One of Wall Street’s largest real estate investment funds was plunged deeper into turmoil this week as its former manager accused his previous employer of breach of fiduciary duty and defamation.

Arthur Solomon made a name for himself as head of Lazard Freres & Co. real estate investor group. An 11-year Lazard veteran, Solomon founded and built Lazard’s real estate investment area, overseeing five funds with total assets of more than $9 billion.

But in early April, Solomon’s resignation was demanded after he reportedly encouraged his investors to push for the firm’s opportunity funds to be spun off, resulting in him having more control over their investments.

One of these opportunity funds is the investment firm’s largest, Lazard Freres Strategic Realty Investors II. With a market value of $1.5 billion, the fund invests largely in REITs, unlike most of these type of funds that directly buy real estate properties.

As the REIT market suffered flat demand and depressed prices over the last year, the fund failed to turn in solid returns. While investors expected annual returns in the neighborhood of 20 percent to 30 percent, as Lazard Freres has rewarded them with before on real estate investments, the fund turned in a small loss for its first year.

This no doubt scared management at Lazard Freres. After all, the client list for Strategic Realty Investors II includes more than 20 large institutional investors, including IBM and General Motors.

That’s why rumors on The Street are pointing to poor fund performance as the real reason Solomon was asked to leave. Gossips say that the spin-off suggestion was just an excuse for his quick-and-dirty ouster to get rid of a non-performing asset.

But Solomon tells a different story. In papers filed with the New York Stock Exchange, Solomon claims that Lazard Freres provided its fund investors with "an intentional misrepresentation of the funds’ actual and potential performance" to justify his termination. In other words, he claims that the firm cooked the books for the worse so that investors would not want to leave the firm and take Solomon with them as an independent manager.

So what is the real reason Solomon was forced out? According to Solomon, Lazard Freres placed its own economic interests ahead of its investors. That’s why he was encouraging investors to jump ship and tried to arrange an "amicable" parting from the firm as early as January.

As many fund managers have done in the past, Solomon wanted to spin the fund off into a separate entity and maintain control. This typically only occurs, however, if the investment firm is no longer interested in keeping the fund. Solomon claims that his former employer made up an excuse to get rid of him so that it could unfairly keep a hold on the large investment pool.

A statement from Solomon’s attorney said, "Solomon’s termination from overseeing the funds permits investors to remove Lazard’s affiliate as general partner and to seek damages unless an investor-approved replacement is located."

Lazard Freres has been trying desperately to make its investors happy. Many were brought in by Solomon’s good name rather than by the firm’s reputation. Just a day after Solomon’s hasty dismissal, Mark Ticotin took over management of the firm’s real estate funds. Ticotin previously served as senior executive vice president at Simon Property of Indianapolis.

Such a quick new infusion of new blood lends credence to Solomon’s story that his bosses were plotting to ditch him for some time.

Published: May 19, 1999

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Editor's Note: This article reflects the opinions of Lesley Hensell only and not necessarily the views of this or any other publication, organization or Website owner.

Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net