Riordan Rejoins Old Firm Though Role is Undefined

Wall Street West by Benjamin Mark Cole

It's Riordan, Lewis & Haden, again. Actually, the name of former Los Angeles Mayor Richard Riordan was never dropped from the shingle of the downtown private equity firm.

But while in office Riordan was hands-off, and indeed many of his assets were in a blind trust. Now that his gubernatorial run has ended in defeat, Riordan is returning home after an eight-year absence, confirmed General Partner J. Christopher Lewis.

Riordan will be back part time, but his role hasn't yet been defined. Even his title hasn't been settled. It's "not important," Lewis said.

"We look forward to having him back, because he is a smart guy. ... I doubt if he will be here full-time," Lewis said.

Riordan retains an intense interest in education policy. But it's likely he will find a moment or two to reacquaint himself with the personal fortune that's been in Lewis' care, as the trust's administrator. Ballpark estimates of Riordan's personal holdings have ranged from $100 million to $200 million. Three years ago, Lewis said the trust had "done well." But of course, that was before the stock market turned south.

Contented Cop

Post-Enron, the investing public has a heightened awareness of financial reporting, but the Securities and Exchange Commission has long devoted much of its legal firepower to going after companies that use "creative" reporting techniques, said Randall Lee, SEC Regional Administrator in Los Angeles.

"At the SEC and the regional office, financial reporting is our highest priority (and) has been our highest priority for years," Lee said. "It's only been lately that we have seen large Fortune 500-type companies get into the press for their style of financial reporting, but it has long been a problem."

Lee devotes nearly two-thirds of the 200 SEC staff professionals in L.A. and San Francisco to scrutinizing the numbers that public companies have filed with the SEC.

That said, the Enron scandal has a brought a flood of informants out of the woodwork. "We are getting referrals in increased volumes ... from current and former employees, from anonymous tipsters. We have never been so busy," Lee said.

Obviously, Lee would like a larger staff. He rues the fact that the financial fraud staff at the local U.S. Attorney's Office (where Lee toiled before joining SEC late last year) cannot also beef up. The SEC usually can only bring fines and industry sanctions in civil cases, but only the U.S. Attorney's Office can put someone behind bars.

Many financial fraudsters, admits Lee, might sneer at SEC sancrions as mere paperwork. But the U.S. Attorney's Office doesn't have enough lawyers to prosecute all the cases forwarded by the SEC, said Lee.

"We are hoping to see budget increases (for more enforcement officers at both SEC and U.S. Attorney's Office) this year," Lee said.

Lee worked in the private sector before joining the SEC. After graduating from UC Berkeley's law school, he worked as investment banker with Banker's Trust, and as lawyer with Munger, Tolles & Olsen in downtown Los Angeles. Then he joined the U.S. Attorney's Office, before switching to the SEC. Usually, it works the other way a young lawyer will put in a stint of public service, then collect larger paychecks in the private sector.

"When I go to work in the morning, I like what I do," explained Lee. "Many of my friends at law firms cannot say the same thing."

Lending Spree

Century City financier Marshall Geller, who heads the merchant bank Geller & Friend Capital Partners, recently formed a "debt SBIC" to lend to small, growing companies in 11 Western states. A debt SBIC (debt-leveraged Small Business Investment Company) is different from the more common "equity SBIC," in that the fund, which has been christened St. Cloud Capital, will only lend, although sometimes it will receive warrants that can convert to equity.

The appeal of a debt SBIC is in its leverage. For every dollar it raises and lends, the federal government will effectively kick in another three. Geller and other investors have kicked in roughly $16 million to fund St. Cloud, giving it $64 million in lending power with the three-to-one federal match.

If Geller reaches the money-raising limit of $20 million in private equity, the fund can lend up to $80 million. Word has gotten around town about the new pot of capital. "I am getting two to three calls a day, from legitimate companies," said Geller, who is chairman of St. Cloud.

Typically, small, growing companies raise funds by borrowing from a commercial bank or seeking private equity from investment bankers. But the banks have been stingy of late, and investment bankers are expensive. Besides, the public's appetite for equity in speculative ventures has dimmed considerably in the past two years.

Geller is especially eager to lend to small, publicly held companies. "We are looking to make bridge loans, or debt with equity kickers," he said. It's harder to sell a loan or an equity stake in a private company, because there's no market, Geller said. "You could have a great company, but no buyers," he said. With a public company, "You just have to worry about making money."

On a recent deal, St. Cloud lent $2 million to a small public company at 10.5 percent interest, and will also receive a 5 percent stake. The loan is secured by the assets of the company, and with the leverage provided by the SBA, St. Cloud could make as much as a 30 percent annual return, Geller said.

Brief

It's a bit of a quirk, but Westside-based investment banking boutique Koffler & Co. was ranked as the second-largest banking firm in the first quarter, when measured by leveraged-buyout transactions where a U.S. company was the target. Industry monitor Investment Dealer's Digest did the rankings. Merrill Lynch was No. 1. How did Koffler get up there with the big boys? "There weren't a lot of LBO's done in the first quarter," Koffler said. "We got ours done." As reported, Koffler engineered the sale of diet house Jenny Craig in the first quarter, for $120 million.



Contributing columnist Benjamin Mark Cole writes about the local investment community. He can be reached at sevencontinents@mindspring.com.

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