Jan. 10 (Bloomberg) -- Steven Kantor, then head of investment banking for Cantor Fitzgerald LP, gathered his staff about a year ago for a holiday party in his 82nd-floor apartment in Trump World Tower overlooking the United Nations.
The bankers discussed the brokerage’s renewed push into underwriting and merger advice while drinking Avion, a tequila in which Kantor, 55, personally invests, according to five guests. Within about 10 weeks, more than half of his 50 bankers had been fired or reassigned.
Chief Executive Officer Howard Lutnick’s drive to turn one of the largest independent U.S. brokerages into a rival to Wall Street’s investment banks has been pocked with dismissals and defections. Forty-one percent of the 158 traders and bankers whose hirings Cantor announced in news releases since 2009 have left, industry records show. In interviews, 19 current and former employees blamed Cantor’s reluctance to commit money to deals and pressure to turn immediate profits.
“It’s very difficult to turn a bond house or an equity-trading house into an investment bank unless you’re playing with big money,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner in charge of that firm’s London office. “This is a very constrained market, and the guys already in it are already competing pretty hard.”
In the decade since terrorists killed 658 Cantor employees in the Sept. 11 attacks on the World Trade Center, Lutnick rebuilt the brokerage, which has said it gave more than $180 million to families of the dead. The private partnership now employs 700 salesmen who earn commissions by matching buyers and sellers of stocks and bonds and has expanded into investment banking as well as mortgages, emerging markets, real estate and sports gambling in casinos.
“They’re known for hustle,” said Turney Duff, a former hedge-fund trader and the author of “The Buy Side” -- a book scheduled to be published later this year. “They come in early and stay late, and they’re constantly hitting the phone.”
Lutnick’s latest focus is the commercial real-estate business, where Kantor helped him start a venture that packaged $3.1 billion of loans last year. Kantor, the chairman of Cantor Commercial Real Estate, was replaced as head of investment banking in August. The banking group, which underwrites securities and advises companies on deals, has dwindled to fewer than 20 people in the U.S., according to an employee who left in last year’s second half.
Sheryl Lee, a Cantor spokeswoman, said the firm now employs about 25 bankers in the U.S.
As a partnership, Cantor isn’t required to publicly report financial results. Payments to partners have fallen in recent years, according to two who have been with the firm for more than a decade. Moody’s Investors Service lowered Cantor’s credit rating to junk in October, and Fitch Ratings said on Jan. 8 it also may downgrade the brokerage.
“They’ve not been very successful in gaining traction” in investment banking, said Mohak Rao, a Fitch analyst. Cantor’s total profit increased in the first nine months of 2012 from a year earlier as earnings in the core debt-brokerage business countered a decline in equities, he said.
Other firms in businesses where Cantor is expanding have struggled to make money as institutional investors rely on computers more for trading and U.S. market volumes fall. UBS AG, the biggest Swiss bank, said in October that it would largely exit fixed-income trading, and smaller brokerages including ThinkEquity LLC and Rodman & Renshaw LLC closed last year.
Average daily volume for U.S. equities dropped 18 percent to 6.42 billion shares last year from 2011, while the value of mergers and acquisitions fell 15 percent to $1.12 trillion, according to data compiled by Bloomberg. Stock in BGC Partners Inc., a publicly traded Cantor affiliate that specializes in matching trades between banks, declined 42 percent in 2012. The shares slid 4.1 percent today to close at $3.50 in New York, the biggest drop in almost two months.
Lutnick, 51, and Shawn Matthews, 45, the head of Cantor’s main brokerage unit, have said on television and in interviews that the struggles of other firms benefit their own.
“We’ve grown pretty much everywhere in lockstep,” Matthews said Nov. 15 in an interview at Cantor’s Manhattan headquarters. “We’re going to grow right through it.”
Lee said Lutnick was unavailable to comment for this story. Only 10 of Cantor’s 44 announced hires from 2010 remain with the firm, according to employment records filed with the Financial Industry Regulatory Authority. Of those announced last year, 10 percent already have left, the records show.
“They’ve tended to have higher-than-normal turnover in their new businesses,” said Richard Lipstein, managing director of New York-based recruiting firm Gilbert Tweed International.
Diego Baez, hired in February to build a Latin American stock-trading business, was employed until October, Finra records show. John Fiore, whose hiring from Bank of America Corp. for prime brokerage was announced in March, also departed in October. Both declined to say why they left.
The turnover is at least partly by design. Unlike at big banks, Cantor’s salesmen generally draw advances against their commissions instead of receiving guaranteed base salaries. They may keep about 30 percent of the revenue they bring in, after expenses, according to eight former and current employees, who requested anonymity because they still work in the industry.
