Serpent on the Rock

by Kurt Eichenwald

  Finally, paydirt: Buried in a file cabinet at the Bureau of Customs was a report linking the Belzbergs, albeit tenuously, to the Mafia. The report had been written by customs agents, who, along with the FBI and Canadian Mounties, secretly watched a February 1970 meeting of American and Canadian mobsters at the Acapulco Hilton. All of the kingpins were there, including Meyer Lansky, the infamous underworld financier. As undercover agents dutifully took notes, Lansky got chummy with a man later identified as Hyman Belzberg, Sam’s brother. For the next few days, Hyman Belzberg was seen in the company of Lansky and Benny Kaufman, a reputed member of the Canadian Mafia.

  The report was thin gruel. It had no information on Hyman Belzberg’s conversations with the mobsters. Bache tried to follow up leads, without success. Still, for Jacobs, the secret report was more than enough; he wasn’t going to let his firm be overrun by gangsters.

  In mid-January, Bache’s nominating committee met to consider Belzberg’s request for board seats. Jacobs took his information with him to the meeting. He told the five members that, based on the shocking facts uncovered by the firm, he could not and would not accept any of Belzberg’s board nominees. His implicit threat wasn’t missed: The board was choosing between Belzberg and Jacobs. If they voted against him, Jacobs would resign. With little debate, the committee sided unanimously with Bache’s chairman and rejected Belzberg’s demand.

  After the board’s decision, Jacobs called a meeting of senior executives and advisers. He knew that something more had to be done to stop the Belzbergs from buying Bache shares. Once they owned enough to control the firm, they could name their own board. Almost certainly, the executives who opposed the Belzbergs so aggressively would then all be fired.

  Unless, suggested Clark Clifford, the former defense secretary who was advising the firm, Bache could scare the Belzbergs away. Why not sit down with Sam Belzberg and let him know the information that Bache had uncovered? Belzberg might be so shocked and scared of exposure that he’d turn tail and run. And to make sure the message had the highest impact possible, Clifford volunteered to carry it to the Belzbergs personally.

  Jacobs was delighted. Clifford’s reputation among Washington’s power elite dazzled him; he felt sure Belzberg would be thunderstruck when such an important man delivered such a dangerous threat. Jacobs said he would contact Belzberg to tell him that Clifford would be calling.

  He made the telephone call a few days later. Belzberg felt certain Jacobs was going to tell him that the demand he made at the La Guardia meeting had been approved. So he was surprised when he called back and Jacobs sounded so distant. In a tone of obvious pride, Jacobs told him that he should expect a telephone call from Clark Clifford.

  Belzberg paused for an instant, perplexed. “Who’s that?”

  The first stage of the Bache new strategy had flopped. Although many American businessmen might have been impressed to receive a call from a former defense secretary, the Bache strategists forgot something about their adversary: He lived in Canada. He had never heard of Clark Clifford.

  A few minutes later, Clifford telephoned Belzberg, suggesting that they get together to talk. “Could you come down to Washington to see me?” Clifford asked.

  Belzberg had never heard such arrogance. They were the ones who wanted to see him. Why should he go to Washington? “Look, if you want to talk to me, why don’t you come to Vancouver?”

  Clifford paused. “Do you know who I am?”

  “I’m really sorry. I don’t. And I really don’t know where this conversation is going to take us.”

  Clifford again asked Belzberg to come to Washington and gave him his private telephone number. Belzberg hung up the phone and instantly dialed Jacobs again. “Harry, I left you at that meeting with a very simple situation,” he said. “I want two seats on the board. So why is this Clark Clifford fellow calling? Who is he?”

  Jacobs hesitated for an instant. “Well, something very terrible came up, out of nowhere, as we were discussing your nomination to the board,” he replied. “Mr. Clifford has been retained by us to talk to you about it. It’s very important that you go to Washington and see him.”

  Whatever came up, Belzberg responded, it couldn’t be that terrible. He wasn’t going to Washington, he said, and would proceed with his plans for the firm.

