Foul Trouble
When ex–Bulls star Scottie Pippen needed a new financial adviser, he turned to a smooth-talking investment guru named Bob Lunn, whose clientele included a cross section of Chicago's elite. For a time the two made a terrific team, whether golfing, socializing, or talking almost daily about money. But then their relationship unraveled into a bitter dispute that has left Lunn bankrupt—and Pippen claiming in court he has lost millions of dollars.
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When they learned in the summer of 1999 that Scottie Pippen was unhappy with his Memphis money manager, lawyers at Katten Muchin, the Chicago firm that had served as Pippen's legal counsel for much of his career, pitched in to help him find a replacement. They lined up representatives of several financial institutions-from brand-name national shops like Goldman Sachs and Salomon Smith Barney to the local Lunn Partners-to meet with Pippen and tell him about their services. Lunn's 20-employee operation might have seemed outclassed against such bigger and better known competition. But because of his small size, he could provide a level of personalized service they couldn't. What's more, Lunn could offer Pippen entrée into the go-go world of private equity investing alongside big-time financial players. "I wasn't an orthodox money manager-you couldn't put me in a cookie-cutter box," says Lunn. "We were looking to do deals, and I was willing to go and look at Pippen's investment ideas, too. A place like Northern Trust isn't going to do that." On the appointed day, Lunn showed up at Katten Muchin's West Loop office, where Pippen and his wife, Larsa, were ensconced in a conference room. Lunn says that he and Pippen "hit it off from the get-go." By the end of the day, Pippen had selected Lunn, based, Pippen claims in a lawsuit, on Katten Muchin's recommendation. (A spokesman for the law firm declined to comment.)Lunn's first move was to liquidate most of Pippen's stock portfolio, he says, sparing Pippen the trauma that began a few months later when the stock market crashed in March of 2000. Over the three years starting in January 2000, Pippen transferred a net total (excluding cash that went back to him) of about $15 million for Lunn to invest, according to one of Pippen's lawyers. (Lunn says the net total was about $10 million.) Lunn's task, as spelled out in an agreement Pippen signed in December 1999, was to assemble a portfolio exposed to "moderate" risk.
But instead of investing in publicly traded and relatively liquid assets, such as stocks and Treasury bonds, Lunn began pouring Pippen's money into relatively illiquid private placements in fledgling companies and stakes in commercial real-estate developments. In time, Pippen owned equity in Continental Community Holdings; Fisher Island, a posh real-estate development in Miami's Biscayne Bay; Fox & Obel, the gourmet grocer in Chicago; a small airline called Indigo that operated charter flights between Chicago and Teterboro, New Jersey; a private maker of guitars; an Internet venture; and more.
At some point in early 2001, Lunn says, an associate of Peer Pedersen approached with a deal that seemed promising: lending money, at 13 percent interest, to a prominent local real-estate developer called Urban Investment Trust to fund the development of some commercial properties. Urban was led by two men, Rudy Mulder and John Terzakis, with solid credentials. Mulder, the chairman and Lunn's chief contact, "was touted as the hot new developer in town," Lunn says. Lunn rounded up several people to lend about $12 million to Urban through Lunn Partners, but the biggest stake-a total of $3.5 million, Lunn says-belonged to Pippen. (Pippen claims in court filings that the figure was more than $12 million.) Indeed, Lunn says, "I elbowed" Pippen into the deal "to the exclusion of other investors I would have gone to. I had to put some of his money to work."
With his stellar career winding down as a member of the Portland Trailblazers, Scottie Pippen was finally savoring the financial fruits that had eluded him during his glory years with the Bulls. Hauling down more than $15 million a year, he was rich enough to splurge on a $10-million yacht (the 85-foot, leather-and-marble-lined Lady Larsa, with seven-foot ceilings designed specially for Pippen's tall frame), build a palatial dream house on the Intracoastal Waterway in Fort Lauderdale, and indulge in other fast-lane extravagances.
In recent years he had come to covet the ultimate bling for a star athlete: a large corporate jet that could whisk him to his destination in pampered style. "He's a big dog," Lunn says. "His buddies are flying around in private jets; he wants to fly around in a private jet. It was an ego thing."
Lunn, himself a frequent flier by private jet, argued in a September 1999 letter to Pippen's accountant that maintenance and financing costs made owning a plane a stupendous waste of money. It made far more sense financially, he advised, for Pippen simply to lease time on private charters whenever he wanted to fly. But over the following months Pippen "kept pounding me," Lunn says. "He had a serious ambition to own his own airplane."
In time Pippen took a liking to a Gulfstream II he had flown on. Piloted by a Florida charter operator Pippen had befriended named Craig Frost, the plane was almost as big as a small DC-9, with an interior roomy enough to stand up in, plush leather seating for about 16 passengers, and plenty of other creature comforts.
