In a revealing interview, James Palumbo talks about his nightclub empire, his Eton schooldays, the rift with his famous father and his relationsh ip with Peter Mandelson

At the Ministry of Sound nightclub in a converted warehouse at the Elephant and Castle in south London, bright young things in Day-Glo trainers and shiny black nylon jackets are burning toast in the kitchen. It is 9am on a Friday, a disorientating time in clubland, as if the empty club, now clothed in dust sheets, is sitting out the daylight hours waiting for nightfall before coming back to life.

In the office at the back of the warehouse, where tours, albums and club nights are promoted, designer-clothes catalogues are assembled and a new magazine, Ministry, is going through a Technicolor birth process, more young people are sitting absorbed at flickering PC screens or rushing around, despite the early hour, with the air of bond brokers just arrived on the Stock Exchange floor. An illuminated sign on the wall reads: "We are building a global entertainment business based on a strong aspirational brand respected for its creativity and quality. The Ministry of Sound team will be more professional, hard-working and innovative than any other on the planet."

And above all this, in a glass office, perched awkwardly in the sky like a DJ booth, the Minister himself paces the floor fiddling with his Tiffany & Co penknife and playing classical- music CDs, watching carefully over his army of techno civil servants.

He is James Palumbo, the millionaire merchant banker turned nightclub owner, a sleek figure with downy hair and aquiline features. Contemporaries who knew him at Eton and Oxford say he is capable of inspiring one of two emotions in most people - devotion or loathing. And while some people are too afraid of him to talk, others hint darkly of scandals from his past.

He is 34 years old but, by his own admission, is at least 44 in his head, despite possessing the fragile looks of a man in his early twenties. Friends say he's been middle-aged since the age of 11 when he went up to Eton. He is certainly an unlikely candidate for the helm of the most wildly successful youth enterprise in the country, the creator of the prototype Nineties superclub; a man who is reported to have the ear of the Blair administration on matters concerning young people. Palumbo, a contrary character, relishes the irony.

The Ministry was the idea of a friend, who saw potential in translating the late-Eighties American dance-club craze into a British phenomenon. Palumbo, growing bored after a decade in merchant banking, agreed to invest pounds 250,000 from his City bonuses - about half his net worth - in a disused warehouse in low-rent SE1. Initially he took no part in managing the club, but a year later - seeing that his investment was riddled with drug dealers and close to going bust - he took over the reins himself. He brought no great knowledge of the industry or love of dance music. But he did bring a quality which was to give the Ministry the edge over its competitors - discipline.

Six years on, things are going well for the Minister. The new magazine - a cross between Mixmag, the bible of mainstream clubland, and the sunny youth title Sky - is due to launch on 4 December. Ministry DJs have just returned from a successful tour of China. The club's annual compilation album, Ministry of Sound 3, is launched tomorrow, ready to appear in every young person's Christmas stocking in a few weeks' time (last year, MoS 2 sold 650,000 copies and spent 26 weeks in the charts, four of them at No 1). Links built up with the Labour Party through the "Rock the Vote" and "Use Your Vote" campaigns, which chivvied young (and therefore mainly Left-ish leaning) people to the ballot box on 1 May this year, are proving useful now that the party is in government.

The Ministry's clothing line is selling well in Top Man and Miss Selfridge and through the Grattan catalogue. The MoS website is buzzing, and the syndicated radio service, a joint venture with Kiss FM and Galaxy, has expanded the Ministry's dance floor to living-rooms and cars in London and Bristol. There is talk of opening new clubs in other converted warehouses in Britain and abroad. If Palumbo was playing the board game Risk, he would be only a few rolls of the dice from world domination.

But the reason most people have heard of James Palumbo has nothing to do with his entrepreneurial skills. He is far more famous for a 15-year feud with his father, Lord Palumbo, a controversial millionaire property developer and former Arts Council chairman. They no longer speak, except through the law courts.

The public dispute was over a trust fund of which the Palumbo children were beneficiaries. James and Annabella, one of his two sisters, alleged it was being withheld by their father. But friends of the family wonder whether the real reason for the split is connected to the private tragedy of the death of James's mother, Denia Wigram, who died of cancer in 1986 as he held her hand, and the remarriage of Lord Palumbo - within months - to a beautiful Lebanese woman, Hayat Calil. Others say the origins of the feud lie in James Palumbo's loveless childhood.

As with most aspects of Palumbo's life - the whispered Eton scandal, rumours about his days at Oxford, the closely guarded friendships and associations with powerful figures he has built while at the Ministry - the sketchy details of this very public war with his father have given way to fanciful theories. The answer is that probably only James Palumbo really knows the facts - and you get the feeling that he would rather not let anything as prosaic as the whole truth get in the way of the overpowering aura of mystery which clings to him like an expensive, if cloying, aftershave.

