The New York Observer, July 2, 2001

By James Verini

With the fall of the Berlin Wall, Ronald Lauder looked east and saw “business opportunity” scrolling across the TV screens of every nation in the Eastern bloc. Oh, to be there first and grab it all, as state-run media fell into the hands of the private sector and glasnost, the free exchange of ideas, flourished from one former Soviet republic and satellite to the next.

Now, at last, Eastern Europeans would be free to watch the Pocasicko, a news segment featuring the naked weather girl, who puts on or strips off clothing according to the day’s forecast.

This was Mr. Lauder’s chance: his moment to step out of the shadow of his successful family, to come back from the debacle that was the 1989 New York Mayoral race and establish his own identity.

How it all went wrong was merely hinted at on June 12, when The New York Times reported that Mary Jo White, the U.S. Attorney for the Southern District, was investigating Mr. Lauder’s television holding company, Central European Media Enterprises (CME), over allegations that the company had bribed state officials in Ukraine. The story was picked up by the Associated Press, the International Herald Tribune and several news outlets in Central Europe, without elaboration. But the message came across loud and clear: Mr. Lauder’s company could be in a mess of trouble.

To people familiar with the heir to the Estee Lauder cosmetics fortune (Clinique, Aramis, Aveda, Origins and the Tommy Hilfiger and Donna Karan scents) and chairman of the Museum of Modern Art, the news came as a shock; that Mr. Lauder even had a television company in Ukraine was little known.

It may have been most shocking of all to Mr. Lauder himself. Officials at CME said they knew nothing about a federal investigation until they read about it in The Times. The company’s chief executive, Fred Klinkhammer, claims that neither he nor any of his employees or predecessors have been contacted by Ms. White’s office. As for the subpoenas and the empaneling of a grand jury, as reported in The Times, Mr. Klinkhammer said that he was never notified. (He added that he was never contacted by The Times, either.) The attorney for Mr. Lauder and CME said he has not been informed of an investigation, either. Ms. White’s office refused to comment.

The Times reporter, Raymond Bonner, stood by his story. But, he added, “if this is the case, and the documents support the allegations, maybe the story is: Why is the U.S. Attorney not issuing more subpoenas?”

If an investigation is underway, it is certainly not the first time that Mr. Lauder’s activities in Central Europe have caused legal controversy. Nor is it the first time that the controversy has been shrouded in ambiguity. Since its inception in 1995, CME, its partners and its associates have been entangled in a dark Gordian knot of court proceedings from New York to London to Kiev, fighting off lawsuits, bringing suits and being accused of ties to corrupt government officials and organized crime.

A federal investigation would not even represent CME’s most pressing legal matter: The company has a $500 million lawsuit against the Czech government awaiting judgment in London and, in a related case, is owed $27 million by a former partner known in his native land as the Czech Ted Turner.

Ironically, if CME is under U.S. investigation, it may be for claims very similar to those it brought against the defendants in those two suits.

But even if all of CME’s legal troubles were miraculously to go away, it may be too late for the company. CME’s stock, once on the Nasdaq, now only trades over the counter, at about $2 per share. Mr. Lauder boasted that the company would be worth billions; it now has a market capitalization of $6.6 million. Standard & Poor’s no longer covers CME’s bonds, because at the end of last year the company defaulted on an $8.5 million bond payment (it subsequently paid it). And to cover debts, Mr. Lauder has had to sell his television stations in Hungary and Poland, the latter after only 14 months of operation.

Mr. Lauder has tens of millions of Estee Lauder money, and more than $100 million from banks, sunk into the ailing company. And the lone prospective white knight on the horizon — plus the $615 million it had promised to bring with a buyout — pulled out some time ago, for fear of CME’s litigious proclivities.

Marveling at the glacial pace at which the company’s grievances are being resolved, CME’s officers can do little more than shake their heads in frustration. “The Czech Republic is a dangerous place to do business,” was Mr. Klinkhammer’s bemused and final statement on that country.

Mr. Lauder, 57, declined to be interviewed.

