Serpent on the Rock

by Kurt Eichenwald

  Someone from Bache had dumped all his personal belongings onto the street.

  Blank couldn’t believe Ashworth had been fired. He thought Bache had drawn an absurd line in the sand on expense accounts. He doubted anyone—even those who challenged the expenses—could survive the kind of test Ashworth had been put through. Still, Blank naively assumed that the events with Ashworth had no relation to the rest of the department. He felt thankful that the problem ended quickly. At least the tax shelter division could get back to work.

  In the spring of 1979, Blank received a telephone call from the security department, asking him to come over to the office right away.

  Blank strolled over, unconcerned. Maybe they had learned something new about Ashworth, he thought. But seconds after walking into the security office, Blank was told this meeting was about him: Now the head of the tax shelter department was being investigated. A security officer said he had heard allegations that Blank had received improper gratuities from a general partner doing business with the firm. He wanted to interrogate Blank.

  The accusation didn’t intimidate Blank; it enraged him. He had worked diligently to build up a reputation as a straight, ethical guy who did deals he thought were right. Taking money from a general partner was probably the worst accusation that could be made against someone in Blank’s position. As the gatekeeper between the retail investors and the general partners looking to get rich off the management fees, Wall Street executives making the judgments about which shelters to accept had to be pure. Taking cash from a general partner meant that the gatekeeper was betraying the investors he was supposed to protect.

  From what the security officer said, Blank could tell that there was no evidence, just a spurious charge. He’d be damned if he would let his reputation be destroyed in some political game.

  “You are making a serious error here,” Blank said in a quiet tone of pure anger. “I have done absolutely nothing wrong. And I am not going to let this go past the close of business today.”

  Instead, Blank said he would immediately take the security officer to his office and let him dig through every file there. Then the two of them would go to his bank and open Blank’s safety deposit box and examine all the contents. Finally the two men would go to Blank’s home and examine every financial record. The security officer could review whatever he wanted, right away, to make sure that Blank didn’t move anything.

  Blank paused a moment for effect. Then he issued a warning: If Bache took this step on the basis of just an allegation and found nothing, Blank said, then he would declare war. “Tomorrow I will go out and hire the biggest, meanest law firm I can to take you apart,” he said. “And since Bache is letting you do this, I’ll go after them, too.”

  The security officer stared at Blank, expressionless. “Let me get back to you,” he said.

  Blank stormed out. He never heard from the security officer again.

  Tom Huzella and his wife strolled past the swimming pool at the Kahala Hilton in Honolulu, Hawaii, heading toward the hotel’s outdoor bar. They were a good-looking, athletic couple, and they exuded self-confidence and success. Huzella, a broker from Bache’s Pittsburgh branch, won the 1979 trip to Hawaii in one of the firm’s sales contests. About a hundred brokers who had opened the largest number of new accounts were flown to the islands, with Bache picking up the tab.

  Although only twenty-nine, Huzella had been a big hitter at Bache for years. He earned his broker’s license in 1975, two weeks before his twenty-fifth birthday, and quickly established himself as somebody to watch. During training at the firm, he sat in rapt attention as Steve Blank explained the firm’s tax shelter business. Huzella always considered himself good with numbers and saw the tax shelters as more challenging than stocks and bonds. Even better were the commissions: Tax shelters paid as much as 8 percent of a client’s investment in commissions, compared to as little as 1 percent for a stock transaction. And since a single unit of a tax shelter almost always sold for several thousand dollars, that meant big money.

  With his interest in the shelters, Huzella focused his business on tax lawyers who would easily understand the investments. The success of the first shelters bred more clients for Huzella, as the lawyers referred their colleagues to him. Business came quickly, and almost every week, one or two new clients would give him $100,000 to $1 million to invest. With that kind of volume, Huzella easily qualified for almost every sales-incentive trip sponsored by the firm.