From his DJ-booth/office James Palumbo is watching over his flock and fiddling with his silver penknife, opening and shutting it thoughtfully like a small boy debating whether or not to dismember an insect. The penknife, one of his favourite possessions, is itself cast in the shape of a beetle, with tiny metallic horns, armour- plated back and knife-edge wings. "Is it?" asks Palumbo, looking at the object anew. "If you say so," he adds disinterestedly.

He is feeling irritated after a disagreeable dining experience the night before with a young female Cambridge undergraduate. He had set her a test worthy of King Lear, with an anecdote about a friend of his - a multi-millionaire - who had offered his son any fast car he wanted to swan around in while at Oxford. "He could have had any flash car, Ferrari, GTi, to speed around in," says Palumbo. "Do you know what he said? He said he'd rather use public transport." Palumbo had asked the Cambridge girl what she thought of the young man's decision. "She said it was stupid of him - he should have bought a top-of-the-range car. I was very disappointed. To me, that sort of attitude precisely sums up the way young Leftie students look at the world."

To an outsider, Palumbo's political views look conveniently eclectic. He had worked closely with the Tories on their Drugs Misuse Bill and, during the election, one of his right-hand men was dispatched to Tory Central Office to help out with the campaign. At the same time, the Ministry was lending its local (Southwark) Liberal Democrat MP, Simon Hughes, credibility with his younger voters by sending Palumbo's second-in-command, Mark Rodol, to assist Hughes in his constituency campaign. The Ministry even hosted a pensioners' party for the MP to meet his public.

All of which left Palumbo himself to liaise with fellow Elephant and Castle residents New Labour, primarily through Use Your Vote - a campaign which featured shocking images including a urinal daubed with the words "Piss On Niggers" and a man carrying a placard saying "Praise God For Aids". Underneath was the slogan: "Use Your Vote: You Know He'll Use His."

Palumbo used his to vote for Alan Clark, the Conservative MP for Kensington and Chelsea. "I had to, because of his column in the [London] Evening Standard," he says. "He's got a huge amount of charisma. Every other joke is to do with some new young Labour woman ... it's hysterically funny." Despite Palumbo's supposed political nous, it seems to have passed him by that the Standard's "Alan Clark" diary is in fact a spoof written by, and carrying the byline of, journalist Peter Bradshaw.

In the run-up to 1 May, Labour's main point of contact with Palumbo was in the figure of Peter Mandelson, the Minister Without Portfolio. Palumbo offered him a chauffeur-driven silver Rover. Perhaps it was another test of a man's morals? Perhaps Mandelson should have declined and said he preferred public transport? Palumbo doesn't say. "Really, all this has been fluffed up as though it's some great big deal," he says. "I thought it was ridiculous that someone with his responsibilities, who ran a huge campaign, would go to dinner, park on the kerb, rush back to the House of Commons, off to a meeting ... it was just a practical thing."

The Minister of Sound and the Minister of Soundbites, as one Tory wittily described the pair during the campaign, became firm friends during the course of the election, although Palumbo is cagey about this friendship. "This is where ... I'm very happy to say that we're good friends but I think I have to be slightly circumspect," he says. "I have a concern that the point is not another Peter Mandelson interview. I'm very happy to say that we're good friends, I'm a tremendous admirer. I don't know if you know him, but he's very amusing and very smart."

He is an edgy interviewee, often leaving sentences unfinished, his olive- black eyes darting about the room. He rarely grants face-to-face interviews and makes it clear at the outset of this one that "hatchet jobs" result in an interviewer never darkening the doors of the Ministry again. He likes to play games, posing lots of questions himself. He asks the photographer if he can take her picture.

On the subject of Mandelson, one wonders from Palumbo's intriguingly stumbling answers whether he has something to hide or whether he is just trying to give the impression that he does. Old schoolfriends say this is a tactic of his - to hint and intimate and leave no one any the wiser at the end of it all. "Classic control freak," says a contemporary from Oxford. Is he?

"No, absolutely not," says Palumbo. "Working here, the most important thing is to allow people their creativity, to do things their own way. If I was trying to control everything how would that happen?" But even as he says it, he is looking down through the floor-to-ceiling glass windows of his attic office at the people scurrying below. The words typed on their PC screens are clearly visible from this vantage point, as is what his employees are having for breakfast. "I like to see what's going on," he says, then adds hurriedly. "But it's all very friendly."

It does seem friendly. Many of his employees are devoted to him, earnestly protective of the big man up there in the sky. As we walk through the office he greets his staff with "hello"s and friendly "fuck off"s. There is something almost touching about him, perhaps because of his physical fragility or his young face, but also something slightly intimidating and dark. Another thing he is called by old university acquaintances: Prince of Darkness. Perhaps this is why he and Mandelson, a man with whom that title is more immediately associated, relate to each other so well.

