(FORTUNE Magazine) – "Once upon a time there was a beautiful princess named Caroline, and a fossi[li]zed guy named Dennis with a snappy snazzola and a bald spot the size of Texas. Dennis was very much in love with Caroline and professed his love and affection for her daily.... We know that this story will have more chapters and more actors, but whatever happens, Dennis is the happier for opening his arms and heart to the lovely Caroline."

So began a corporate fairy tale, as told in a private e-mail by its protagonist: Dennis C. Carey, now 54, a Spencer Stuart headhunting superstar with a wife and two school-aged children back home in Scottsdale. The "beautiful princess"? Marie-Caroline von Weichs, 38--an Austrian-born Carey subordinate with a Ph.D. in molecular biology from Oxford. Theirs was a world of private jets and expensive gifts, daily contact with the world's most powerful CEOs, and whirlwind trips to executive getaways. "The sun shines brightly," wrote Carey in a 1999 e-mail entitled ODE TO CAROLINE, "on the memories of Arizona, Oxford, New York, Biarritz, Paris, Pantelleria, Frankford [sic], Washington, Connecticut, Florida, South Carolina, and St. Michael's Island.... You have touched me in a way no other ever has or ever will."

Unfortunately, this fairy tale is ending badly--very badly. Carey's fable has become a bitter soap opera with a decidedly unromantic shift of scene to the courtroom. For more than two years, von Weichs had worked directly for Carey. She ran Aspen-based G100, a super-exclusive club he'd launched for CEOs with the investment and involvement of Spencer Stuart, one of the nation's two top executive search firms (it has placed CEOs at such companies as Campbell Soup, Gillette, Motorola, and Yahoo). But von Weichs is now out of a job, and she's accusing Carey of having her fired because she stopped having sex with him. She is suing Carey, Spencer Stuart, and For CEOs Only, the parent company of G100, for more than $10 million. In a surprising plot twist, Carey's former mistress and his estranged wife have joined forces, signing a mutual-assistance pact. With information from von Weichs, Janet Carey's divorce lawyers have filed court papers accusing Dennis of committing perjury and failing to disclose assets.

This is the sort of stuff that can roil a blue-chip firm. Last year the messy divorce of Ernst & Young chief executive Richard Bobrow triggered the disclosure of the firm's financial details, infuriating his partners and prompting his resignation. Carey's personal problems are already providing a peek at how such firms indulge a big moneymaker--investing in businesses he set up on the side, letting him operate with almost complete autonomy, and providing a lavish package of pay and perks that many CEOs would envy. Says one former Spencer Stuart partner of the mess: "It's going to hurt him within the firm."

Ironies, of course, abound--and not just because Spencer Stuart is in the business of dispensing expensive advice on how to manage top executive talent. Carey is a widely quoted expert on smooth corporate succession, among other subjects--indeed, this is the topic of one of the three books that bear Carey's name. The collaborator for his most recent literary work (containing business advice, not poetry) was none other than von Weichs. It was published in October 2003--three months before she lost her job. Its title? How to Run a Company.

For Spencer Stuart, which relies on its image as headhunter for the biggest, most prestigious corporations, the Dennis Carey affair is an embarrassing black eye. In the intensely competitive search game, gleeful rivals are already exulting. And it offers a window into how badly "experts" in the world of business sometimes manage their own affairs.

"It's flattering to get the professional attention of someone that senior and with that reputation," says von Weichs. We are sitting in a conference room in the downtown Dallas offices of Bickel & Brewer, the aggressive Texas litigation firm that von Weichs has retained to go after her former lover and former employers. Von Weichs met Dennis Carey in late 1998 at a Spencer Stuart meeting in Arizona. Carey is an intensely competitive man--he swam the English Channel in 1980--and a heavyweight at Spencer Stuart. He holds the title of vice chairman, reported a peak income of $8.9 million in 2000, and raked in such perks as six-figure country club initiation fees and $8,000 a month for a home office in Aspen. A Ph.D. in finance and management, he also possesses an entrepreneurial streak, dreaming up lucrative new businesses such as helping CEOs assess acquired talent after a merger. (Carey declined to comment for this story.)

