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Chapter 12

Cassidy's earnings begin to attract attention. He rejects several offers to buy the firm, then "sells" part of it to the employees. This gambit makes him $11 million, but he maintains full control of Cassidy & Associates.

By Robert G. Kaiser

The combination of success for clients and new public notoriety brought a steady stream of clients to Cassidy & Associates and profits soared. By 1989 the firm's revenues had reached $21.2 million for the year.

Cassidy & Associates had been wholly owned by Gerald Cassidy and his wife, Loretta. At the end of a good year, after he had paid salaries and bonuses to himself and his staff, Cassidy could put any residual profits directly into his own pocket. Cassidy took more cash out of the business in the late 1980s than at any other time in its 31-year history, including $3 million to $5 million a year in salary and bonuses from 1985 to 1990.

The fact that Cassidy was making a lot of money was not lost on the outside world. Several companies, including at least two big British advertising conglomerates, expressed an interest in buying Cassidy's firm. The most serious of these feelers came in 1987. Cassidy later told the story:

"I was on vacation in August, and I got a call that Mr. Peter Gummer was trying to reach me. . . . Peter, later to be Lord Chadlington, had created Shandwick [an international public relations and advertising company based in London.] He wanted to buy the company. I listened to him and had a number of conversations with him, and I went to London to see his operation, and I got a very good idea of what he was doing. He had taken his company public on the London exchange, and the stock there -- it's very interesting how it's easier to go public there than here -- created a currency for him with which he could buy companies. . . . So I really studied what he was doing, and had him make pretty elaborate proposals to me. We made about three runs at this. I did not want to sell, but I wanted to learn. It impressed me that the way you could grow a business was to create your own currency, that being stock."

Peter Gummer
Peter Gummer, founder and chairman of Shandwick, sought to buy Cassidy's firm in 1987. (File photo: Ottawa Citizen)

James Fabiani, chief operating officer of Cassidy & Associates at the time, remembered with admiration that Cassidy had extracted $1 million from Gummer as earnest money while their negotiations continued. They had reached the threshold of a deal when Shandwick's stock, the "currency" Gummer planned to use to acquire Cassidy, suddenly lost value on the London exchange. The deal collapsed. Cassidy kept the million dollars.

By 1989, he was ready to try another gambit to extract some of the capital value that he had added to the firm Kenneth Schlossberg and he had created. By this time, he was relying heavily on the advice of Lester "Ruff" Fant, the Sidley & Austin partner who had helped him oust Schlossberg from the firm in 1984 and had served as his lawyer ever since.

In a recent interview, Fant acknowledged that some of his partners in the Washington office of Sidley, a Chicago firm that has grown to be gigantic and global, expressed some disdain for his client. "We're working for railroads and A.T.&T.," he recalled one of them saying, "why are we working for a lobbyist?" Of course at the time, no partner of Sidley made even half as much money as Cassidy was taking home.

Fant said he was intrigued by Cassidy and found his legal issues interesting. "The key thing is, would he follow your advice?" Fant recalled. "And I thought he would. I thought it was a good professional relationship."

Gummer's effort to buy the firm persuaded Cassidy and Fant that they had an opportunity. Fant remembered: "Gerry . . . was making a lot of money, and always worrying about it -- you know, will I make a lot of money next year? Should I sell the firm? What can I do to capitalize on what I've created? We had a lot of discussions on that. . . . There was a lot of value there, and there might not be in a couple of years." But how, other than selling the firm, could that value be extracted?

The way the firm operated, its extraordinary cash flow never accumulated huge cash reserves, because whatever came in each year also went out -- in salary, bonuses, rent and other expenses such as Cassidy's chauffeur-driven limo. And lobbying could be a volatile business; there was no guarantee that next year would be better than this.