"I suppose I can relate to the way Peter's been demonised," says Palumbo, who admits that some people at school saw him as a "monster". "He's pretty robust, which is just what I was when I was at school. He's certainly effective, isn't he? But I don't think that the Prince of Darkness is a very intelligent way to regard Peter. In fact, I think a lot of people have a clear appreciation of his talents and don't buy that line."

Palumbo's schooldays and time at university - the latter, in many ways, simply an extension of the former due to the well-trodden route from Eton to Oxford - are a subject to which he often returns. The rawness these memories evoke in him suggests that possibly they have hurt or angered him even more than the irreparable rift with his father, which also began during his time at Oxford.

There are two stories that people remember about Palumbo at Eton. Firstly, that when he was House Captain he had some boys expelled for growing cannabis. He says this is the reason why he got such a bad press at school - added to his vocal objections to "fagging" ("which I like to think I abolished"), the practice whereby younger boys effectively acted as slaves to older boys, as well as the renowned and humiliating discipline of Eton in the Seventies and Eighties. "I just thought that fagging was ridiculous and my own self-esteem demanded that I made as much of a nuisance of myself as possible," he says. "It made me unpopular." Although he doesn't mention it, there was also the endemic snobbery of Britain's most famous public school, which turned its nose up at boys from "nouveau riche" families. Palumbo's grandfather was an Italian immigrant who built up a multi-million- pound property-development business from the purchase of one London cafe.

"I had quite a few guys slung out for ... I forget what it was ... growing cannabis in their window boxes," he continues. "But also letting younger boys smoke it. The rules are you're not allowed to take drugs, so if you get caught with it ... you can say, 'Oh James snitched,' and all the rest of it, but if you're caught, I'm sorry, that's the rule. Out. End of story."

His environment may have changed, but his views remain broadly the same. Unlike many of Britain's club owners and promoters, Palumbo is still emphatically anti-drugs, despite the fact that his business effectively thrives on a drug- influenced music scene.

"My moral view on drugs is that I'm totally against them," he says. "I've never smoked a cigarette, I think it's a sign of weakness. I drink and I have lots of other vices, I'm sure, but I just think it's weak" - he almost spits the word out. "I'm not sitting here as a great moral commentator on drugs. We can't stop people taking them before they come into the club and we can't stop people smuggling in half a dozen Es and giving them out in the loos, but what we have a moral duty to stop is organised dealing."

Excluding organised dealers from the Ministry was an experience he describes as "similar to losing a child in terrible circumstances - I never want anyone to ever have to go through it again. It was very frightening because the vested interests were very powerful. But we won in the end." People still take drugs at the Ministry but anyone seen doing so is ejected and anyone dealing is handed over to the police.

Back at Eton, however, it wasn't south-London drug dealers with whom Palumbo was making enemies, but his public-school peers, a perhaps infinitely crueller brand of adversary.

Then came the second thing that Old Etonians remember Palumbo for: a good, old-fashioned boys' school scandal. There are a lot of versions of this story, but the most far-fetched has him being made House Captain in his penultimate year - an honour usually only accorded to final-year boys - and the housemaster later resigning following the discovery of some mysterious letters written by him and found in Palumbo's possession.

James Palumbo looks weary. "This business about my housemaster and letters ... in my last year I went to live in a beak's house to do my Oxford entrance exam. At least half of the boys did that every year. People think: 'This is a sign of James's terrible past.' But a normal thing was made into a negative. My housemaster was coming to the end of his years and a new housemaster took over. I think he did leave a couple of terms early, but that was not dramatic ... and it was nothing to do with me. People were jealous that I had been made House Captain early."

The rumours, along with several boys from his year, followed Palumbo to Oxford, where he infrequently attended Worcester College with its sweeping lake and hidden grounds. He established an elite dining-society, The Charivari, which fellow students could join at his invitation, and quickly attracted a salon of admirers.

"He was rather like one of those unsatisfactory kings in Shakespeare," says a contemporary. "There were those who would flourish in the sunshine of his favour and in whom he inspired devotion of a rather myopic kind. He collected lame ducks. For those who didn't play along, you had the feeling that life could be made rather difficult for you." Other students were struck by his air of amorality, as if he would or could do anything. "And of course, you always knew he was rather powerful and would go on to be more so."

Out of term-time he was already working in London as a property developer, but at Oxford he was known as the boy with the manservant, who attended to his every need and was reportedly given to saying, "My duty is to serve Jamie." "It was creepy," says another fellow student. "He would order him around like a slave. One never knew if there was any economic dimension to this friendship, but he would say: 'Do this, do that.' And it was done."

