Joe Grano Could Use A Little Financial AdviceLeah Nathans Spiro and Elizabeth Lesly
For Joseph J. Grano Jr., it's been a long road to the top. A man who dropped out of college and still loves to reminisce about his experiences as a Green Beret in Vietnam, he joined Merrill Lynch & Co. as a broker in 1972. In 1988, he joined PaineWebber Inc. as head of retail and in 1994 he became president. In the last year, Grano has emerged as heir apparent to CEO Donald B. Marron, and Grano now runs the firm on a day-to-day basis.
Smooth and gregarious, Grano has a reputation as a strong manager of the firm's 6,125 brokers, which puts him at the heart of a major shift in PaineWebber's strategy. Just this fall, the firm began scaling back its investment-banking ambitions to focus on retail. Analysts applaud the move as a return to what PaineWebber does best: helping wealthy clients with their investments.
Grano's personal investment savvy, though, leaves a great deal to be desired. BUSINESS WEEK has uncovered details of four private ventures in the 1980s, which is still a lingering issue at the firm. Three either failed or are great disappointments. A project to create a glitzy Vermont ski resort ended in a total loss to Grano and his investors and gave rise to allegations of mismanagement and sloppy bookkeeping. BUSINESS WEEK has learned that the Federal Bureau of Investigation has been looking into the resort's affairs. Grano's investments in two Maryland racetracks have also been disappointments. And two Colorado casinos that he lent money to in 1991 went bust. His sole success? A racing stable, now closed.
HIGH LIVING. Grano's losses were so severe that Marron advised him to declare personal bankruptcy. Grano declined and instead PaineWebber lent him $6 million, $4 million of which is outstanding. The loan, which matures in 1996, is not being amortized. And the 3.83% below-market interest is being picked up by PaineWebber, though Grano has to pay about $75,000 a year in taxes on the arrangement. PaineWebber says the board's compensation committee approved the loan. "The honest truth is, it's a perk," admits Grano. PaineWebber, meanwhile, loses use of the $4 million until the loan is repaid.
Grano's biggest disaster was the Vermont ski resort limited partnership. Grano was the project's chief executive until 1986 and one of four shareholders in Summit Ventures, the resort's general partner. Grano envisioned turning a shabby, family-oriented ski area called Mt. Ascutney into a ritzy Vail-caliber resort for Wall Street's upper crust. In 1983, he recruited as investors such Wall Street bigwigs as Merrill Lynch CEO Daniel P. Tully. In 1990, Mt. Ascutney filed for bankruptcy, one of the biggest in the state's history. Industry experts say the resort was doomed by a business plan based on ludicrously optimistic assumptions. Grano and the other managers of the resort were criticized by accountants working for the bankruptcy court for overspending on jets, limousines, and travel and entertainment expenses. "The operation was poorly managed and what management was done was at an exorbitant cost," said a report by the accounting firm, Gallagher, Flynn & Co.
Grano blames the Mt. Ascutney failure on the downturn in the real estate market and tax-law changes in 1986 that made limited partnerships less attractive to investors. Grano says he went beyond the call of duty by lending the resort $4 million to keep it running before and after the bankruptcy. And he says by not declaring bankruptcy, he honored his obligations. "In this business, your word is your bond. I chose to stand up," he says.
Grano denies ever using Mt. Ascutney funds for personal enrichment, instead portraying himself as a selfless would-be savior of the resort who continually reached into his own pocket to help without being reimbursed. He says he never took a salary, never asked to be reimbursed for $2 million in Ascutney-related expenses he says he paid, except for $45,000 in T&E expenses mentioned in the accountant's report.
Even at the start, the Mt. Ascutney project did not have the aura of a winner. It had been in and out of bankruptcy twice before Grano bought it from bankruptcy court for $1.5 million. The south-facing, snow-starved slopes had a low elevation and only four ski lifts. The huge Killington ski complex is only a short drive away.
That didn't dampen Grano's enthusiasm, though. He, Ira B. Lampert, a Long Island accountant who was a partner in some of Grano's other projects, and two other general partners raised or borrowed $80 million. The plan was to build a luxury hotel, conference center, health club, golf course, and condominiums to be used as second homes. "What gave credibility to the deal was that Grano was a very substantial guy at Merrill Lynch and he was putting his own capital on the line," says one Mt. Ascutney investor.