The story of CME begins in Hungary, where it all started for the Lauder family. Mr. Lauder’s mother, Estee Lauder, a Hungarian Jewish immigrant, had begun selling homemade hand creams at a pharmacy in Queens after World War II and, over the course of several decades, parlayed that into a beauty-products empire. Mr. Lauder’s older brother, Leonard, had assumed the helm of the company when their father, Joseph, died in 1983. Leonard Lauder took it public, making himself and his brother billionaires four times over.

Ronald, however, was not as good with money as he was at acquiring things. By 1991, he’d accumulated a world-class collection of modern European art — he’d made his first purchase at 13, an Egon Schiele, with $10,000 in bar mitzvah money. He’d also conducted a not-very-serious run for Mayor of New York, losing the Republican nomination to Rudolph Giuliani in 1989. (“The big news today is not what Ronald Lauder said at City Hall, but that Ronald Lauder actually found City Hall,” Mr. Giuliani’s campaign was quoted as saying during the race.)

He’d also gotten himself embroiled in a scandal involving the importation, for an exhibit at the Museum of Modern Art, of Egon Schiele works that may or may not have been stolen from Holocaust victims. All in all, Mr. Lauder was ripe for a win.

That’s what he was aiming for when he plunged into business in the former Eastern bloc. He had the perfect pedigree: A generous donor, along with the rest of his family, to Ronald Reagan’s campaigns, he’d been rewarded in 1983 with a stint in the Pentagon as Assistant Secretary of Defense for Europe and the Soviet Union. From 1986 to 1987, he served as U.S. Ambassador to Austria (where he famously drew criticism for tooling around with a pack of bodyguards paid for by his protective mother).

The lifelong New Yorker developed a European persona, enhanced by his art connections and that Lauder international patois.

His timing was right: Communism was awkwardly birthing free-market capitalism, regulations were negligible and assets were cheap. With an illustrious but eclectic assortment of partners that included Chicago real-estate magnate Sam Zell, Canadian real-estate legend Albert Reichmann, and supermarket tycoon and Indiana Pacers owner Melvin Simon, Mr. Lauder bought up tracts of real estate and restaurants, parts of banks and brokerage houses in Budapest, and put up a $400 million office complex on the former site of Checkpoint Charlie in East Berlin.

Soon the region’s nascent television industry caught his fancy. Mr. Lauder sensed, rightly, that cities like Prague and Budapest were on their way to emulating the free-wheeling investment atmosphere of Moscow — and that their citizens, too, loved American popular culture. All they needed was their own version of Vladimir Gusinsky, the Russian mogul behind MediaMOST.

And that’s what Mr. Lauder set out to be. He went from country to country lining up local business partners, whom he needed to secure the state-controlled broadcasting licenses. Like Mr. Gusinsky, he did not know what sort of trouble some of his partners would soon be causing him.

In 1994, CME was formed with Mr. Lauder as non-executive chairman (he holds a good deal of the stock and a majority of the voting power). A year later, TV Nova was up and running in the Czech Republic. By 1996, Mr. Lauder was broadcasting local news, American movies and shows like Melrose Place and The X-Files in Germany, Slovakia, Poland, Slovenia, Hungary, Romania and Ukraine.

Jan Culik, a professor of Central and Eastern European media studies at the University of Glasgow, who has been watching CME since its arrival on the scene, said that Mr. Lauder’s and CME’s business practices were simple and direct. “They basically came in and said, ‘We are from the West — we can do what we want.’ These governments are corrupt; the infrastructures are weak.”

Professor Culik said that, in the Czech Republic at least, CME and its local face — a well-known Prague entrepreneur named Vladimir Zelezny — went back on their promise to provide content heavy on cultural programming. No sooner did they start the station than they put on sensational news programs, Professor Culik said, including the one with the stripping meteorologist, and tabloid talk shows with names like Taboo — a lot of “soft porn,” as Professor Culik put it.

But apparently, that’s just what the Czech people wanted. At its height, TV Nova held 70 percent of the Czech Republic’s viewing audience on any given night, and the Ukrainian station still brings in 45 percent, according to Mr. Klinkhammer. Mr. Lauder looked like a genius.

