Citadel's Griffin: Hedge fund superstar (cont.)

By Marcia Vickers, Fortune senior writer

Chicago's revolving door

Griffin grew up in Boca Raton. His father was once a project manager in General Electric's space program. His mother often drove the teenaged Ken to a local Computerland store, where he spent hours picking the brains of the salespeople. In high school he worked as a part-time debugger for IBM. "Ken wasn't your typical 17-year-old who'd hang out at the movies," says Dan Wechsler, a friend from the Computerland days. "His friends tended to be older. He knew where he wanted to go. He was always coming up with ideas."

In 1986, Griffin came up with a novel concept: selling educational software to schools. He and two of his Computerland pals founded a tiny software sales company, Diskovery Educational Systems. Though he sold out years ago, it's still around, run by Wechsler in West Palm Beach.

At Harvard, the story goes, Griffin rigged a satellite dish outside his dorm room so he could receive real-time stock quotes. With money from his family, he assembled a convertible-arbitrage portfolio, and when the market crashed in 1987, he was on the short side.

After graduating from Harvard in three years with an economics degree, Griffin was introduced to an influential hedgie named Frank C. Meyer, the founder of Chicago's Glenwood Capital Investments. Meyer was taken with Griffin's enthusiasm and impressive, if short, track record. He invited Griffin to work for him, giving him $1 million to run on his own. A year later Griffin set up his own shop, coming up with the name Citadel because of its connotation of strength in times of volatility.

Seventeen years later, Citadel has more than 1,000 employees in six locations worldwide. The home office takes up seven floors of Citadel Center, a 37-story office tower right in Chicago's Loop.

On a day in early March at Citadel, it's difficult to tell traders and techies apart; they all seem to be dressed in black casual pants, button-down shirts open at the collar, with white T-shirts peeking out. People are walking quickly through corridors and the lobby, having clipped conversations. The atmosphere is a mix of Silicon Valley's high tech meets Wall Street's high octane, with emphasis on the latter.

It's not an easy place to work. "Citadel can be a real sweatshop," says a former employee. "You have to be incredibly energetic, willing to give your life up to work there." The money is good - it's a hedge fund - but that doesn't seem to do much for employee retention. "Griffin pays talented traders a fortune," says a former manager.

"An example is, he'll pay $5 million a year for two years to a star trader. But once their contract expires, they often head out the door. They get no ownership stake. They don't get a sense they're really valued." In the past five years Citadel has lost at least 15 senior managers - some who "created the fabric of the firm along with Griffin, though Griffin probably wouldn't admit it," says a former trader - including David Bunning, who led the global team; Peter Labon, a top equities manager; Alec Litowitz, the merger arbitrage head; and most recently Anand Parekh, who ran global equities.

The local press has lampooned Citadel as "Chicago's revolving door." (People close to the firm say turnover is on a par with a typical investment bank's.) "Ken is an extraordinarily talented trader and technical guy," says a former top trader, "but along with his youthfulness comes an emotional immaturity."

A more colorful assessment of Griffin's abilities comes from one of his peers: Dan Loeb, the voluble chief of Third Point Partners who's famous for slamming competitors in open letters that end up all over the Internet, apparently refers to Griffin as a "gerbil."

In 2005, after Griffin snagged an analyst from another shop, Loeb sent an e-mail to Griffin: "I find the disconnect between your self-proclaimed 'good to great, Jim Collins-esque' organization and the reality of the gulag you created quite laughable. You are surrounded by sycophants, but even you must know that the people who work for you despise and resent you. I assume you know this because I have read the employment agreements that you make people sign." Citadel declined comment, as did Loeb.

While all that workplace angst at Citadel is going on, Griffin is often holed up in his office reading management books. "He's borderline obsessed with it, perhaps because it's his biggest weakness," says someone who recently worked with him. "He thinks that by reading books and hiring management consultants, he's managing."

As Loeb so graciously noted, Griffin admires management guru Jim Collins. He also once told Bloomberg Markets magazine, sounding a lot like another hero of his, former General Electric CEO Jack Welch, that "each of the business leaders here knows they have to drive their business to be No. 1 or No. 2.''

Griffin borrows Welch's tactics, like firing the bottom 10 percent of his workforce each year. He also tries to follow that management-consulting chestnut Hire your successor, which he seems to interpret as Hire large numbers of interchangeable brainiacs. "He's got this pipeline of people with similar skill sets in case someone walks out the door," says a former trader. "It's like shark teeth - there's always one behind another. The message is that everyone is replaceable at any time."