By 1987, the resort was running into serious trouble. Problems ranged from poor condo sales to construction delays--only the hotel and some condos had been built--to poor management. Although high fees were paid to four accounting firms, there were no audited, or even CPA-reviewed, financial statements. The project had to pay $435,340 in Internal Revenue Service fines, court records show.
Large amounts of money flowed to Grano and Lampert and other general partners with no documentation. Travel and entertainment expenses, for instance, were $484,663 from 1987 through 1989. Some $85,000 was paid to Grano and Lampert in June, 1988, as reimbursement for T&E expenses. Some $82,000 was paid for private jet service to shuttle officers to and from Mt. Ascutney. "In the aggregate, taking into consideration the relatively small size and the financial condition of the resort, they were excessive," the report said.
When Mt. Ascutney, crushed by $30 million in losses, went bankrupt, the resort listed $65 million in debts to banks and local creditors. Grano and other general partners were personally liable for some of the resort's bank debt. Lampert declared bankruptcy shortly after the resort did. "All of the investors suffered," Lampert says. "I lost a very, very substantial amount of money."
In June, 1993, Mt. Ascutney was sold for just $1.1 million. The community of West Windsor was economically devastated, as property taxes rose 25% to compensate for the resort's delinquency, and real estate values fell by as much as 50%.
Among the creditors were Kneeland and Shirley Brown, both 78. They sold a hayfield to the resort for $90,000. But instead of receiving cash, Grano's group gave them a mortgage, which was to pay them principal and interest for several years. The mortgage payments constituted most of the Browns' retirement income. But the Browns lost that income, and their land was among the assets sold at bankruptcy. They got just $15,000. "A lot of people were hurt by that business up here," says Shirley Brown.
Despite Grano's Mt. Ascutney losses, in 1991 he lent money to Cripple Creek Associates, which owned two casinos in Cripple Creek, Colo. The owners included Robert W. Pangia, a PaineWebber executive who was just promoted to vice-chairman. In 1992, both casinos closed, in part because of severe overbuilding of casinos in the town. Grano says he is optimistic because one casino has been leased and the other is being converted to a hotel. "Both of those casinos will be operating," says Grano. "The investment looks quite sound."
Grano's only successful partnership, in the mid-1980s, was Wall Street Stables, which raised, raced, and bred trotting horses. It was disbanded after some financial success several years ago. Grano's other horse venture did less well. In 1984, he and some partners bought a passive half-interest in two Maryland racetracks, Bowie and Laurel. That investment has been a financial disappointment, says Louis P. Guida, one of Grano's partners.
One survivor of the Mt. Ascutney affair is William H. Bruett Jr., former chief executive of Vermont-based Chittenden Bank, an early lender. Bruett resigned in 1990 as the bank faced large loan losses, according to Vermont Business Magazine. In 1991, Bruett was hired as CEO of PaineWebber Trust Co., and he is now a senior vice-president at the firm. Sources say Grano arranged the hire. Bruett and Grano deny that the hiring had anything to do with his bank's loan to the project.
Grano, who is not a skier, still has a condo at the resort. But he hasn't visited in a while. "I don't even want to think about it," he says.
Joe Grano's Not So Excellent Adventures
MID-1980s: Grano invests in Wall Street Stables to breed and race trotters.
AUGUST 1983: Grano and partners buy Mt. Ascutney ski area, then in bankruptcy, for $1.5 million.
FALL 1984: Grano and partners invest in two Maryland racetracks.
APRIL 1990: Mt. Ascutney files for Chapter 11.
1991: Grano gets $6 million loan from PaineWebber to help cover his investment losses and avoid bankruptcy. Grano's total losses: $9 million. More than $4 million in loans remain outstanding.
1991: Grano lends money to two Colorado casinos that quickly close.
JULY 1992: Accountant's report on Mt. Ascutney details mismanagement during the 1980s.
JUNE 1993: Mt. Ascutney is sold for $1.1 million, which is divided up between 721 Mt. Ascutney creditors who were owed $65 million.