“We have a very simple business philosophy,” said Anthony Orso, head of Cantor’s commercial real estate arm. “People who don’t produce don’t stay with the firm.”
Those who make it reap rewards. Sean Goodrich, 36, an equity salesman who joined Cantor as a 22-year-old trainee, has made about $5 million in some years, according to two people with knowledge of his pay who asked for anonymity because the information is confidential.
Cantor has paid most salesmen about 10 percent of their compensation in partnership units for about the past four years, according to 21 current and former partners. The shares can’t be sold and have paid some dividends in BGC stock instead of cash, they said.
Becoming a partner doesn’t mean joining Lutnick’s inner circle. More than a dozen current and ex-partners said they don’t vote on strategic decisions and that they weren’t given the firm’s financial statements. Lutnick provided quarterly updates on a generally upbeat conference call, they said.
“It doesn’t sound to me like they’re actual partners,” said NYU’s Smith. “A partnership is an entitlement to the income and your share of the capital. You put in so much capital, you get that back when you leave.”
Ten former partners said they were surprised when Cantor took back the units after their firings or departures, reclaiming investments that in some cases were valued at hundreds of thousands of dollars. Lee said those who abide by the terms of the partnership agreement are entitled to their investments in the partnership.
“I’m a partner who went through 9/11, and I still don’t know where my partnership stands,” said Andrew Pritchard, who was fired in 2009 after 13 years at Cantor. “I’m checking my legal options.”
After an arbitration panel awarded Pritchard $1.2 million over his dismissal, Cantor sued him in New York State Supreme Court in Manhattan. The court overturned an award of attorney fees for Pritchard, which he has appealed.
Some former partners said they expected to sell their shares when Cantor went public. Lutnick hoped the initial public offering would have come before this year, once Cantor had finished building itself into a full-service investment bank, he told Bloomberg News in a 2010 interview.
Cantor suffered setbacks while expanding in other areas. Marty Teevan was hired at the end of 2008 from New York-based Goldman Sachs to build a business trading high-yield corporate bonds. Cantor fired him in 2010 and took away his partnership units, he said last year in a lawsuit filed in Delaware Chancery Court in Wilmington.
The firm hired Bill O’Keefe, a former Morgan Stanley executive, in January 2010 to build a municipal bond desk. He left a month later. Seven other municipal-bond bankers hired at that time are also gone, industry records show. Cantor announced in October that it had hired a new team for munis.
Cantor Gaming, which runs sports betting for Las Vegas casinos, lost about $96.6 million since its inception and had revenue of $7.7 million for the nine months ended Sept. 30, 2011, according to a February filing for an IPO that was later canceled.
Michael Colbert, director of risk for the firm’s sports book, was fired after a New York grand jury indicted him in October for allegedly participating in a gambling ring. Jerry Markling, chief of enforcement for the Nevada Gaming Control Board, said in a telephone interview that he’s investigating Cantor Gaming and declined to say more.
Colbert, who was 32 at the time of the indictment, was charged with enterprise corruption, money laundering and conspiracy. He pleaded not guilty, said Kevin Ryan, a spokesman for the Queens County District Attorney. Cantor Gaming wasn’t accused of wrongdoing and Lee said the company is cooperating with investigators.
Revenue at Cantor’s Hong Kong branch dropped 29 percent after the head of the unit and three colleagues resigned in 2011, the firm’s chief financial officer for the region said last January in Hong Kong’s Court of First Instance after Cantor sued the former employees.
Cantor made forays into investment banking as early as 2000. The latest push started in 2009 when Kantor was hired from Zurich-based Credit Suisse Group AG, Switzerland’s second-biggest bank, where he was a head of global securities and ran real-estate investments.
Unlike stock and bond salesmen, whose customers can switch trading to new firms quickly, bankers often court CEOs for months or years before winning business, sometimes offering to lend companies money to help finance deals. Kantor told the bankers he hired they could use Cantor’s balance sheet and sales force to win mandates, according to 10 former employees.
“The barriers to entry in investment banking are high,” said Charles Geisst, a Wall Street historian at Manhattan College in New York. “Even those who are throwing money at stuff, who have the capital to do underwriting or M&A, even they have to give it time.”
Steve DesJardins, another former Credit Suisse banker, was Kantor’s chief operating officer and right-hand man, the former employees said. Other hires included Steve Dearing from JPMorgan Chase & Co.; Cliff Smallman from Credit Suisse, and Mark Davis from Macquarie Group Ltd.
DesJardins referred questions to Lee. Dearing, Davis and Smallman didn’t respond to messages seeking comment.