The unmarried von Weichs, daughter of an Austrian ambassador, had joined Spencer Stuart's Frankfurt office two years earlier, specializing in global life-sciences recruiting. She says Carey told her he was separating from Janet, his wife since 1983, and would soon be filing for divorce. They began a whirlwind affair in March 1999. Carey showered von Weichs with love letters and expensive gifts--by her attorney's count, more than $200,000 in jewelry, clothing, and other items. He bought her a $15,155 gold and diamond Frank Muller watch, for example, in April 1999 and a $39,900 platinum, diamond, and emerald bracelet that October.

By 2000, Carey was urging von Weichs to take a new job in the U.S., working directly for him and running the new business that would become G100, his club for CEOs. The organization had been launched a year earlier by Carey and two friends--Tyco's Dennis Kozlowski (who has his own problems these days) and former SmithKlineBeecham CEO Jan Aeschly. Spencer Stuart, which bought a 20% interest, gave its blessing: The organization would help the firm forge precisely the sort of executive relationships it craved. Spencer Stuart (which continued to formally employ her) offered von Weichs a four-year contract as president of G100, which would be headquartered in Aspen. She would reveive a minimum annual salary and bonus of $310,000, free use of a car and a home (which also doubled as office space), club memberships, free travel between the U.S. and Europe, and an office staff back in Frankfurt. Carey promised she'd receive performance bonuses if she did well and get an equity stake in the business. She accepted.

G100's primary business is conducting twice-yearly meetings in New York City where select CEOs could engage in private uber-networking between elegant meals and seminars with high-profile speakers. Guest speakers and panelists have included Henry Kissinger, Jack Welch, Microsoft's Steve Ballmer, and eBay's Meg Whitman. Famed photographer Richard Avedon was paid hundreds of thousands of dollars to document the proceedings. Individual CEOs--or, more precisely, their companies--pay $50,000 a year to participate; "advisory members" pay $75,000 a year.

In 2001, Carey and von Weichs extended their business, launching the CEO Academy, styled as a boot camp for new chief executives. Von Weichs received the title of "dean." Held right before the G100 meetings, this one-day program (at $10,000 a pop) featured panels on handling the business press, managing shareholder issues, and working with boards of directors. Seminar leaders included GE's Jeffrey Immelt, former Honeywell CEO Larry Bossidy, and superlawyer Ira Millstein.

Von Weichs was clearly a success. G100 members sent her warm notes of congratulations. "The event was first class," noted Kellogg's Carlos Gutierrez. "... You do very good work." Home Depot's Bob Nardelli e-mailed: "... A great couple of days ... the intimacy and confidentiality of the group lent itself to what I felt was a very open and candid discussion. I really think you have got something special going with this group...."

By 2003, von Weichs--who had been promoted from president to CEO of G100--had tripled membership to more than 100, including the CEOs of Citigroup, H.J. Heinz, Volkswagen, EDS, Biogen, Coca-Cola, State Farm, and Verizon. G100 had become "nicely profitable," according to von Weichs, a year ahead of schedule. Carey joined in the praise, recommending her in late 2002 for partnership in an e-mail to Spencer Stuart's top management. "The quality of her work and her business acumen are unquestioned," Carey noted, adding that G100's value had doubled since Spencer Stuart purchased its stake.

Von Weichs says that Carey was living with her when she was in Aspen. But in February 2003, von Weichs found that Carey, after finally separating in 2001, had just filed for divorce, something she thought had happened "long ago."According to her lawsuit, von Weichs, "sickened by her growing awareness of his true nature ... decided to end her romantic relationship with Carey and keep their relationship on a purely professional level." She put it this way during a lengthy interview: "On a personal front, I discovered that he's a compulsive pathological liar, and that's when you fall out of love." A lawyer for Spencer Stuart says such charges are beneath comment.

Von Weichs says that she asked Carey to move out of the Aspen house, which he did in April. Then, she says, he began excluding her from meetings, undermining her to members, and taking days to return her urgent business calls.

