The House of Pritzker

One of America's richest families is carving up its far-flung business empire -- and it isn't a pretty sight

Long before teenage actress Liesel Pritzker dismayed her secretive Chicago family with a sordid lawsuit last November alleging that her $1 billion inheritance had been spirited away, her Uncle Jay could see trouble stirring among the younger Pritzkers. His eldest son had beaten out his brother to run the family's showcase business, Hyatt Hotels Corp., while a third son was chasing after elusive success in rock 'n' roll. What's more, Liesel and several of Jay's other nieces and nephews were pursuing dreams far removed from the family's generations-old hospitality and industrial businesses: one a gung ho paratrooper who has scouted around Antarctica for meteorites, a second passionate about politics, another immersed in Buddhism, and two smitten with Hollywood. Selecting a leader who could oversee the family's $15 billion empire and reconcile the ever-more divergent interests of all 13 Pritzker cousins would be the patriarch's final legacy.

Jay Pritzker, the man largely responsible for accumulating the family's vast holdings, believed that his erudite, ambitious son, Thomas, was the one who could maintain unity in the clan, including the mavericks. Jay and Tom had a particularly close relationship. Jay had groomed his son for nearly two decades; both were the eldest of three brothers, both lawyers-turned-businessmen and dealmakers through and through. When Jay formally named Tom as his successor in 1995, he wrote a memo to the family urging cooperation and declaring: "I expect our modus operandi will continue harmoniously through this next generation."

It didn't even last through the next decade. Just four years after the patriarch's death, one of America's wealthiest families is being torn apart by sibling rivalry and resentment. The fourth generation has become so divided that the only solution the cousins can agree on is to break up the empire into equal pieces and go their separate ways. Hyatt may be forced to go public, take on partners, or be mortgaged. And Marmon Group, the $6 billion-a-year industrial crazy-quilt that Jay and his brother Robert crafted, is likely to be sold off. The ideals of their forebears -- formalized in Pritzker records as the "Family System" and best described as all for one and one for all -- did not sustain them for long.

At the heart of the dispute is a rift over control of the family businesses and fortune. Tom, now 52, had balked at giving his relatives leading roles in the Pritzker Organization, hewing instead to Jay's edict to hold on tightly to his power. Compounding matters, some of their relatives feel that Tom and the two cousins chosen to help him -- Nicholas and Penny -- have enriched themselves to excess, some $500 million, even though they increased the family wealth by far more.

The dissolution of the empire, crafted secretly two years ago and expected to be put into place during the next decade, might have proceeded smoothly, or as smoothly as such arrangements can go when every cousin has a lawyer standing by. But Robert's 18-year-old daughter, Liesel, disrupted the family's plan with her spectacular lawsuit. She claims her father unlawfully and systematically drained her trust fund and that of her older brother, Matthew, after their parents' vicious divorce -- which included fights in court over everything from what pets the kids could own to what last name they should use in school and, in Liesel's case, on screen. In their response to Liesel's suit, Robert's lawyers don't dispute that he moved some assets out of Liesel's trusts, but they maintain the transfers were proper and that he had "unfettered subjective discretion" over the trusts. Liesel's suit also revealed that her cousins, some of whom are decades older than she and Matthew, decided that Liesel and her brother should really be considered members of the fifth generation, which would give them less of a claim on the family fortune. Liesel's suit is more than just an embarrassment for the family: It could snarl the entire distribution effort unless she and Matthew get what they consider their fair share. "It's a tragedy," says Ronald H. Galowich, a Chicago lawyer who long managed the Pritzkers' real estate and still regards many of the cousins as friends. "This is so atypical of the family."

But it is often true that great families fall apart over time. The respected patriarch can hold the squabbling at bay; a new leader cannot quell the discontent as easily. Younger members become more independent and less trusting: In the end, they just want their money. The Koch brothers of Wichita, who inherited the second-largest private company in the U.S., fought savagely in the courts for two decades after one claimed he was shortchanged when he sold shares in the family oil business. (They finally settled the feud last year.) The Dorrance family, which owns a majority stake in Campbell Soup Co., was bitterly divided over a plan to sell the company after the father died in 1989; family members eventually united behind an outside chief executive a few years later. The Binghams were forced to sell their $430 million media dynasty in 1986 to settle a dispute among the heirs.