The bankers were paid like Cantor’s salesmen. Managing directors were told they’d get a portion of the revenue from any deals they landed and given base salaries of between $100,000 and $200,000, less than half of what bigger banks paid, according to four former employees.
The group struggled to bring in business, the former employees said. Cantor executives refused to put the firm’s money at risk by lending or committing to underwrite clients’ bond offerings, they said.
“This is a hard environment in general,” said Bryant Riley, chairman of Los Angeles-based investment bank B. Riley & Co. “They were trying to compete on some of the larger companies. That’s even harder.”
As the bankers sought to win over CEOs, resentment built about Kantor’s lifestyle, according to some of the former employees. He’s a “manager” of Avion Spirits LLC, according to a May 14 filing with Florida’s Division of Corporations. Avion tequila is known for its role in “Entourage,” the HBO television series in which the character Turtle seeks to prove his worth by investing in it.
Kantor also is listed as a principal on the website of Philippe, a chain of club-like Chinese restaurants. Philippe, which has locations in Manhattan, Miami Beach and Los Angeles, is so popular with celebrities that the rappers T.I., Young Jeezy and Lupe Fiasco have called it out in songs.
Two former employees said they were embarrassed when Kantor told the New York Times about his custom Mercedes-Benz van -- furnished with a couch, massage chairs and big screen TVs -- for a November article. Three said they didn’t understand why Kantor hired his 80-year-old father, Ed Kantor, as vice chairman of investment banking.
The elder Kantor, who declined to comment, had been a senior executive at Drexel Burnham Lambert Inc. until he was suspended from the industry in 1993 for failing to supervise junk-bond pioneer Michael Milken, Finra records show. Milken pleaded guilty in 1990 to six felony securities law violations and went to prison.
Steven Kantor doesn’t run Avion or Philippe, and his investments don’t distract him from his work, said Orso, the head of Cantor Commercial Real Estate, or CCRE.
Lee, the spokeswoman, Orso and other Cantor executives disputed the former employees’ characterization of the banking unit’s struggles. One senior executive said bankers were fired because they underperformed. The firm had advised on $36 billion of transactions over the past two years, Lee said.
The list of seven deals she provided included two acquisitions by BGC, the Cantor affiliate, and a $35 billion bankruptcy. Cantor was awarded $2.05 million in fees for its work on the bankruptcy, according to a court filing in that case. The list also included a casino buyer, which Cantor claims stiffed the firm on its $400,000 fee, according to a lawsuit the company filed in New York state court.
Charles Edelman, who replaced Kantor as co-head of investment banking in August, said in a statement after a Dec. 11 interview that Cantor is “committed to building the investment-banking business.”
Jeffrey Lumby, the other co-head, said he’s run a business for Cantor since 2001 advising companies on selling their own stock in pieces over time and that he helped on 30 such deals last year. Cantor has about 50 bankers worldwide, Lee said.
Counting employees isn’t a good way to evaluate Cantor’s investment bank, Orso said in a Dec. 14 interview.
“Rather than the number of people working somewhere, a better measure of success is adapting to changing markets,” Orso said. “We want to be important in the industries that we focus on.”
CCRE originated $3.1 billion of commercial real-estate loans that were packaged into securities last year, more than double the total in 2011, according to Commercial Mortgage Alert, an industry newsletter. Cantor owns less than 25 percent of the venture, which is part-owned by CIM Group LLC, a Los Angeles-based investment firm, Fitch’s Rao said. Orso declined to specify Cantor’s stake.
“We have over 90 people in 10 offices, making us one of the largest CMBS originators in the industry,” Orso said. “We’re growing in leaps and bounds.”
Kantor’s investment bankers moved from the fourth floor of 499 Park Ave., Cantor’s headquarters about two blocks from the southeast corner of Central Park, to newly renovated offices on the fifth and six floors in 2011, two former employees said. He was still hiring investment bankers in October of that year, industry records show.
At his party in December 2011, bankers and their spouses mingled at one of the three apartments Kantor bought for about $15 million near the top of Trump World Tower, according to New York property records. He said he intended to use the apartment as a so-called man cave while combining the other two, according to one banker, who said he couldn’t tell if it was a joke.
Kantor displayed an ice sculpture advertising Avion, the guests said. He spoke optimistically about his group’s prospects throughout the night, they said.
Then in February, Moody’s warned that it might downgrade Cantor, saying it was “only modestly profitable” in 2011 and that market conditions were getting more difficult. On Feb. 28, Cantor fired the majority of its Los Angeles-based bankers and the next day about half of those in New York were told to pack their things, former employees said.
That afternoon, Cantor put out a press release titled “Cantor Fitzgerald & Co. to Boost Its Investment Banking Business.” It didn’t mention the cutbacks.
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