The "manservant" was Humphrey Waterhouse, his best friend at Eton and the boy with whom he had escaped to America in his gap year, to avoid increasing tensions at home. The young entrepreneurs had set up a butler service in California. Palumbo says they were business partners and equals all the way through college. "People are frightened of people who work hard and go for it, so they called him a manservant," he says. "It's like at school. They put the most negative spin on something they don't understand or, frankly, they're jealous of. At school we'd both had pretty outrageous careers and people didn't like me because I had strong views. So that made him my manservant and me a monster." The pair continued to share a flat after Oxford, but in 1993, Waterhouse left South Kensington to live in a caravan with his girlfriend in Spain.

While Palumbo was still an undergraduate, his father made it clear that he was no longer welcome at the family home. They haven't spoken since, or met, except at the funeral of Denia Palumbo and once in a park when Lord Palumbo was exercising his dogs and father and son walked straight past each other. "My personal relationship with my father is such a boring subject," says Palumbo, but his expression is oddly sad. "I left home and that's it. I'm completely open. If he called me while we were in this interview I would be delighted to talk to him, no hard feelings, no bitter twisted knots. I honestly can't remember when the last time I spoke to him was, it may have been 10 years ago. My father and I are different people and I think our personalities clashed. It didn't have anything to do with money at all - that would be too easy an explanation. I honestly never give it a thought."

Six years ago he became a father himself. His son, Alessandro, also known affectionately as Boo-Boo, lives in Dubai for most of the year with his mother, 26-year-old Atoosa Hariri. Despite their geographical distance, Palumbo is clearly devoted to his son, his face visibly softening at the mention of his name. When he speaks of him, you know he is also talking about his own relationship with his father.

"My little boy could do anything, and it wouldn't make any difference ... I would be with him to the absolute end," he says quietly. "Any threat or problem I'd be 100 per cent there. I cannot intellectually, emotionally, physically, whatever ... understand how parents cannot love their children completely and stick by them." He laughs slightly. "You know, they are very smart, children. They can smell weakness or inconsistency. Being a parent really is a fantastically complicated business."

He and Atoosa maintain a friendly but platonic relationship. "My son's mother is first class," he says, as if talking about a business partner. "We are totally as one when it comes to him and we speak almost daily. We're very, very close ... it's just I don't think either of us wanted to settle down. I'm very busy with my business, all her family are in the Middle East. There was no big discussion, it was all very clear."

As a millionaire's son with all the trappings of wealth, he has never been short of Sloane Rangers clamouring to cling onto his arm in public, but he maintains that he is so self-sufficient and busy at work that the idea of commitment to another person - except his son - is unappealing. The only woman with whom he has shared his adult life is a mysterious character he calls "my cat" who keeps house for him. "Sometimes people get the wrong idea because she is very beautiful," he says. "But basically she has looked after me for 10 years."

Yet another mystery, yet another chapter in the life of the fascinatingly shadowy James Palumbo. Indeed, the story thus far - his immigrant self- made grandfather, the feud with his father, the public-school scandals and his days as an Oxford Svengali, the battles with the south-London drugs barons and the love-child in the Middle East - has all the elements of an inter-generational rags-to-riches blockbuster.

Anna Pasternak, author of A Princess In Love, the story of James Hewitt's relationship with Diana, Princess of Wales, and a close friend of Palumbo's, may have thought so too. She began writing a book called The Feud, the outline for which went as follows: Italian immigrant amasses fortune in property speculation. His son marries upper-class girl and receives knighthood but rift occurs between him and his own son, a brooding boy. It all ends in a legal battle. That was in 1995, but the book has never made it to publication.

"I'm a big fan of Anna's," says Palumbo, cheerfully. "She's very bright, very tough, always gets to the bottom of the situation. She has an intensely female way of looking at things, stripping away at the layers. I don't think her book is even loosely based on my family. If it was, well, it doesn't affect my life ... it's just stuff which gets washed away. I don't think she's writing it any more, anyway." The Minister dismisses the subject with a wave of his long fingers.

"I dread to think what would happen if all his secrets actually came out in a book," says a former friend of Palumbo's. "God knows, they would have to know him pretty well, because they'd never find anyone to talk to them. I must confess I've always been rather afraid of him. In fact, I don't even know why I'm talking to you."

But there's one more thing he can help with. Can he remember what car Palumbo drove when he was at Oxford? "Oh ... it was a big, red, fast car ... something hatefully expensive ... a red Ferrari, I think. Why?"

'Ministry of Sound 3' is out tomorrow on the Ministry's own record label. The magazine 'Ministry' is launched on 4 December.

Party politics: James Palumbo liaised with fellow Elephant and Castle residents New Labour on the Use Your Vote campaign - but used his own vote for Alan Clark, the Conservative MP for Kensington and Chelsea

Clubbers at the Ministry of Sound, the south-London 'superclub' which became a best-selling record label, a clothing line, a website, a syndicated radio service, a magazine - and an adviser to all three main political parties

Palumbo (with sister Annabella) outside the High Court: 'If my father called, I would be delighted to talk'

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