Darr would be the recipient of the largest share of that cash. But for the money to come in, the department had to find a stable of relatively weak tax shelter promoters who would be willing to split the general partner’s role with Bache. The more of those deals the department sold—at times, regardless of quality—the more money Darr and his allies stood to make.
Days after the new shelter payment program started, Ball announced that the firm was changing its name to Prudential-Bache, a move that would tap the goodwill associated with the Prudential name. Almost simultaneously, Bache’s old advertising agency was shunted aside, and the ads it created featuring the Bache broker as a hard-boiled hustler working twenty-four hours a day were shelved, as was the tag line “The winning attitude of Bache. Put it to work for you.” Instead, Ball sought out a more visionary motto, one that appealed to the needs and insecurities of individual investors.
By November, television viewers around the country saw the seductive new ads that portrayed a dawn in finance. A red sun rose with unusual haste behind a city skyline, as a voice-over described a “bright new world of financial opportunity” that could be explored with the investment experts at Prudential-Bache, who were “part of Prudential, the Rock.”
The ad closed on a single line: “Bring us your future.”
Over the next few years, hundreds of thousands of investors would do just that.
PART TWO
BETRAYAL
CHAPTER 7
CLIFTON HARRISON BOUNDED OFF the elevator into the offices of the Prudential-Bache Direct Investment Group. He bantered for a moment with a receptionist, who allowed him to walk past without checking to see if he was expected, then headed briskly toward Darr’s office. “Good morning, Vawn,” Harrison drawled as he reached a desk outside the executive suite. “How are you this fine day?”
Darr’s secretary, Vawn Major-Hazell, looked up at Harrison and smiled. By late 1982, Harrison was a frequent visitor to the department, using its offices as almost his personal New York headquarters. With his polish, expensive clothes and unflagging good manners, Harrison charmed many of the women in the department. He came off as a friendly—if hyperactive— senior executive. And with good reason. With Darr as his chief backer, Harrison had been catapulted from being just a convicted felon hustling for attention on Wall Street to a top sponsor of partnerships sold by Prudential-Bache.
As Major-Hazell and Harrison chatted, Darr emerged from his office, beaming. He and Harrison had grown especially close; Harrison was one of the few general partners Darr would meet alone, behind closed doors. Harrison, who loved to tell tales about his playboy exploits, bragged about escorting Darr to swank parties hosted by Manhattan’s jet set, including Steve Rubell, the flamboyant cofounder of Studio 54, and Roy Cohn, the feared Manhattan lawyer and former sidekick to Senator Joseph McCarthy. Darr seemed giddy with excitement anytime Harrison planned to take him out for a night on the town.
On this day, Harrison wanted to take one of his victory laps around the department to thank the people who worked on his most recent deal. Shortly after he arrived, he and Darr headed toward the cramped cubicles in the due diligence area. Harrison popped his head into each and thanked everyone. Finally he arrived at the cubicle of David Levine, who handled much of the work on Harrison’s deals.
“David,” Harrison said as he shook Levine’s hand, “I want to thank you. You’ve done a marvelous job.” Harrison prattled a bit about his next deal, saying how it would be the best one yet, then he said good-bye.
As Levine watched Harrison stroll away with Darr, his polite smile dissolved into a scowl. Why the hell are we doing business with this guy?
No one in due diligence was happy about Harrison’s prominence in the small camp of general partners that Darr was forming for the Direct Investment Group. His criminal record—and the decision to keep it secret from both brokers and investors—was only part of the problem. Even D’Elisa, the man who found Harrison, finally had decided that the man was little more than a fake.
“I am very uncomfortable with this guy,” D’Elisa had told Levine while reviewing a Harrison deal. “He’s got no expertise. He brings nothing to the table. And he’s a felon.”
D’Elisa knew that the success of a partnership often hinged on the integrity, knowledge, and experience of the deal’s sponsor. Harrison came up deficient on all counts. His financial condition was far riskier than D’Elisa might have imagined when they first met; his debts left him with a negative net worth.
Worse, Harrison never lost the heavy spending habits he picked up in his days as an embezzler. He spent tens of thousands of dollars a month on dinners at fancy restaurants, nights at elegant hotels, limousines, furs, expensive wines, and flowers for his wife and girlfriends. The spending was so reckless that in 1981 Diners Club had threatened to cancel his account for failing to pay his balance of $14,597.43. Months later, he cracked the spending ceiling on his MasterCard. The man held up by Prudential-Bache as a top financial professional could not even manage his own credit cards.