At Sidley, Fant had developed a practice helping entrepreneurs to extract wealth from the companies they had founded. "That was kind of the bread and butter of the practice I had." One of the techniques he had used was an Employee Stock Ownership Plan (ESOP), a novel form of corporate ownership created by Sen. Russell B. Long, the son of "The Kingfish," Huey Long of Louisiana, a governor and senator who was assassinated in 1935. The senior Long had plotted a presidential campaign on the slogan "Share the Wealth."

Russell Long saw ESOPs as a way to do just that, and as chairman of the Senate Finance Committee, he engineered the enactment of legislation making them attractive to certain business owners. Fant had worked with the former owner of a small Illinois newspaper, the Peoria Journal-Star, which had been owned by the same family for several generations. Fant's client had no interested heir, so he sold the paper to his own employees through an ESOP.

Long added inducements to the law to encourage companies to take advantage of it. The most compelling were tax advantages. The biggest of these allowed the founder of a company who was selling his business to an ESOP to protect the proceeds from federal tax as long as they were invested in "replacement securities" in other American corporations. In other words, the founder could sell his company for millions of dollars and invest the entire amount in stocks or bonds issued by American companies, without paying any tax until those replacement securities were sold.

ESOPs could be created over a period of years, with the company allocating a portion of its annual profits to acquiring shares in the firm to be held for its employees, who could eventually gain control of the firm, as those employees did in Peoria.

The law also permitted the use of ESOP shares in a retirement program. Shares in the firm would be purchased by an ESOP and held for the benefit of employees when they retired.

The law gave its tax benefits to proprietors who sold at least 30 percent of their company, so owners could gain those benefits without losing operational control of their companies. And it was legal to organize a leveraged ESOP, which meant the company could borrow the money to buy its founder's shares, repaying the loan out of its earnings.

This is what Fant and Cassidy did. They found a Dutch-owned insurance conglomerate, Aegon, that lent Cassidy & Associates $15 million. The money was used to acquire Cassidy & Associates shares from Cassidy himself ($11 million worth) and key associates to whom he had given stock as rewards over the years, including Fabiani, Vincent Versage, Frank Godfrey and several others.

In other words, the firm borrowed millions to make Cassidy wealthy, and to provide six- and seven-figure windfalls to key personnel. The loan was repaid out of the firm's cash flow; the money used to repay it had to be taken from funds that could otherwise have gone to salaries or bonuses. Thus the staff subsidized the creation of new wealth for the principals. [Note: The original version of this paragraph stated that the money used to repay the ESOP loan "would otherwise" have gone to salaries or bonuses. As owner of the firm, Mr. Cassidy had complete discretion over the disbursement of the firm's revenue.]

Before the ESOP's creation in October 1989, there had been no market in Cassidy shares, so an appraiser was hired to establish a value for them. Fant structured the deal so that the shares sold into the ESOP would represent 30 percent of the outstanding shares in the company, the number needed to qualify for the ESOP tax break. If 30 percent of the firm was worth $15 million, then the appraisal had to conclude that Cassidy & Associates was worth about $50 million, not bad for a company with no tangible assets and revenues of about $20 million a year.

If the ESOP's stake in the company was 30 percent initially, it was soon much less. Cassidy & Associates stock was "diluted" again and again after that first transaction by the subsequent issuance of new shares.

No matter -- under the law, Cassidy could still avoid taxes on that $11 million as long as he held it in U.S. securities, and that is just what he has done. He invested it in a General Electric bond fund, and left it there. If all interest payments were reinvested, an $11 million investment in corporate bonds in 1989 would be worth at least $40 million today.

The existence of the ESOP never had any practical effect on the operations of Cassidy & Associates. A trustee theoretically represented the interests of the employees covered by the ESOP retirement plan, but with 30 percent or less of the shares, the trustee had no real influence on the running of the firm. Gerald Cassidy remained in complete control.

Washington Post research editor Alice Crites contributed to this report.

Tomorrow: Cassidy diversifies his business beyond lobbying.