Then, in 1996, he was sued by a former partner in Hungary, American businessman Seymour Holtzman, for wrongful termination of their joint venture. Mr. Holtzman alleged that Mr. Lauder had basically forced him out of their partnership in the Central European Development Corporation, the company he’d formed in Hungary in 1989. “He is mean-spirited … He thinks he’s above everyone else,” Mr. Holtzman told the Wall Street Journal in 1991. The matter was settled in court for an undisclosed sum. (Mr. Holzman did not return calls from The Observer.)

But the Holzman case was nothing compared with what was to come. In 1997, Perekhid Media, a Western-owned rival in Ukraine, brought a suit against Mr. Lauder and CME in New York, claiming that CME had bribed Ukrainian officials, essentially to snatch from Perekhid a license which the company had obtained in 1993. Mr. Lauder had subsequently started a station there using that license, called Studio 1+1.

Perekhid wanted $750 million in damages. The case was dismissed, refiled a year later in London and dismissed again.

“The first case was thrown out because it was a completely cynical matter to be brought up in New York,” said Mr. Klinkhammer, the CME chief, speaking from Ukraine. “And then the second case was thrown out of England because it was a completely cynical matter to be brought up there.”

Mr. Klinkhammer called Mr. Lauder’s acquisition of the Studio 1+1 license “completely legitimate.” He said that if the U.S. Attorney’s office is indeed investigating CME, he assumes it was the principals of the now-defunct Perekhid — David Stewart, a Scotsman, and Andy Bain, an American — who made the precipitating complaint. Other sources close to the situation harbor similar suspicions.

Mr. Bain now runs, with Mr. Stewart, an investment firm called Atlantic Group, which operates in republics in the eastern portion of the former Soviet Union, including Ukraine.

The Observer was able to obtain only the complaint portion of the 1997 Perekhid case. The remainder of the court papers are sealed, at CME’s request. Mr. Lauder and CME’s attorney, John Kiernan of Debevoise & Plimpton, said the seal was requested because Perekhid was using sensitive business documents to conduct a “worldwide smear campaign” against Mr. Lauder and his company. Because of a confidentiality agreement, Messrs. Bain and Stewart could not comment.

The Perekhid case ended favorably for CME, at least for the moment. But Mr. Lauder’s biggest headache was still to come.

CME’s former partner in the Czech Republic, Vladimir Zelezny, has been called the Czech Ted Turner. But, Mr. Zelezny has an even more flamboyant past than the American media mogul. Mr. Zelezny has been arrested for allegedly smuggling art (he was never charged). He is also infamous for his weekly television talk show broadcast from Prague, Call the Director, on which he openly attacks or sucks up to chosen public figures — sort of a more scandalous O’Reilly Factor. A onetime screenwriter and news producer, Mr. Zelezny was among a group of Czech intellectuals who applied to the state in 1993 for the first privately held broadcasting license.

A radical television journalist in his youth — he once defied official policy to broadcast footage of the 1968 Soviet invasion of Prague — Mr. Zelezny was, by the early 1990’s, as eager a capitalist as Mr. Lauder. The two met in 1993 and formed their partnership.

Mr. Zelezny helped to make TV Nova the most-watched television station in the Czech Republic and a $15-million-a-year business. But in April 1999, CME expelled Mr. Zelezny from the fold and filed suit against him, claiming he’d formed a television company of his own, CETV, which, in Mr. Klinkhammer’s words, “siphoned off” millions of dollars from CME.

“He was fired. For theft,” said Mr. Klinkhammer.

Mr. Zelezny did not return repeated calls for comment by deadline.

In August 1999, Mr. Zelezny retaliated, buying out Mr. Lauder’s other partners and wresting control of TV Nova’s broadcasting license. Mr . Zelezny used it to start a second station. Later that month, Mr. Lauder initiated proceedings against the Czech Republic, claiming that it had colluded with Mr. Zelezny to take away his station and demanding $500 million from the Czech government to compensate CME for its drop in market capitalization — precipitated, the firm claimed, by the license transfer to Mr. Zelezny.