  A few weeks later, Belzberg was flying from Denver to eastern Canada. With a simple rerouting, he would be able to take his private plane to Washington. He telephoned Clifford, and the two men agreed to meet at Dulles International Airport in the first-class lounge of Air France. A few hours later, Belzberg was sitting across from Clifford, a tall man with patrician good looks and white hair. The meeting grew rancorous quickly.

  Bache had considered putting him on the board, Clifford said, but had voted it down. He pulled a stack of papers out of a briefcase and showed them to Belzberg. “The firm is simply too concerned about the terrible thing your brother did,” he said, motioning toward the papers.

  For an instant, Belzberg could not imagine what Clifford was talking about. Then it hit him: Hymie’s trip to Acapulco.

  For years, the time his brother unwittingly had palled around with the Mafia during a vacation had been a big family joke. While in Acapulco, Hymie, who ran the family’s furniture business, had bumped into Benny Kaufman, who owned a Canadian rug dealership. The two had done business before. Hymie had no idea that Kaufman was a reputed mobster. It was Kaufman who introduced him to Lansky. Hymie didn’t recognize the name; he just assumed he was meeting some businessman. When Hymie returned home, the Mounties came calling to investigate. Hymie was dumbstruck. He said he had no clue that his friends from the Acapulco Hilton were reputed mobsters. The Mounties wrapped up the investigation quickly, and Hymie, while a little embarrassed, was none the worse for wear.

  “You couldn’t be talking about that crazy thing in Acapulco, could you?” Belzberg asked.

  “Oh, we don’t think it’s crazy at all, Mr. Belzberg,” Clifford responded.

  For the next few minutes, Belzberg explained what happened. He told Clifford that the Mounties had investigated and cleared the matter up years earlier. “You don’t know Hymie,” he said. “Only he could walk down the beach with gangsters and not know it.”

  Belzberg offered to have the Canadian attorney general telephone Clifford the next day to confirm everything, but Clifford demurred. The board had already voted, he said, so such a phone call would be unnecessary. The meeting reached an impasse. After a few minutes, Belzberg left, frustrated and angry.

  On the plane headed to Toronto, Belzberg stewed. He kept running through his mind how mistreated he felt. He never had intended to take over Bache. But they kept pushing him and pushing him. And now this, from someone like Clifford, whom he now understood had been an adviser to presidents. By the time his plane arrived, Belzberg had put away a few drinks, and he was boiling. Despite the late hour, he picked up a telephone and called Clifford’s private line.

  “Mr. Clifford, I’m really surprised at you, a man of your stature, trying to intimidate me with this kind of dirt,” Belzberg said. “You’ve worked with presidents, and here you are wallowing in the mud. I’m not just going to take this sitting down.”

  “Are you threatening me?” Clifford snapped.

  “I’m not threatening you. I’m saying that I gave Mr. Jacobs a proposal, and what you have brought up here means nothing to me. You’re not interested in finding out the truth, so I’m not worried about it.”

  “Well, Mr. Belzberg,” Clifford responded, “if you don’t stop buying stock in Bache, this is all going to be in the papers in the next week or so.”

  Belzberg’s soft voice betrayed his absolute anger. “I have been threatened with my life before, sir,” he said. “And you don’t frighten me.”

  He slammed the phone down in its cradle.

  It didn’t take long for Bache to realize that its latest tactic had been a disastrous miscalculation. Belzberg opened up the throttle on buying Bache stock. I
n just two trading sessions, a few days after meeting with Clifford, he purchased more than 20,000 shares. By February 9, a few weeks after their meeting, the Belzbergs had snapped up another 200,000 shares. No longer were Sam Belzberg’s investment decisions based on strictly financial considerations; now he was being driven by pure anger. He wanted to teach Bache a lesson. Even when Bache made good on its threat, turning the information about Hymie and the Mafia over to the Wall Street Journal, Belzberg just bought more shares. Soon he controlled close to one-quarter of the firm’s publicly traded shares.

  “Is there nothing that will stop these people?” Jacobs moaned at a Bache executive committee meeting that month.

