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Financier's Dealings Disclosed

Courts: Leonard I. Green's divorce, lawsuit papers reveal an old SEC charge, IRS audit and partnership strife.


The SEC accused Green, then a partner of a New York-based investment group, of buying 700 shares of a trucking company in March 1974--months before it was to be acquired by the group for a higher stock price. The agency's civil complaint, filed in 1976, alleged that Green bought the stock while "in possession of material, non-public information."

Without admitting guilt, Green signed a 1977 stipulation forfeiting his $3,613 profit and prohibiting him from "purchasing, selling, recommending or inducing the purchase or sale" of securities based on inside information.

Green said he was unjustly accused, since at the time he bought the stock the takeover appeared unlikely. "If I had the money to fight it at the time, I would have," he said, calling it a "very disturbing experience."

Jude Green is claiming that her husband engaged in insider-trading activity involving Thrifty Payless and Rite Aid drugstores, one of his firm's biggest success stories.

In 1992, Green's firm paid $40million for Thrifty Drugs. It then merged Thrifty with Payless Drugs, which it acquired in 1994 for $1.2 billion. The privately held combination created the largest drugstore chain in the Western U.S. with more than 1,080 outlets.

In April 1996, Thrifty Payless went public; six months later it was sold to Camp Hill, Pa.-based Rite Aid for $2.3 billion. The transaction netted investors at Green's firm, which had a controlling interest in Thrifty Payless, a total of $420 million in equity.


Green's Suit Claims Wife Defamed Him

In the defamation suit against his wife, Green contends that her insider-trading allegation damaged his reputation and harmed business relations with his partners. It also added pressure to sign a succession agreement that cut him out of future investor funds, Green said.

It was Green himself who warned his partners in September 2000 that he expected his wife to make an accusation about insider trading during the divorce, depositions in the defamation case show. The partners concluded that the claim was untrue after two associates interviewed Jude Green in her Bel-Air home and checked trading records, depositions show.

But the episode further deteriorated relations between Green and his younger associates. They already were pressuring him to step down over his decision to sink $300million of investor funds into a Rite Aid investment in late 1999, when the drugstore was teetering and its bankers were unhappy.

"Rite Aid was having a financial crisis similar, for example, to what's going on today with Enron," partner Peter Nolan testified in a November deposition.

Green said he was on a weekend golfing trip in Southampton, N.Y., in late 1999 when he received an emergency phone call from a Rite Aid executive saying that bank loans were due and the chain needed more equity. Green began working with the firm to provide a $300-million infusion of money through the purchase of preferred stock.

Amid pressure from Rite Aid executives to make an immediate announcement of the investment, Green discussed the financing plan with his partners during a telephone call to Los Angeles the next Monday, depositions show. The partners protested.

"I voiced a concern about the company's numbers and its financial performance, and ... about the speed at which we were making the investment," Nolan testified. He had another worry: whether Green had a personal conflict of interest because he owned 1 million shares of Rite Aid in a trust.

"If someone's out making an investment decision in a company, that's a factor that needs to be vetted, which we did not vet," Nolan testified.

The telephone exchange became heated and Green hung up, according to depositions.

"Leonard basically terminated the discussions and signed a commitment letter," testified partner John G. Danhakl.

As his percentage of the partnership fee, Green earned a $460,500 payment for placing the Rite Aid investment, court filings show. He said he did not recall a discussion about a conflict of interest and pointed out that all the partners owned shares in Rite Aid.


Rite Aid Management Shakeup, SEC Probe

Shortly after the decision, news broke about trouble with the company's books, a discovery that prompted an SEC investigation. Rite Aid management was thrown out and Green was briefly appointed chairman.

The financier, who retains a seat on the board, said he understands that the SEC probe is continuing. An SEC spokesman declined to comment.

The acrimony within Green's firm continued to escalate.

"As the stock dropped and as the problems became more apparent, and as we started getting more heat from our investors, the tension among the partners increased," Danhakl testified.

The flashpoint came in early 2000, when Green called a meeting to discuss his partners' unhappiness with the investment. Green recalled the session as a "frank discussion about the investment and the way the partnership should conduct itself relative to communication with the outside world."

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