At Pippen's insistence and against Lunn's advice, according to court documents, in early 2002 Lunn worked out a deal that made Pippen the co-owner of the Gulfstream II along with Frost. The agreement gave Pippen 51 percent of the equity in the $7.4-million plane and enabled him to share in the revenues it generated in Frost's charter service, thereby helping him cover the maintenance costs and the monthly payments on the $5 million he and Frost had borrowed.
Over the next several months, the Pippen-Frost partnership was "all seashells and balloons," Lunn says, as Pippen embraced his inner big shot, flying to and fro with Frost at the controls. But soon enough there was turbulence. In late October 2002 Scottie and Larsa called Lunn to tell him they believed Frost was not maintaining the plane properly, Lunn says. Larsa said she no longer felt safe on board. Scottie had become interested in an even fancier plane and insisted that Lunn get him out of the deal on the Gulfstream. The conversation ended on an ominous note: "‘We should have never bought this plane,'" Larsa said, according to Lunn. "‘We hired you to prevent us from making decisions like this. You're supposed to protect us from ourselves.'"
Despite Pippen's desire for a moderate-risk investment strategy, by the middle of 2003 Lunn had allocated 90 percent of his funds to "risky and speculative non-public investments" instead of publicly traded companies and other "safer" investments, according to court documents.
Lunn says today that he believed at the time that those investments offered a higher margin of safety and better returns than stocks or bonds. But financing small privately held startups is inherently risky, and by some accounts many of Lunn's deals were turning out to be losers. "He started getting sloppy with his investment strategies, and the deals became crazier and crazier," says the source familiar with several of Lunn Partners' deals. By the end of 2003, says the Lunn creditor, "the people Bob could go to to raise money were drying up. Nobody trusted him anymore." Meanwhile, Lunn found himself in an increasingly precarious financial condition, relying on a growing list of creditors to keep his investments-and himself-afloat.
Of all the troubled investments weighing on Lunn, the one that threatened to devour him was the loan to Urban Investment Trust. Over the course of 2002, Urban had fallen further and further behind on its interest payments to Lunn Partners. At a tense meeting in January 2003 with Rudy Mulder and John Terzakis, Lunn says, he learned that Urban was unable to repay the $12 million it had borrowed. (Mulder would file for personal bankruptcy that September.) Faced with this catastrophe, in the spring of 2003 Lunn worked out a deal in which he would take personal possession of several commercial properties-including a South Side parcel at 119th Street and Marshfield Avenue and a 49-acre site at 26th Street and South Kostner Avenue in the Hispanic neighborhood of Little Village-in exchange for releasing Urban from its debt obligations to Lunn Partners.
The two most valuable properties, the South Side and Pilsen parcels, carried mortgages totaling $40 million, but Lunn believed they might be worth substantially more than that. If he could find a buyer, he thought, he could pay back Pippen and the other bondholders in the Urban deal, as well as his other creditors. But Lunn was not a real-estate developer, and these would be complicated transactions that would take time to play out. Meanwhile, Lunn would have to shoulder the $200,000-plus in monthly interest payments on the mortgages. With other investments foundering, this huge new obligation left Lunn badly "strapped," he admits now. "I was working seven days a week; I had my hand in many dikes. Every ounce of cash flow we had at Lunn Partners was going to pay the carry [on the properties]. In retrospect, clearly I got stretched too thin."
In the spring of 2003, Lunn took Pippen golfing at Beverly Country Club. By then friction had developed between them over the Gulfstream II. Although Lunn had helped arrange a buyout from Frost in which Pippen would "suffer no financial loss and even retain a minority stake in the airplane," court papers say, Pippen, "believing his interest was worth more," refused to accept. As the stalemate wore on, Pippen was not making his share of the loan payments, Frost says. Eventually Frost stopped making payments as well and mothballed the plane. (Eventually U.S. Bank National Association sued Pippen and Frost on the delinquent loan, and Pippen is potentially liable for the entire $5 million still owed.)
In Lunn's version of events, the plane was the principal cause of Pippen's turning against him. But it seems plausible that Pippen had plenty of other reasons to be unhappy with Lunn. Pippen alleges in court filings, for example, that Lunn failed to answer Pippen's questions or provide reports about investment transactions and performance. Even Lunn admits that although he had learned of Urban Investment Trust's troubles in January 2003, he didn't tell Pippen about it until the May golf outing, when Pippen also learned that Lunn now owned the properties. Lunn tried to reassure Pippen that he would get his money back. "At the end of the day, this is going to be more than OK," he told Pippen on the drive back from the country club, "because the property is now worth more than what we were owed."
To give Pippen further comfort, Lunn did something he now regrets. He ordered his lawyer to draw up a written pledge, he says, personally guaranteeing he would buy Pippen out of his investments with Lunn Partners, including the real estate, for about $7.6 million-the amount Lunn says Pippen had put into the various Lunn Partners private equity deals and the real-estate developments. "I just wanted to get him out of my life and out of my business as delicately and fairly as I could, but I also wanted to protect him," Lunn says. He hoped that by giving Pippen a personal guarantee, he would forestall a possible lawsuit. But in fact he had handed Pippen a powerful legal cudgel to use against him.
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