As a close examination by BusinessWeek shows, it's very likely that Tom could never have placated his family. Even with his formidable negotiating skills and considerable charm, the favored son could not quash the rivalries and ease the tensions the way his father could. As some of Tom's family critics have suggested, the unhappy relatives weren't about to kowtow to a brother or cousin -- even one as accomplished as Tom, who earned an MBA and law degree from the University of Chicago, honed his business smarts on Wall Street, published studies of Tibetan cave paintings, and worked at his father's side for years. Tom is "very capable, and he takes his responsibilities very seriously," says longtime friend Melvyn N. Klein, a former investment banker at Donaldson, Lufkin & Jenrette. But, Klein adds, family matters "involve issues and emotions that transcend business."

Nicholas Pritzker emigrated to America in the 1880s from the Jewish ghetto near Kiev, in the Ukraine; he taught himself English, studied pharmacology and law, and started his own law firm just as Chicago's industrial economy took hold at the turn of the 20th century. His grandsons -- lawyers Jay and Donald and engineer Robert -- slowly and determinedly moved into real estate as World War I and then the Great Depression reshaped urban life. The family now controls more than 200 private companies, with Marmon and Hyatt accounting for two-thirds of its wealth, according to papers filed by the family in Liesel's lawsuit.

In and around Chicago, the Pritzker name is everywhere. There's the Pritzker School of Medicine at the University of Chicago and the Pritzker Law Library at Northwestern University. There is the Pritzker Wing at the Art Institute of Chicago, a Pritzker Laboratory in the city's Field Museum, the Pritzker Gallery of Cosmology at the Adler Planetarium. In 2000, the family contributed more than $30 million to about 340 different organizations around the nation. And the Pritzker Architecture Prize, often described as the Nobel for the field, has been awarded annually by the Hyatt Foundation since 1979.

Still, the family has always tried to draw as little attention to itself as possible, all things considered. Members who remain in Chicago live modestly; their indulgences, aside from an 860-acre family compound near Libertyville, Ill., include collecting dinosaur bones (that would be Nick) and Himalayan art (Tom). Few of the cousins ever talk publicly about each other, especially now. They all declined to comment for this story. Indeed, Tom's defenders say his success, if one can call it that, has been in keeping the breakup relatively civil so far. Although the cousins all have lawyers -- some have public relations advisers for that matter -- and the family are bristling with animosity, the elder cousins have stayed out of the courts. They're not the Kochs.

Just how well Tom maneuvers through this personal and professional thicket will say much about both his character and that of his strife-torn family. His performance may shed light on how well the reticent businessman, long accustomed to operating out of the public eye, would fare under the scrutiny of Wall Street, market regulators, and investors should he choose to take Hyatt public and remain in charge. He is comfortable wooing the high and mighty -- he has entertained the likes of Chinese Prime Minister Zhu Rongji -- and he has chaired one public company board and served on at least one other. But that may not be adequate preparation for the rigors of leading a public company today.

Of course, Jay hoped his heirs would be able to keep the family empire together. It was Jay and his brother Robert who decided that Tom should work closely with Nick, their younger cousin who's now 57, and their industrious niece, Penny, now 43. While he drew on three different branches of the family to form the new ruling troika, Jay wasn't being diplomatic, simply pragmatic. He picked three people -- all lawyers -- who had helped build the family businesses. Tom's bold venture into health care, through the $800 million-a-year First Health Group Corp., has produced a $370 million gain on a $2 million investment in 1984. Penny's championing of upscale senior-citizen housing has spawned the lucrative Classic Residence by Hyatt, a chain of 17 facilities, some of which require a $250,000 deposit for an apartment. And the casino business that Nick fostered generates hundreds of millions of dollars in revenue a year through two riverboats and a gambling house. He has also mapped out the pending $2 billion hotel, office, and residential Fan Pier complex in downtown Boston.

But the tensions among Tom and his siblings grew so worrisome that their father tried to placate them with money. In 1997, Jay distributed $30 million worth of assets to each of his children -- except Tom, who let his share go to the others. Some associates say Tom turned down the money as a conciliatory gesture. But he had also been earning hefty personal cuts -- called "promotes" in the family jargon -- in the various business ventures he was managing. Those promotes (which other Pritzkers received as well) have, in fact, become a major bone of contention. With First Health alone, Tom has earned as much as $70 million personally; the family has made about $300 million from the investment.

Soon after Jay's death, rifts in the family began to widen. John, Tom's younger brother, was probably the most put out. While Tom was in law school, John left the University of Denver hospitality program early to open and help run several Hyatts, rising to divisional vice-president in California. He quit the chain in 1988, even though some in the family believed that John's operations skills and Tom's dealmaking savvy would complement each other nicely. Indeed, insiders say that even Tom has described John as "the only Pritzker who could actually check someone into a hotel." Dan had also worked in the family businesses until he decided to devote himself to his rhythm-and-blues band -- Sonia dada -- and record production. Sonia dada's five CDs have occasionally garnered high praise from critics but have sold modestly.

