. In addition, the chain paid a $286,000 penalty to settle charges, brought by the Federal Trade Commission, of selling franchises without disclosing the U.S. Trustee lawsuits. Giuliani Partners severed its contract with the company last year, as Distenfield was selling out to Dollar Financial (nasdaq: DLLR - news - people ) for $14 million. "I think the concept and the theory of doing that kind of work is still a good one," says Hess.

Some of Giuliani Capital's most lucrative work has been providing financial advice to failing airlines. The firm deploys 11 employees at Delta Air Lines, which has been operating under bankruptcy protection since September 2005; for eight months of consulting, ending May 31, Giuliani Capital pocketed $3.2 million. It billed $2.3 million last year, when it worked on the us Airways bankruptcy.

But its contract with Aloha Airgroup, parent of the distressed airline, has brought angry charges of greed. Cutting a deal with Aloha Chief David Banmiller in December 2004, Giuliani Capital agreed to work for a flat fee of $125,000 a month and what amounted to a $1 million restructuring bonus if the company got out of bankruptcy court alive. Seven Giuliani advisers, led by Marc Bilbao, obtained a $65 million loan and helped negotiate the sale of the carrier to a group led by billionaire Ronald Burkle.

Then last November, on the eve of Aloha's exit from Chapter 11, Giuliani Capital decided it deserved a bigger payday. It persuaded Banmiller to amend the original contract in order to give Giuliani a $1.5 million restructuring bonus and a total compensation of $2.9 million. Giuliani Capital argued that it all added up to a mere $369 an hour. No way, cried the flight attendants union, which was in the process of persuading 420 members to accept deep cuts in wages and benefits. The union petitioned the court to "soundly condemn" the request. Backing that position was Steven Katzman, a U.S. Trustee. Judge Faris awarded the flat fees and the $1 million bonus. But he deferred making a decision on the extra bonus. In February 2006 Aloha withdrew the request. Giuliani Capital says it acted appropriately.

Giuliani is still renting out his name. But these days it's with a political goal in mind. Last year he signed on as a senior partner at a Texas law firm known for its energy sector work and ties to the Republican Party. Bracewell & Patterson got something out of it, too, besides a name change (to Bracewell & Giuliani): a branded New York office. Giuliani joined the nation's 121st-largest law firm, in terms of revenue, and copped a fee that Lynn Mestel, a legal recruiter, estimates at $1 million a year. And he gained something much more valuable. "The alliance with law groups in Texas gives him a network he didn't have," says Frederick Siegel, a former Giuliani campaign consultant and biographer. "It's the contacts he is making that are going to be the backbone of the presidential campaign."

Just as Giuliani contemplates that important decision comes a reminder, courtesy of the New York tabloids, that political and business relationships can sometimes collide. Nearly two years after leaving Giuliani Partners, Bernie Kerik is still embarrassing his old boss. The contretemps involves former Westchester County district attorney Jeanine Pirro, recorded by the police talking with Kerik last year about bugging her husband's boat to expose an affair. Kerik called an employee of Giuliani Security & Safety to get a recording device. Pirro insists the boat was never bugged but reportedly had her husband followed by Giuliani Security employees. "It was, for lack of a better term, 'freelance' work," says Sunny Mindel, Rudy Giuliani's spokesperson. "Jeanine Pirro was not a client."

There is another Giuliani connection to this mess. According to the New York Post, in 2004 Pirro strong-armed the Great Atlantic & Pacific Tea Co. (nyse: GAP - news - people )'s A&P stores to hire Giuliani-Kerik to settle allegations of the chain's selling alcohol to minors. "All the background that went on between Jeanine Pirro and A&P we don't know," says Giuliani Partners' Hess.

No doubt. Still, it pays to know something about the company you keep.

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