Making matters more troublesome for the due diligence team, Harrison’s knowledge about real estate was woefully thin. He rarely could answer their detailed questions about his deals. Instead, Harrison often just dismissed his questioners with a wave and a claim that he only dealt with the finest properties. But in truth, the deals Harrison championed were never his own real estate developments. Instead, he used his reputation as having an “in” at Prudential-Bache to persuade other developers to allow him to raise money for projects with a tax shelter. If the developer agreed, Prudential-Bache sold the shelter to its retail investors. The developer would then receive money to help finish construction. For his part, Harrison would be named the shelter’s general partner, allowing him to charge investors huge annual management fees. Harrison, the developer, and Prudential-Bache all made money from the arrangement.
As far as D’Elisa was concerned, all Harrison deserved for that sort of effort was a one-time finder’s fee, not the right to manage the properties. But Darr not only insisted that Harrison be named general partner, he also helped make sure those deals received only light due diligence. If D’Elisa or Levine asked too many questions, Harrison went over their heads to Darr. If due diligence did not want the deal approved, Darr simply took it to the department’s investment committee, which rarely ignored his opinion. If there were five votes on the committee, the joke went, then Darr had four of them. After all, he played the largest role in deciding how everyone on the committee was paid. It was in no one’s self-interest to cross him.
What made Darr’s embrace of the Harrison deals all the more inexplicable was the fact that the department didn’t need the business. Scores of reputable corporations, developers, and syndicators were knocking at the firm’s door with partnerships to sell. The list of potential general partners included a number of high-profile, high-quality groups, such as Lincoln Properties, a large real estate company in Chicago. Although the firm did business with such groups, the volume never equaled that of the Harrison deals.
It all seemed very suspicious. From D’Elisa, the real estate due diligence team knew that Darr took money at Josephthal and that Harrison had been imprisoned for embezzlement. Put two people like that together, the reasoning went, and sparks had to fly. It became an article of faith among many in the department—despite a lack of evidence—that Harrison was paying Darr to sell his shelters. When Harrison’s huge fees were calculated, executives would joke about what percentage would line Darr’s pockets. Even a trip Darr and Harrison took to Europe was fodder for black humor.
“They’ve got to go check out their Swiss bank accounts sometime,” Levine said when he heard about the trip.4
Even with all their scorn, the due diligence team knew that Harrison could market the hell out of himself and his deals. That was largely because Harrison had no qualms about putting the deals together in a way that ensured the highest tax breaks possible for investors—either by pouring tax-ded
uctible debt onto the building project or by relentlessly pushing up the appraisals of the properties. Of course, that aggressiveness also raised the risk that the partnerships might anger the Internal Revenue Service, but few brokers or investors seemed to worry about that.
There was so much focus on the tax benefits of the deals that few investors noticed the many fees that had been lathered on by Harrison and the Direct Investment Group. The charges were so thick that the chances of obtaining a capital gain on the investments were virtually obliterated. Through the endless assortment of fees, more than 20 cents out of every dollar invested by clients immediately went into the pockets of Harrison and Prudential-Bache.
To bring more fees into Prudential-Bache, Darr set up a complex web of corporations, such as Bache Properties and Bache-Harrison Associates. Though the arrangement was not disclosed to investors, those corporations allowed Darr and other executives he chose to share in some of the cash flow from the partnerships.
Darr often played hardball in negotiations on how much money those corporations would receive—once going so far as refusing to hand over investor cash that had already been raised unless Harrison agreed to pay higher fees to the firm and to Bache Properties. By directing the fees to the shell companies, Darr sidestepped the restrictions imposed by the National Association of Securities Dealers on the amount a brokerage firm could charge in selling a security. The Bache subsidiaries were not selling securities—they were monitoring, consulting, and advising.
“It was ridiculous. If we could have figured out a way to charge a fee for breathing, we would have done it,” one member of the department said years later.
By 1982, the money was rolling in from the huge fees tacked onto the Harrison partnerships. But, unknown to Darr, Harrison had planted a time bomb—in one of their very first deals. That partnership, called Bessemer–Key West L.P., raised about $4.4 million. The partnership was designed to tap into Harrison’s European contacts. It raised the money exclusively from investors in West Germany, where Bache had a strong presence. But the partnership was a tough sell—it invested in two shopping centers based in Bessemer, Alabama, and Key West, Florida, hardly the places where a German investor would be inclined to put his money.
So Harrison made his investors a promise. On May 20, 1981, he wrote letters to all of the potential foreign investors and guaranteed that the deal would be a success. If, by 1986, they were dissatisfied with the investment, Harrison said he would repurchase their partnership stake for 150 percent of the original cost—putting himself on the hook for $6.6 million. To the investors, the promise was even more attractive because it came on the letterhead of Bache-Harrison, the corporation set up as a device for charging fees. With a commitment for guaranteed profits, apparently backed by a large American brokerage firm, foreign investors snapped up the deal.