  On March 2, 1981, he decided he had had enough. He called Robert Bayliss, an investment banker with the First Boston Corporation. Bayliss was a longtime friend of the firm—he was the banker who helped take Bache public in 1971.

  Jacobs told Bayliss that he had a new assignment for him: He wanted to put Bache on the block. After a hundred years of independence, the firm had to be sold to the highest bidder. It was the only way left to stop Belzberg.

  Bayliss hopped on the assignment and called back the next day with tantalizing news: First Boston had received a nibble of interest from the Prudential Insurance Company of America, the financial giant based in Newark, New Jersey. The company was already looking to get into the brokerage industry but had not found the right situation yet. If they moved quickly, Bayliss said, a deal could be wrapped up in a matter of days. Jacobs was skeptical. He knew that Prudential was a mutual company, meaning that it was owned by its policyholders. He doubted whether it could legally buy a securities firm.

  Still, a company like Prudential could be the answer to Bache’s problems. If nothing else, it brought something to the table that Bache desperately needed: undeniable, unwavering integrity. Prudential’s reputation had been built over more than a hundred years, since being founded by an obscure life insurance agent named John Dryden. Its image as a company dedicated to helping working people find financial security could wrap Bache in a new blanket of respectability. The firm’s scandals and missteps might finally be washed away. With a simple stroke of a pen on a merger agreement, Bache’s sullied past could be subsumed into the glorious history of the Prudential.

  JOHN FAIRFIELD Dryden, a bookish, gangly thirty-four-year-old, arrived in Newark in 1873 with a wife, two children, and a history of failure. Dryden’s career had centered on fruitless attempts to build a life insurance company for the poor and working class. He wanted to model his company on the Prudential of England, which had already succeeded in that line of the business. But Dryden’s contemporaries scoffed. In an era when American insurance was a privilege of the wealthy, the idea seemed too radical. Worse, few of them believed the poor could afford the premiums. Dryden was told repeatedly that his business plan was only so much social dreaming, destined to go belly-up. When Dryden replied that he could sell his policies for as little as three cents a week, he was dismissed with a laugh.

  Newark was Dryden’s last chance to build his company. Then the nation’s third-largest industrial city, Newark built a reputation in trade and manufacturing on the strength of its leather making, metalwork, and jewelry manufacturing. Across the country, beer drinkers knew the local Feigenspan’s brand as P.O.N., for Pride of Newark. The scores of mills, ironworks, and factories dotting the waterfront attracted hundreds of new immigrants and working-class Americans to Newark. It was among these people that Dryden hoped to find his customers.

  Dryden cut an impressive figure for the people of Lincoln Avenue in Newark, where he took up residence. With his thin, long legs and piercing blue eyes, he stood out as a man to reckon with. Each day, he tried without success to persuade members of Newark society to invest in his idea. Finally, Dryden met Allen Bassett, a big-talking former military captain who made his money in real estate after the Civil War. Dryden persuaded Bassett to let him have some desk space at no charge so that he could organize the Widows and Orphans Friendly Society, a nonprofit organization that would sell insurance to its members. This, Dryden hoped, could be the foundation of the profit-making insurance company he hoped to establish.

  With Bassett opening the doors, Dryden’s new society attracted the support of some prominent Newark citizens, some of whom took unpaid positions as the foundation’s senior officers; Dryden assumed the lowly title of secretary. After a few months, with its leadership helping the society to gain great respect in Newark, the group converted into a full insurance company. That allowed it to sell policies to anyone, not just its members. The name was changed to the Prudential Friendly Society, in a tip of the hat to the Prudential of England. Dryden approached new investors and won more support for his ideas. Within a short time, he had raised the $30,000 in capital his company needed.

  The Prudential had been born.

  In 1876, while running an errand for his mother, fifteen-year-old William Digannard was struck by a train and killed. He was the eldest son of a poor family, and his death may have gone unnoticed in history but for one thing: Digannard’s parents were among the first to collect on a Prudential life insurance policy. Their decision to take out the policy on their son’s life allowed them to bury him without destroying the family’s meager finances. “What my poor desolate household would have done without this policy I do not know,” William’s father wrote in a letter to the company. “God bless and prosper the Prudential Company.”