Key Related Materials

Documents / Web sites / Newspaper Stories

Cassidy Responds to This Chapter

I made a decision nearly three years ago to cooperate with Bob Kaiser as he began writing his series on modern-day lobbying. I invested countless hours in interviews and preparation to ensure he had accurate and complete information. Much of that time was explaining and correcting his ideas of the financial history of Cassidy & Associates.

So today, after reading his article on our firm's Employee Stock Ownership Plan (ESOP), I was amazed how he successfully weaved his own opinions into the story, but more amazingly, he just got the facts wrong.

Prior to 1989 when Cassidy & Associates entered into an ESOP, I owned 100% of the company, therefore after all salaries and bonuses were paid to our employees the remaining income went to me as profit. Once we entered an ESOP and as Mr. Kaiser points out owed a debt to AEGON, who funded the ESOP, they were repaid the interest and principal on their loan from what were previously the profits of Cassidy & Associates which I had up until that time received as income. To suggest that the payments to AEGON came from the "salaries or bonuses" that would have gone to the employees is simply incorrect. Those funds would have gone to me just as they had in the past.

If Mr. Kaiser was going to offer the reader his opinion of what happened he at least owed the reader my view of what actually transpired.

This is another example of where Mr. Kaiser had information that countered his reporting but failed to include it in his story. What should we expect from future stories?

-- Gerald Cassidy

About This Series | Chapters:

Photo Gallery

An overview of Gerald Cassidy's life and career.

Key Players

A "cast of characters" in the life and career of Gerald Cassidy.


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Sorry, I fell asleep for a moment there.

Posted by: sportsfan | March 20, 2007 10:32 AM

sportsfan, you are not alert today. if how gerry cannibalizes his own staff enron style while he laughs all the way to bank at them (and twists the intent of the 30% no tax loophole like a paper clip to stiff his own country while posing as a patriot) does not grab you... maybe the part about citizen's kane love nest will wake you up. your feigned boredom with how cassidy bilks the usa and those devoted to him is the refuge of the busted. enron.02

Posted by: sportsenron | March 20, 2007 03:05 PM

Hello IRS? Are you there? If Cassidy intended to dilute that 30% all along, as he did, shouldn't there be an audit of both Cassidy and Associates, Gerald Cassidy and Loretta?

Posted by: irsfraud | March 20, 2007 03:38 PM

"In other words, the firm borrowed millions to make Cassidy wealthy, and to provide six- and seven-figure windfalls to key personnel. The loan was repaid out of the firm's cash flow; the money used to repay it had to be taken from funds that would otherwise have gone to salaries or bonuses. Thus the staff subsidized the creation of new wealth for the principals."
Err..or money that would have been plowed back into the business, or given straight to Mr. Cassidy as profit. The employees only subsidized the new wealth if they took pay cuts to pay off the loans. It's accurate to say the loan payments came out of revenues and decreased profits, but it's not accurate to say they came straight out of salaries and bonuses.
I'm not specifically defending Mr. Cassidy here, but I think it's important to avoid sensationalism. What we're talking about is the owners of a business taking some of the value out of what they've built. Are home equity loans evil? It's a pretty similar concept.
Is it possible that the valuation was inflated by the consultants? Sure. Do investment bankers ever act against the interests or regular stockholders to benefit corporate decision makers? Yeah - every day. But, owners of a business deciding what to do with profits is not inherently evil, and it isn't fair to portray it that way.

Posted by: steveharmon | March 20, 2007 04:09 PM

To SteveHarmon, after reading these posts ever since this story began, I havent read a post as thoughtfully written and thought out such as yours. Its refreshing to see someone combat the spin the author spits out with real world examples that we all hear about in the news every day. It puts it in perspective. Most of the comments on here have been, "You're wrong, and I'll tell you why, you idiot!" That, or something about fascism, but i'm not sure what that's all about.

Posted by: ox1606 | March 21, 2007 08:36 AM

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