On Jan. 8, when von Weichs was in Austria visiting her Alzheimer's-stricken mother, she received a letter from Spencer Stuart CFO Richard Kurkowski. The firm had "re-assessed" its commitment to G100, he wrote, and decided "not to extend or renew" her four-year contract when it expired in September 2004. While von Weichs would be paid through the end of the contract, "effective 15 January 2004 your services will no longer be required...." Spencer Stuart would halt payments on the Aspen lease, and she was not to travel to the U.S. at firm expense without prior approval. Finally, the letter pointedly noted that once her employment with Spencer Stuart had ended, her work visa would terminate, and "you will not be able to legally stay in the U.S. unless a different company employs and agrees to sponsor you."

Gerald J. Fields, a New York attorney with Paul Hastings who represents Spencer Stuart, says she had known for months that her contract wouldn't be renewed. He says Spencer Stuart was curbing its support for G100 to focus on its search business. Von Weichs, however, contends that the termination letter was a "complete surprise." She says she'd been repeatedly told--as recently as the fall of 2003, by Spencer Stuart chairman Dayton Ogden--that she was doing an excellent job and G100 would pick up her salary directly. Fields denies that von Weichs was given any such assurances. A lawyer for G100's parent says the group didn't pick up von Weichs's contract because she was spending too much time outside the U.S. She denies it and says no one ever raised that complaint.

To von Weichs, the source of her separation is no mystery: It's Dennis Carey. "For his vindictiveness and ego, he had to get rid of me," she says. The way her dismissal was handled virtually forced her to file suit, she says. "I couldn't walk away from working with the top business leaders in the U.S. and have my career ruined. It's not easy to find a job at this level when 100 CEOs think you've been fired. I had to defend myself."

And she has been doing precisely that--in part by forging an alliance with Janet Carey, who has a Ph.D. in psychology and whose divorce with her estranged husband has become nasty. (Janet Carey declined to be interviewed for this story.) Less than a month after von Weichs lost her job, the two women, accompanied by their attorneys, met at Bickel & Brewer's offices in Dallas. They spoke for more than five hours. "There was an underlying feeling of two women who had been fooled by the same person," says von Weichs. They signed a formal "cooperation and release agreement" to share information. Von Weichs gave Janet Carey details about Dennis's expensive gifts to her; tipped her off about an account he hadn't disclosed (at one point it contained about $1.6 million) and provided documentation that G100 was profitable, making the Careys' 21% stake in the business--in which Janet has a community-property interest--valuable.

In March, Carey gave a deposition in which he said he had only had a "brief" personal relationship with von Weichs. Then Janet Carey's lawyers confronted him with von Weichs's information, and he was forced to file a statement acknowledging that the relationship actually lasted for more than three years; he also acknowledged a sexual relationship with a woman he had previously identified as his children's nanny and disclosed additional financial holdings. Carey's lawyers then withdrew from the case.

Spencer Stuart lawyer Fields says the partnership is standing firmly behind Carey, whom he calls "a star of the firm--a very talented, creative, major guy in the field." He calls von Weichs's charges "replete with inaccurate and irresponsible facts" and accuses her attorneys (who contacted FORTUNE about the story) of exploiting the press in an effort to extract a hefty settlement. He says that before losing her job von Weichs never told the firm she was being mistreated and that she never accepted Spencer Stuart's invitation to present her grievance internally before filing suit. Says Fields: "Spencer Stuart takes any charge of harassment very seriously."

G100 parent For CEOs Only is now counterattacking von Weichs, seeking damages by suing her in Denver on the grounds that she'd disclosed "confidential and trade secret information" to Janet Carey, including financial records and lists of G100 members. (Janet Carey's lawyer says she was entitled to the information because she's a shareholder of the business.) The suit also sought a temporary restraining order against von Weichs. In late April the order was denied.

No matter who wins the lawsuits, it likely won't be pretty for Spencer Stuart or the super-exclusive CEO club Carey founded. But perhaps it could inspire a new book: How Not to Run a Company.