  Still, Blank’s tax shelter department frustrated him. The demand among Huzella’s clients for tax shelters was enormous, but the department just was not churning out enough deals to keep all of his investors satisfied. The department seemed more interested in shooting down deals than in getting them out to the brokers. At times, the problem was embarrassing, such as when Huzella promised some clients that they would get a piece of a particular shelter, only to find the deal sold out. With more and more brokers getting involved in the business, there wasn’t enough of the product to go around. By the time of the Hawaiian trip, Huzella was sick of it.

  As he approached the bar, Huzella saw Bob Sherman dressed only in a bathing suit and nursing a gin and tonic. Huzella liked Sherman. Because of his big sales, the broker always felt comfortable skipping the normal chain of command and speaking directly with senior executives. Over the years, Sherman had become one of his good friends.

  After a few minutes of idle chatting, Sherman asked Huzella about any problems he had with the firm. The broker decided that this would be a good time to dump on Steve Blank. The tax shelter department did not produce enough product, he said, leaving him with lots of angry customers. No matter how many times he complained, nothing changed. Blank just seemed unwilling to whip up lots of deals for the brokers to sell.

  Sherman looked down at his drink. “I’ve had enough of this,” he muttered. Then he broke into a smile and looked up at Huzella. “Tommy, watch this.”

  Still holding his drink, Sherman walked over to a pay phone near the bar and made a call. Huzella couldn’t hear what Sherman said but could tell that he was setting something big in motion. He didn’t think Sherman could do anything to Blank directly, since the tax shelter department reported to someone else. But Sherman was one of the best at Bache power politics: If there was something he wanted to get done, he knew which buttons to press. Within a few minutes, Sherman hung up the phone and returned to the bar, beaming.

  “Well, the problem is solved,” he said. “You won’t have to worry about Steve Blank anymore. He’s gone.” Sherman patted Huzella on the shoulder and turned to walk away.

  Huzella stared at Sherman in awe. My God, he did that just to impress me.

  A second thought raced through Huzella’s mind, and he turned to his wife. “That man just fired somebody while holding a gin and tonic in his hand,” he said. “Now that’s power.”

  No one in the tax shelter department ever knew for sure what hit Blank, but they suspected Bob Sherman somehow had been behind it. The word spread fast on June 14, 1979, just after Blank’s supervisor, George Meyer, told him he was fired. The reasons sounded hazy—something about not pleasing the brokers and not turning out enough product. The timing was horrible, since Blank had just moved his family to a new house over the Memorial Day weekend. His friends were relieved when he landed on his feet a few days later at Kidder Peabody & Company, a competing investment firm.

  Things started changing quickly at the Bache tax shelter department. Executives throughout the firm suddenly began sticking their noses into the department’s business and successfully dictating which deals were done. With Blank gone, the buffer that kept the politics at bay and the bad deals from going to market had vanished. Garbage that would not have been given a look was being dressed up and sold with Bache’s seal of approval.

  Curtis Henry, who originated energy deals at the Dallas branch, couldn’t stand it. It seemed like he was beginning to spend more time trying to stop bad deals than promoting good ones. And now, even
when he killed a deal, it would not stay dead. Brokers who hoped to earn a finder’s fee for bringing in new business just kept the pressure on, and often succeeded. Without Blank there, the Bache end run worked wonders. The worst, Henry thought, was a ridiculous oil deal brought into the firm by Bob McGiboney, one of the top brokers in the Dallas branch office.

  Henry had little patience for McGiboney, whose blond, blow-dried hair gave him the looks of the lifeguard he once was. Shortly after Blank was fired, McGiboney came to Henry with an idea—one of his clients, a young man who had graduated a few years before from Baylor University, wanted to sell his own oil-drilling partnership. Henry pored over the proposal and broke out laughing: The guy was only in his twenties, had little net worth, no reputation in the industry, no training in the oil business, and almost no staff. He would have thought McGiboney was kidding if he didn’t see the eager look on the broker’s face.

  “This is absolutely preposterous,” Henry said, rejecting the deal with a wave. “There’s no way we’re going to be involved in this thing.”

  But a few days later, the deal came back to life. McGiboney had gone over Henry’s head. Lee Paton, the firm’s head of marketing in New York, heard about the controversy and contacted Henry. “Look, McGiboney is one of our biggest producers, and the Dallas office is one of our best branches,” he said. “Unless you can come up with something really wrong with this deal, we are going to have to do the thing.”