Sometimes, however, Griffin's castoffs bite back. Last June, Griffin was sued by an old friend and self-described mentor, Rush Simonson. Simonson had been a tech-savvy Computerland salesman back when Griffin frequented the store. In a complaint filed last June in Cook County Circuit Court, Simonson, now 48, claimed he had developed the computer program at the center of the convertible-arbitrage business the two ran while Griffin was at Harvard. Simonson also alleged Citadel's beginnings were based on his program and demanded a cut of the action. (Simonson alleged as well in the suit that he never had a clue Griffin ran a hedge fund until 2003, when he saw an article about Griffin in a copy of Fortune at his dentist's office.)

In January, Simonson abruptly dropped the lawsuit. Griffin, in a statement, acknowledged the two had been partners: "I have fond memories of my days in college when I would run back to my dorm room to execute trades on behalf of the partnerships we had formed." Griffin and Citadel claimed that the partnerships had been legally terminated and that there was no settlement in the case. Simonson declined comment.

Do investors care about Griffin's interpersonal skills? Not as long as he makes them money. But that's the problem: What if employee retention deteriorates so much it hurts Citadel's returns? "I like to see some broad experience set when I invest in managers," says Philip Halpern, the University of Chicago's former endowment manager. "My concern is that Citadel doesn't have that. The turnover has been too high over the years."

If Griffin does go for an IPO, those issues will be even more urgent - he'll have a whole new constituency agitating for succession plans, bench strength and better leadership all round. And here's another problem: What's stopping all those disgruntled but well-trained former Citadelians from launching copycat funds once their non-compete clauses wear off? Nothing, really. "The ideal is to take what you learn at Citadel and combine it with great management, which truly values talent," says one former trader.

A softer, cuddlier persona

Perhaps it's the human resources issues that have persuaded Griffin to emerge from his bunker and burnish his image. This is where his wife helps. "I think if it were just up to Ken, he'd be less public," says a close acquaintance of Griffin's. "You might say Anne has helped to broaden him as a person."

If Griffin really is transforming into a softer, cuddlier persona, future stories about him may say this new chapter began in July 20 03, on the day he and Anne Dias exchanged wedding vows. Several of the 200 or so in attendance swear Griffin shed tears of happiness. "It was uncharacteristic coming from Ken," says one, "so it was noted."

As was the wedding itself - a two-day affair held in Versailles. (No, not Versailles, Ill. Versailles, France.) The reception was held at Hameau de la Reine, or the "Hamlet of the Queen" - Marie Antoinette's well-preserved 18th-century faux village, complete with thatched-roof cottages and farm animals, where the young Queen played peasant. A two-story tentlike structure had been constructed for the occasion. After a formal dinner, dancing, fireworks, an aerial act involving people attached to large helium balloons and a performance by Cirque du Soleil, the dining room wall disappeared and - voilà! - guests found themselves in a Casablanca-style lounge with ceiling fans and potted palms. Next came disco diva Donna Summer. "Most people were out until four in the morning," says a guest.

Since the wedding, the Griffins have blown into the Chi-Town civic scene like a gale off Lake Michigan. Anne - who's 36, was born in France, and runs her own small hedge fund (Aragon Global, $55 million in assets) - sits on the board of Chicago's Children's Memorial Hospital. The couple underwrites Chicago Symphony Orchestra concerts and are players in the Robin Hood Foundation, the charity founded by Paul Tudor Jones.

But it's the art that has attracted the most attention. Three blocks east of Citadel Center is the Art Institute of Chicago, a gem of a museum known for its collection of 19th- and 20th-century paintings. Donor names emblazoned throughout the galleries include Cyrus McCormick, who founded a company that became the backbone of International Harvester, and Potter Palmer, an inventor of the money-back guarantee.

Toward the rear of the museum there's a small room dedicated to the 264,000-square-foot Modern Wing - THE BUILDING OF THE CENTURY, a sign says - designed by Renzo Piano and set to open in 2009. A centerpiece of the project will be a grand two-story entrance called the Kenneth and Anne Griffin Court.

Of course, getting your name on a museum simply means you're rich. Achieving Rockefellerdom - Griffin must know he's still a ways from that. He has to keep Citadel growing, possibly take the company public, keep his investing edge, and get the hang of that HR stuff. It's the human element again, the part of business he's never been comfortable with. But it's essential. Without it, to paraphrase Griffin's idol Jim Collins, a business just isn't built to last.

Doris Burke contributed to this article.

______________

Hedge fund Citadel has 4.5% stake of Accredited  Top of page

previous