  Just a year after opening its doors, Prudential had earned a reputation as a company on the side of the needy. Its life insurance policies proved to be an enormous hit. The company paid claims within twenty-four hours, as promised. It charged as little as three cents a week, as promised. And it made life better for the struggling people of Newark, as promised.

  Within a few months, Dryden was a fixture at factory yards during lunch. Standing on a box amid gatherings of soot-covered workers, he peddled his peculiar little policies as protection for their wives and children. He found few takers at lunchtime, but once the day was done, Prudential’s office filled with rugged men toting lunch pails and searching for more information. Money—a few pennies at a time, collected door-to-door—began pouring into the new company.

  By 1883, Prudential found itself in the strongest financial position in its history; it had 200,000 policyholders, and that number was expanding at a rapid clip. Just two years later, on May 13, 1885, Prudential issued its policy number 1,000,000 to its newest insurance client, and new president, John Dryden.

  With business booming, the company attracted New York advertising agencies that saw Prudential as a potential client. Mortimer Remington, a young account executive with J. Walter Thompson Advertising Agency, got his foot in the door through his father-in-law, a friend of Dryden. Remington persuaded the Prudential president that the company needed a national advertising strategy, complete with a trademark recognizable to any prospective client. Once hired, Remington pored through books and magazines in search of inspiration.

  The truth of how Remington found his trademark idea has been a source of some mythmaking within the company. But it doesn’t matter whether, as some have it, Remington’s brainstorm hit when he saw a large, rocky hill in New Jersey or while thumbing through a library book containing pictures of geological formations. Either way, within a few weeks, Remington returned to Dryden with his suggestion: The trademark should be a likeness of the Rock of Gibraltar, with the legend “Prudential has the strength of Gibraltar.” Dryden was delighted. For years to come, Prudential would be known as “the Rock.”

  By the late nineteenth century, Prudential’s rich cash hoard came to be coveted by its own shareholders. A huge surplus had grown at the company, largely the result of better-than-predicted mortality rates. Dryden divvied up the kitty among policyholders, reasoning that his company had essentially overbilled. But, as the shareholders saw it, the money belonged to them—after all, the policyholders had received exactly the insurance they wanted for the price
they agreed to pay.

  As the years passed, Dryden’s split with his shareholders grew deeper. A group of dissidents sued the company, demanding that it be prohibited from distributing its surplus capital to policyholders and be ordered to turn $2.5 million over to the shareholders. The court split the difference—it upheld the company’s right to make the concessions but agreed that the shareholders should receive the millions they wanted.

  For Dryden, the problem had become untenable. Aggressive stock speculators were snatching up shares, with an eye toward the cash surplus. Dryden feared that his company would be torn apart by short-term greed and left with too little cash to honor claims. He decided Prudential had to rid itself of shareholders and turn the ownership over to its policyholders, a process known as mutualization. Dryden set the complex process in motion, and by 1915, after intense lobbying, the New Jersey state legislature authorized Prudential to repurchase its shares and transfer ownership of the company to the policyholders. When the effort succeeded, years later, Prudential was left answerable to almost no one.

  But Dryden did not live to see the battle through. Shortly after the push toward mutualization began, he slipped into a coma during a minor operation. In a matter of days, on November 24, 1911, John Dryden died at his home. Born into poverty, he left behind an estate valued at more than $50 million.

  As the years passed, the responsibility for running the Prudential fell on a series of unimaginative homegrown favorites. For decades, none of these bland executives wanted to tinker much with the company’s recipe for success. Prudential grew almost unavoidably, with its national reservoir of goodwill expanding with each policy it sold.

  Heavy advertising polished that image, burning the name Prudential into the national psyche as a synonym for duty and honor. The ads, imprinted with the company’s increasingly familiar trademark, used slice-of-life vignettes that went for the jugular. Any uninsured reader who put down the ads without guilt wasn’t paying attention.