  Henry had no one he could appeal to. The deal was going through.

  After reviewing it more closely, Henry was more certain of his original opinion: This shelter was junk. It was composed mostly of little oil wells, which were selling at their highest rates in years because of the oil crisis that year. And the kid from Baylor who was promoting the deal did not make him any more comfortable. In a meeting with Henry and Linda Wertheimer, the Dallas lawyer working on the deal, the kid kept saying all he wanted to do was put together “a good Christian oil deal.” Henry and Wertheimer looked at each other and smirked. Apparently their new general partner didn’t realize that his lawyer was Jewish.

  To make the deal meet the legal requirements of a partnership, Henry ordered a number of changes in the corporate structure. The most important required the client to set up a subsidiary to his main corporation that would serve as the general partner. But only corporations with a strong net worth could legally run partnerships. So, before the deal was sold, Henry ordered the kid to transfer much of his net worth into the subsidiary.

  Three months after the deal was sold, Henry received a telephone call from Wertheimer. She wanted to know if he had seen the latest financial statements on the deal. He hadn’t.

  “Well,” Wertheimer said, “I’ve discovered that the day after you closed that deal, your buddy took all that net worth back out of the subsidiary.”

  Henry was livid. If investors figured out what had happened, Bache would be on the losing side of a major lawsuit. He fired a letter off to the kid, telling him that he had forty-eight hours to put all the money back. Otherwise, Bache would cancel the deal and give investors all their money back through a process known as a rescission offer.

  A few days later, Henry was at the Bache office in Raleigh, North Carolina, shooting the breeze with Roy Akers, the branch manager. Akers’s secretary knocked on the door and told Henry that Lee Paton, the head of marketing in New York, was on the telephone and wanted to talk to him.

  Paton nearly climbed through the phone in anger. The letter was the final straw, he said. “You know, Curtis, you’ve pissed off half the people you deal with.”

  “Lee, my job is to piss people off,” Henry said. “When one of our brokers brings a deal in, the only thing we have in common is our name on our business card. I’m on the buyer’s side, he’s on the seller’s side. He’s looking for a fee to bring the deal in, I’m looking to see if the deal is any good or not.”

  “Well, you’ve really pissed off McGiboney,” Paton said. Not only that, but the branch manager in Dallas and the regional director were mad at him, too. The letter had backfired.

  Henry never controlled his anger well. This time he did not want to. “Listen, goddamn it!” he snapped. “I’m not worried about what any of those guys think. I’m trying to cover Bache’s ass. If this dumb idiot doesn’t put the money back, I’m going to proceed with a rescission offer.”

  Paton started shouting, accusing Henry of being insubordinate. But Henry cut him off.

  “Listen, Lee, you don’t know what you’re talking about. Stop yelling at me.”

  “I’ll yell at you if I want to,” Paton screamed. “You work for me!”

  “Lee, go fuck yourself!” Henry yelled, and he slammed down the phone.

  Things are really starting to fall apart, Henry thought. The shelter department desperately needed somebody in charge before it got worse. And to withstand political pressure like that, Henry knew one thing for sure: It had better be somebody pretty damned ethical.

  James Darr, the head of the tax shelter department at Josephthal & Company, burst into his spacious office just two blocks from Wall Street, a look of absolute terror on his face. His cheeks were drained of color, almost matching the lightest shades in his wavy, prematurely graying hair.

  Waiting in a chair in front of Darr’s desk was Herb Jacobi, the general counsel of First Eastern Corporation, a Josephthal client. Jacobi had arrived earlier that day in the summer of 1978 to speak with Darr about a new tax shelter his company wanted to sell. Darr had been called out of their meeting to speak with his bosses. Now, half an hour later, Jacobi looked up in surprise as Darr rushed into the room.

  Their eyes locked. “Herb, you have to help me!” Darr pleaded.

  Darr spoke quickly, seeming fearful that his chance to talk might end any second. Some Josephthal executives were about to call Jacobi into another office, Darr said. They might ask some questions about some payments from First Eastern.

