SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --------------------------------X : JOHN H. GUTFREUND, : Index No. 95-109669 Plaintiff, : : -against- : Complaint : TIME INC., : Defendant. : : --------------------------------X Plaintiff John H. Gutfreund, by his attorneys, Howard, Darby & Levin, for his Complaint alleges as follows: 1. This is an action for defamation and libel. 2. Plaintiff John Gutfreund is the former Chairman of Salomon Inc., a worldwide securities firm. He now works as an adviser in international securities and financial transactions. 3. Fortune magazine is a biweekly publication of Defendant Time Inc. Fortune is one of the preeminent business publications in the United States and around the world. It has a circulation of about 860,000 copies. Fortune describes itself as "the world's premier global management magazine" that "draws the world's most successful business people into every issue." The principal place of business of defendant Time Inc. is New York City. 4. The May 1, 1995 issue of Fortune, in a box prominently displayed on page 54 as part of the cover story, states that John Gutfreund has been "barred from the securities business for life." The statement is false: John Gutfreund has never been barred or suspended from the securities business, not even for one day. 5. The Fortune statement is libelous per se. The false and defamatory statement gravely injures plaintiff's reputation and severely impairs his ability to retain and attract clients. 6. The Fortune article, entitled "Famous Failures -- Where They Are Now," concludes that Mr. Gutfreund has "no chance" for a comeback. Fortune's publication of the false statement asserting a non-existent "bar from the securities business," and all that it implies to the world's business leaders reading Fortune, goes far to ensure the result that Fortune confidently predicts. Background 7. John Gutfreund began his career at Salomon Brothers in 1953, immediately after leaving military service in the Korean War, and worked there for 38 years. He was Chairman of Salomon Brothers from 1978 until August 1991. 8. In August 1991, John Gutfreund resigned from Salomon amid wild public speculation over the possible involvement of Salomon's senior management in a series of fictitious bids by a Salomon managing director, Paul Mozer, in government Treasury auctions. In fact, as later found and publicly announced by the SEC, Mr. Gutfreund was not involved and did not acquiesce in Mozer's scheme. 9. The facts behind Mr. Gutfreund's resignation are largely a matter of public record. In late April, 1991, John Gutfreund received a report from three of Salomon's most senior officers, including Salomon's chief legal counsel, that Mozer had come forward and admitted to submitting one fictitious bid in a Treasury auction two months earlier. In this report to Mr. Gutfreund, the incident was explained as an aberrational act, committed in the heat of the auction, without personal benefit to Mozer or monetary injury to the Treasury. 10. Salomon's chief legal counsel told Mr. Gutfreund that there was no legal duty to report the incident, but it was decided that, as a matter of good business relations with the Federal Reserve Bank of New York, Mr. Gutfreund and another senior officer would tell the Federal Reserve of Mozer's unauthorized bid. 11. Several weeks later, before the report was made, another incident occurred involving the government bond desk. Salomon began an internal investigation into that incident, hiring a respected law firm, Wachtell, Lipton, Rosen & Katz, to conduct the inquiry. In this investigation, Salomon discovered that Mozer had lied to the executives when he said that the earlier unauthorized bid was an aberration. Mozer had, in fact, submitted seven fictitious bids between July, 1990 and February, 1991. Mozer's motivation was apparently not monetary self-interest, but an egotistical effort to subvert Treasury bidding guidelines he disagreed with. 12. On August 9, 1991, before its investigation was complete, Salomon voluntarily reported all that it then knew to government authorities and made a public disclosure announcing Mozer's bids. Immediately upon Salomon's announcement, the press began speculating that John Gutfreund must have approved Mozer's bidding violations, because, according to Wall Street myth, he "oversee[s] all trading activity." The rumors of management involvement appeared to be confirmed by the fact, disclosed by Salomon, that Mozer had admitted to a single false bid some three months earlier. Speculation that "management knew" quickly drowned out the fact that it was Salomon's management that had uncovered Mozer's scheme and voluntarily disclosed it. 13. Federal officials, embarrassed that Mozer's bidding scheme had evaded regulatory detection, fostered this sinister view of "management involvement" by falsely suggesting that Salomon had disclosed Mozer's scheme only because it was about to be "caught" by federal regulators. In fact, at the time, the government had no clue that Mozer had submitted any fictitious bids. One high Treasury official later described these false suggestions as "damage control" to try to "spin things our way" and divert attention away from why the government itself hadn't detected Mozer's unauthorized bids: "[W]e were concerned we were going to be accused of being asleep at the switch." 