With Tom in charge, many family members, and John in particular, felt they were being sidelined in their own ventures. John helped build, run, and sell a high-end business called Mandara Spa, which operated in such ritzy spots as the Paris casino-hotel in Las Vegas, but he couldn't strike a deal with Hyatt. Insiders complain that Tom didn't grant John the same privileges others in the family received: Nick ran the casinos partly under the Hyatt name, and Jean ("Gigi") had a corporate video-production business there that helped set her up in Hollywood. She has since bankrolled the 2001 box office success The Wedding Planner, starring Jennifer Lopez and Matthew McConaughey.

And in the view of some, Tom failed to take advantage of the 1990s boom. While other chains were expanding -- Marriott International Inc. and Hilton Hotel Corp. now have more than 2,000 hostelries apiece in the U.S. alone -- Hyatt has only 212 worldwide, plus a further 486 in a recently acquired franchised business.

For their part, defenders of the trio argue that Jay and his successors had invested plenty of family money in ventures undertaken by other Pritzkers -- ranging from venture-capital funds set up by Penny's brother, Jay Robert "J.B." Pritzker, to Dan's music projects and John's spa, sports, and marketing businesses. What's more, they insist, there was good reason to keep some of the efforts separate -- conflicts of interest between John's spa business and Hyatt could have caused problems for both the Pritzkers and the chain's many independent hotel owners. And the trio may have been smart to decline to back some investments. John, for example, wanted the family to take a stake in Key3Media Group Inc., which owned the trade-show company Comdex. He was turned down but maintained his involvement in Key3Media. The company filed for bankruptcy earlier this year, and the stock is now worthless.

By 2000, resentments in the family had hardened. Led by John and Dan, six Pritzkers circulated a letter -- described as friendly, but backed up by lawyers -- asking for an independent accounting of the family assets. After initially resisting the idea, Tom agreed, hoping to avoid "a lot of bad blood and litigation," according to someone close to the three.

That hope was soon dashed: The review, which tallied the value of the "promotes" earned by Tom, Nick, and Penny at some $500 million, enraged some of the other Pritzkers. Much of that, they argued, should have been added to the general family funds. But people associated with the trio say that Jay had awarded the "promotes" and that the amount was but a fraction of the wealth they helped create. Indeed, Jay and Robert in their 1995 memo urged that "special recognition and financial participation should be given to those who assist in administering the Family's affairs and in enhancing the Family wealth, a very difficult and often thankless task."

Tough economic times began to complicate the situation. Tom told colleagues that the hospitality-industry depression was the worst in a half-century. And in 2001, Marmon, still run by Robert, reported a nearly 60% decline in net earnings, to $121 million, on a 5.5% slide in revenues, to $6.4 billion. Nor had Robert, now battling Parkinson's disease, groomed a successor. His oldest son, James, had made his career in the Army as a paratrooper. Linda was a therapist active in a Buddhist school in Montana. And a second daughter, Karen, was a former magazine editor raising a family in Connecticut.

Then more trouble hit: In July, 2001, Superior Bank, a small Illinois bank that the Pritzkers owned 50% of, failed, putting the family under unprecedented scrutiny. At Jay's request, Penny had briefly chaired Superior's board years earlier and served on its holding company's board. The bank was shut down by the government amid recriminations between the Pritzkers and Alvin Dworman, a longtime partner of Jay's whose executives actually ran Superior. To end the dispute, the Pritzkers agreed to pay $460 million to the Federal Deposit Insurance Corp., but they didn't admit any wrongdoing. Now, they could recover much of that if a government lawsuit against the bank's auditor prevails. Ultimately, Penny's allies say, she protected the family's interests by brokering the deal.

With the pressures mounting outside and with much of his family rebelling against his leadership, Tom was stuck. The exasperated trio determined that the only course of action was the most drastic one: to abandon the Family System and split the fortune into 11 equal parts. Mistrust remains high, though. The family has asked Michael I. Sovern, ex-president of Columbia University who has mediated squabbles among private companies, to arbitrate any disputes. Tom has added more outsiders to the Hyatt board, and the ruling trio urged Robert to hand over his job at Marmon to former Illinois Tool Works Inc. Chief Executive John D. Nichols.