  “You have to tell them that First Eastern is interested in doing a leveraged lease airplane tax shelter,” Darr said.

  Jacobi had no idea what Darr was talking about. First Eastern wasn’t doing an airplane deal.

  “I’ll do no such thing,” Jacobi replied.

  Darr pleaded with Jacobi, begging for him to say there was such a deal in the works.

  It was a critical moment for Darr. Josephthal had just caught him improperly taking money from tax shelter promoters. From the people who needed his approval to sell their deals. From people like Matthew Antell, Jacobi’s boss at First Eastern.

  Someone had slipped Josephthal executives copies of the checks Darr received from First Eastern and another client, Rothchild Reserve International. Lawyers from Josephthal’s law firm, Guggenheimer & Untermyer, were investigating. The lawyers had learned that over two months, Darr had deposited $80,000 from clients into his personal account, more than his annual salary. Even the timing seemed suspicious: Within weeks of depositing the checks, Darr purchased a new house in Stamford, Connecticut.*

  Already the lawyers had interviewed a number of people connected to Darr. His supervisors and the professional staff members of the tax shel* Darr acknowledges receiving the money but denies it was improper. He also denies doing anything unethical during his career. See Notes and Sources.

  ter department—Neil Sinclair, Stuart Ober, and David Orr—had been questioned. All of them had been shown copies of the checks and were asked what they knew about them. For the most part, they were simply stunned.

  Despite his job as First Eastern’s general counsel, Jacobi also knew nothing about the payments. Antell was too clever and was not the type to brag about such things. All Jacobi knew from Antell was that First Eastern, a Massachusetts real estate company, needed Darr’s help to sell its tax shelters through Josephthal.

  Time was running out. Darr again pleaded with Jacobi to cover for him. Gradually Jacobi came to sense what had happened and became concerned. He didn’t care about Darr, but he did worry about First Ea
stern. Many of the same securities laws that dictated what had to be disclosed about stock offerings also governed tax shelters. Even in private deals, the law required that investors be told about every penny paid to advisers and consultants on the deals. Under the law, even an improper payment had to be disclosed. And no payments to Darr had been revealed in any of the offering documents for partnerships First Eastern sold. Some of the deals already were not doing well. First Eastern could get into trouble, and Josephthal could get dragged into the mess.

  Before Darr could finish, Jacobi was asked into another office. Without introducing themselves, two grim-faced lawyers started hammering him with questions. Whom did he work for? What was his job? And what did First Eastern have to do with airplanes?

  “Nothing,” Jacobi said. “But Matt Antell has always been interested in airplanes.” His answer was true. The credenza behind Antell’s desk was loaded with airplane brochures. But planes were his love—his business was real estate. Still, Jacobi knew his answer gave Darr just enough confirmation to back up whatever he was trying to pull. No one asked directly about the payments.

  The interview dwindled to an end. Jacobi walked out of the room, back to the tax shelter department through Josephthal’s marble halls. He walked into Darr’s corner office and closed the door. Darr still looked a wreck.

  “Herb, I’ve never done this before,” Darr said, still sounding frightened. “I’ll never do it again.”

  Darr looked back down at his desk. “My God, I’m in trouble,” he said.

  Jacobi stared at Darr as he poured out his fears. He doubted that Darr had done it only once. But no matter. Jacobi knew this guy’s professional life was at a crossroads. Regardless of what happened, Darr would probably never be in a position to take money from clients again.

  JAMES J. DARR scratched his way onto Wall Street from modest roots. The only son of Gene and Dottie Darr, he was born in December 1945, just ahead of the first wave of baby boomers. His parents lived a hardscrabble existence, raising their son in the rural, blue-collar country of West Boylston, Massachusetts. In 1948, Gene took a sales job with the Brown Shoe Company, maker of such popular brands as Buster Brown and Naturalizer. The work kept him on the road for days at a time, as he tried to persuade shoe stores to stock his brands. The hefty travel schedule, with Gene clocking as many as a million and a half miles driving from town to town, took its toll on his marriage. Eventually, when Jim Darr was a young man, his parents divorced.