In May, arbitration ended in London. Mr. Klinkhammer said that he expects a judgment soon. Mr. Kiernan, CME’s lawyer, is not as sanguine. “Any prediction I would make would be wrong,” he said, the frustration palpable in his voice.

Mr. Kiernan did get some satisfaction in February, however, when a London court ordered Mr. Zelezny to pay CME $27 million in damages. So far he hasn’t paid a cent, and interest is accruing at the rate of $3,000 a day, according to Mr. Kiernan.

At this point, however, the money is only part of the enmity between Mr. Zelezny and CME.

“He wanted to become the czar of the Czech Republic,” Mr. Klinkhammer told the Prague Tribune in 1999. “I think his plan was to control TV Nova and use it as a cash machine, and control Prima TV [Zelezny’s station], using it as a propaganda ministry to drive himself into the No. 1 office in the country. I think this should be the Czech people’s worst nightmare.”

Mr. Lauder’s case against the Czech government, and even more so the one against Mr. Zelezny, have been the source of headlines in Central Europe and London for two years. Professor Culik said that during that time, Mr. Zelezny — who wields tremendous power in his native country — has been waging a propaganda war against CME and Mr. Lauder on his weekly television program.

“The Czech courts are very reluctant to act against him,” Professor Culik said.

But he added that Mr. Zelezny is just another example of an ongoing problem for CME. He pointed to the “convoluted arrangements between local entrepreneurs and CME.

“CME was absolutely happy about Zelezny until he started rocking the boat,” Professor Culik continued. “In the first five years of their partnership, CME didn’t mind associating themselves with practices which, in the United States, would have been simply unacceptable.” And, he added, “They stupidly allowed Zelezny to buy out the other partners in the license to gain majority control of TV Nova.”

Mr. Klinkhammer disagreed with Professor Culik’s analysis. He said that, with the exception of Mr. Zelezny, “I think we’ve been pretty fortunate in finding good business partners.”

But even if Mr. Zelezny pays, the most damaging fallout from the TV Nova debacle has already occurred. For a company operating in uncertainty like CME, perhaps the best route — certainly the one that Mr. Lauder, who borrowed heavily from the Estee Lauder company (an estimated $68 million) and J.P. Morgan (an estimated $125 million) to launch CME, seemed to have in mind — was to become big and sell. (Leonard Lauder, perhaps sensing trouble, made the Estee Lauder loan formal, using lawyers on each side. “The idea was to make it an arm’s-length borrowing,” said Ira Wender, Estee Lauder’s broker at the time.)

And sell was precisely what Mr. Lauder thought he could do when the Swedish Broadcasting System — impressed with CME’s rapid growth — started knocking on the door in early 1999.

Had SBS bought CME, Mr. Lauder would have proven himself a real businessman. He would no longer have been the dilettante son of Estee Lauder, the less accomplished younger brother of Leonard Lauder. But in September 1999, in the midst of the Zelezny mess, SBS suddenly pulled out. With it went a potential $615 million windfall.

Meanwhile, The New York Times‘ June 12 story reported that investigators are reviewing thousands of documents surrounding CME’s acquisition in 1996 of a Ukrainian broadcasting license — after a moratorium on the granting of new licenses had been declared. They’re also reportedly looking into a payment of $1.4 million that CME made to a suspicious company which, according to documents obtained by The Times, was “indirectly owned by many high Ukrainian officials.”

“That’s completely false,” Mr. Klink-hammer said. “To imply that [the money] was paid to any individuals is just utter nonsense.”

The Times also reported that certain business associates and part-owners in Studio 1+1 — including one official in the scandal-ridden administration of Ukrainian president Leonid Kuchma — are being investigated or have been investigated by European state agencies or the F.B.I. for offenses ranging from corruption and gold smuggling to ties with the Russian Mafia.

Mr. Klinkhammer denied any knowledge of the investigations of his Ukrainian colleagues.

But other sources think differently.

“[CME] knew exactly whom they were getting into bed with,” said one former associate. “They’ve made a lot of enemies all over Eastern Europe, and all of them keep in touch.”