For some in the family, the rifts have been truly heartbreaking. J.B. and Anthony, for instance, had once been inseparable from their sister, Penny: Their father, Donald, died when he was just 39, and their mother died a decade later. Penny, a runner who competed in an Ironman triathlon in Hawaii and earned a law degree and an MBA from Stanford University, had helped fund an ill-fated Evanston (Ill.) Congressional primary race by J.B. in 1998. Now, J.B. and his sister rarely speak. Among Tom's siblings, Gigi has tried to remain loyal to her eldest brother while keeping relations cordial with John and Dan. And amid the strain, Nick has developed a skin condition that has left him without any hair.

For a while in 2002, it seemed Tom had managed to give his relatives what they wanted without losing control altogether. Then Liesel, a Columbia University freshman who is now appearing in a Broadway play, Vincent in Brixton, upset all the plans. Liesel's 20-year-old brother, Matthew, who was still on good terms with some of his cousins, learned of the breakup and their different treatment -- as members of a younger generation -- under the settlement. When the pair's mother, Irene, asked Tom about the situation, he referred her to a family lawyer. Instead, she turned to independent trust experts. Liesel and Matthew had a claim on trusts set up by their grandfather, A.N., for all his grandchildren -- even though Robert and Irene had divorced in 1991.

After months of investigation, Irene's lawyers claimed that her children had been cheated. Already, this branch of the family had been seared by the acrimonious divorce, granted on the grounds of mental cruelty by Robert. His lawyer at the time, Donald C. Schiller, says: "The use of that term in the decree in no way connotes conduct beyond normal marital unhappiness for a marriage that was breaking down." The warring parents fought in the courts over Robert's visits with the children, whether Liesel, at age 10, should appear in the film A Little Princess, and if she did, what name she would go by. Robert, who had apparently learned of her role by reading about it in the newspapers, didn't want Liesel to act or use her then-stepfather's name. Eventually he agreed Liesel could take the part if she attended his marriage to wife No. 3; she did and adopted the stage name Liesel Matthews (using her brother's name).

Not much later, Tom resigned as a trustee of Liesel's funds. According to her lawyers, the embittered Robert soon afterward "looted" the trusts. They say Robert parceled out his children's assets among trusts set up for the other Pritzkers, shifting their 5% stakes in Hyatt's holding company to a family foundation and then back to Hyatt, and giving some to the family foundation to distribute to charities.

Furious at her father, Liesel sued him and her cousins in late 2002, demanding $1 billion in actual losses and $5 billion in punitive damages. Soon after, Matthew hired his own lawyer -- Dan Webb, who defended Microsoft Corp. in the federal antitrust case -- and unless he can broker a deal, Matthew seems likely to join in his sister's fight. Matthew is keen to avoid the courts. He has grown close to his father, while Liesel has become more estranged. For his part, Robert, through his lawyers, maintains that the financial moves were legal and notes that Liesel's trusts still hold assets worth some $160 million. And, argue Robert's lawyers in court papers, "none of the transactions was undertaken because Robert was angry that 10-year-old Liesel had been chosen to star in a Hollywood movie."

Liesel's lawsuit has given much of the family common cause -- but that may prove fleeting. The 11 other Pritzkers signed a statement crafted by Tom attesting that they "continue to work together as a family in a way that reflects the values and principles of our parents and grandparents." But the family unity that Jay fostered and that Tom was expected to perpetuate has been shattered, as all of the 13 demand their shares of the legacy. Indeed, with the fifth generation included, at least 52 Pritzkers have claims on the family fortune. Back in 1995, Jay and Robert warned: "As the number of Family members grows, it is possible that lesser sums may be available for future generations; it is therefore important that the distributed monies are used prudently, so that some portion is available to your heirs."

Just how much will be available -- and how it will be arranged -- is hardly clear. Tom, Nick, and Penny must reorganize the family's financial structure, with its some 1,000 trusts, to parcel out assets equally. They plan to streamline the structure of Hyatt so they can -- if they choose -- take it public, take on partners, or borrow against it for cash. No course has been set yet, but Hyatt Corp. President Douglas G. Geoga says the company wants to grow. He argues that Hyatt can now can snap up rivals at bargain prices: Buying when others are selling, he says, is "classic Pritzker style."

How ironic. Because, of course, when the family divides its empire, it will lose its style, its influence, and its place among America's business dynasties. The feud may have been inevitable, some might say natural. But no one expected it to be public. That has never been the Pritzker way.

Read a Letter to the Editor about this story.

By Joseph Weber in Chicago

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