14. As the false rumors spiralled out of control, John Gutfreund decided to resign in an effort to prevent a potentially debilitating loss of confidence in Salomon, the 8,000-employee firm to which he had devoted his entire 38- year professional life. Salomon's principal outside counsel, Martin Lipton, strongly counseled against such resignation since, based on his firm's extensive investigation, Mr. Gutfreund had done nothing wrong. Nonetheless, on Friday, August 16, Mr. Gutfreund announced that he would offer his resignation. At a board meeting on August 18, 1991, John Gutfreund resigned from the firm. 15. Instead of ending the matter, John Gutfreund's resignation only added fuel to the fire of speculation. It was as if his act of self-sacrifice were confirmation that he had engaged in wrongdoing. Why else, everyone seemed to assume, would such a prominent executive resign? Several weeks later, during a congressional hearing, a Congressman suggested that Mr. Gutfreund and the other top executives should be in "striped suits sweeping the streets." The following day, Salomon's board, under enormous pressure to distance itself from prior management, cut all links and compensation to Mr. Gutfreund, including his previously accrued pension and other benefits. For a period, Salomon even cut off medical benefits to Mr. Gutfreund's family in violation of federal law. SEC Findings and Settlement 16. The shameful vilification of John Gutfreund and other senior Salomon executives, judged guilty before the SEC investigation even began, was proved baseless when the SEC investigation concluded more than a year later. 17. In May 1992, Salomon avoided indictment for Mozer's pattern of misconduct by agreeing in a settlement with the SEC and the Department of Justice to pay $290 million in fines and restitution. The government complaint contained no allegation of any willful misconduct by Mr. Gutfreund. Salomon in its submissions concluded to the SEC that the former executives were "at most negligent but certainly not reckless" to have believed that Mozer's act was an aberration. 18. In December 1992 -- at the end of a 15-month investigation -- the SEC settled with John Gutfreund and the other executives. The SEC found no evidence that John Gutfreund or the other senior executives had done anything intentionally wrong. Nor did the SEC find that John Gutfreund and the other executives had broken any SEC rule. Instead, the SEC issued a report finding that Mr. Gutfreund and two other senior executives had "failed reasonably to supervise" Mozer. As to John Gutfreund, the SEC concluded that "[a]s Chairman and Chief Executive Officer of Salomon, Gutfreund bore ultimate responsibility" for assuring that Mozer was adequately supervised. 19. The actual terms of SEC's public settlement with John Gutfreund are a dramatic contrast to Fortune's statement that John Gutfreund "was barred from the securities business for life." In addition to fines, the SEC had a range of sanctions available to it, including: i) public censure; ii) suspension from the securities business; and, iii) being barred from the securities business for life. A permanent bar is generally imposed only on individuals whom the SEC finds committed criminal acts. Individuals who have been barred for life include Michael Milken, Ivan Boesky, Dennis Levine and Martin Siegel. The opprobrium associated with a permanent bar from the securities business is well understood in the industry. 20. In the SEC settlement in which, as Chief Executive, he took "ultimate responsibility" for reasonable supervision, John Gutfreund agreed to pay a fine of $100,000. Mr. Gutfreund did not receive a public censure. Contrary to Fortune's assertion that he was "barred from the securities business for life", John Gutfreund was not suspended from the securities business, not even for one day. Two Salomon executives did receive short suspensions from the industry of three and six months. Mr. Gutfreund, however entered into an undertaking of little practical effect to a man who was then 62 years old: he stated to the SEC that "he has no intention of serving in the capacity of Chairman or Chief Executive Officer" of a securities firm, and therefore undertook not to become Chairman or CEO of such a firm unless he reapplied and got the approval of the Securities and Exchange Commission. 21. The SEC's Order was available publicly and widely covered. In a lead article the day after the settlement, The New York Times headline reported that the settlement was "A Low-Price Settlement." The Wall Street Journal reported that Mr. Gutfreund "won't head a securities firm again without prior SEC approval." These accurate reports of the resolution of the SEC investigation were and are fully available to Fortune at the touch of a button on computerized databases. Claim for Libel 22. Plaintiff John Gutfreund repeats and realleges each of the allegations of paragraphs 1 to 21 above, as though fully set forth herein. 23. The statement that John Gutfreund "was barred from the securities business for life" is false. 24. The statement that John Gutfreund "was barred from the securities business for life" constitutes libel per se, for which damages are presumed. John Gutfreund has also suffered immediate and continuing injury to his reputation and business as a result of Fortune's defamation. 25. Defendant published its assertion that Mr. Gutfreund "was barred from the securities business for life" either with knowledge of the statement's falsity or with reckless disregard for the truth of the statement, the standard for constitutional malice. A finding of knowledge or recklessness is unavoidable in view of the ready availability to Fortune of the results of the SEC investigation and of accurate accounts in the newspapers of record that are readily available to Fortune through computerized databases. WHEREFORE, Plaintiff John H. Gutfreund demands damages in an amount to be calculated by the Court, including an amount sufficient to purchase full-page retractions in major business and general-interest newspapers and periodicals worldwide. Plaintiff also demands punitive damages and such other relief as the Court may deem just and proper. Dated:. New York, New York April 18, 1995 HOWARD, DARBY & LEVIN 1330 Avenue of the Americas New York, New York 10019 (212) 841-1000 Attorneys for Plaintiff John H. Gutfreund