Harrison didn’t tell any senior Pru-Bache executive in New York about his guarantee, including Darr. Worse, he didn’t have anything close to the money he needed to live up to his promise. At the time he sent out the letters, Harrison’s net worth was in the deficit column, at a total of negative $350,000. If he ever had to make good on his commitment, he would be wiped out. Under federal securities laws, it was the kind of fact that had to be disclosed to investors in every subsequent Harrison deal. But since Harrison didn’t tell Bache, the firm raised millions of dollars for him over the next few years without revealing his financial guarantee in the deal for the German investors.
The first big Harrison deal in the United States came that same year with a partnership called Barbizon New York Ltd. The partnership invested in the Barbizon, a twenty-four-story hotel in the heart of Manhattan. With Harrison as the general partner, the deal raised $6 million for refurbishing the hotel. Investors expected tax deductions and hoped to enjoy the cash flow the hotel received from guests.
The deal was immensely profitable to Bache and Harrison. Harrison was paid $100,000 a year in the first year—and $150,000 each year afterward— as a “servicing fee.” Metro-Housing, a Harrison affiliate set up for the Barbizon deal, tacked on an “incentive management fee” of at least 4 percent of the deal’s cash flow.
Still, Harrison was more than generous to Bache with his investors’ money. The firm was paid $540,000 in commissions and expenses. In other words, 9 percent of the money contributed by the investors immediately went into the firm’s pockets. Bache-Harrison, the jointly owned corporation, slapped on another $78,000 in fees for finding a loan. Then Bache International, another affiliate, received $25,000 for arranging the same loan. And although the arrangement was not disclosed to investors, Bache Properties would also receive 20 percent of certain money received by Metro-Housing. In the end, at least 17 percent of the money invested in the deal went into the pockets of the brokerage, its executives, and Harrison.
Although the firm didn’t tell any of the investors that Harrison was a convicted felon, it became a point of great importance almost immediately after the deal closed. Every luxury hotel needs to be able to sell alcohol in its restaurants and through room service. But that requires a liquor license from the state. In 1982, Harrison decided to apply for a license and picked up all the necessary forms from the New York State Liquor Authority. He went down the application, answering no to each question on such matters as whether he had been known by another name or had ever filed for bankruptcy.
He turned to the second page. There, in the middle of the document, was the question: “Have you ever been convicted of any felony or of any other crime?” Harrison scribbled the answer “yes, misappropriation of bank funds.” Then he studied the other requirements: He would have to submit his fingerprints to the government, and his filing would become a matter of public record. Harrison tossed aside the form. He refused to complete it, even when bankers who lent money to the deal begged him. Harrison would not create a new public document that would disclose his criminal record.
Clifton Harrison, whose felony conviction wasn’t viewed by Darr as sufficient reason to prevent him from raising millions from retail clients, could not legally sell any of those same people a glass of wine.
Peter Archbold, the manager of Pru-Bache’s Dallas branch, leaned back in his chair as he listened to one of his fellow branch managers who had just called with a question: Why hadn’t the Dallas branch done more sales in a Clifton Harrison deal involving a Texas property?
Archbold had figured someone would ask him that at some point. The Dallas office was one of the firm’s jewels and was a huge seller. Archbold had earned the reputation as a team player from the time he was an assistant manager in Binghamton, New York, in 1972. By 1982, Dallas had one of the best collections of prospective clients for tax shelters—booming oil in Houston and rising real estate prices in Dallas produced a surplus of wealthy investors with no idea what to do with their money. Because Harrison was a Texan, it seemed likely that the branch would sell out the deal all by itself. But the Dallas brokers knew something the rest of the firm hadn’t been told.
“Well, Harrison is pretty well known here,” Archbold said. “He’s a convicted felon.”
“You’re kidding.”
“No, I’m not,” Archbold said.
The two managers talked for a bit and then hung up. A few minutes later, Archbold’s telephone rang again. It was Bob Sherman, the head of retail, and Jim Darr. Both men sounded absolutely livid. The other branch manager had just called New York in a rage, wanting to know why he had never been told that the firm was doing business with a felon.
“What are you doing putting down our deals?” Sherman demanded.
Archbold was taken aback. He hadn’t done anything except tell another manager the truth. Obviously, this was a touchy point in New York. So before he got into any more trouble, he agreed that he wouldn’t say anything again that would put down the deal.
A few days later, Archbold received a telephone call from another branch manager, again asking why the Dallas office wasn’t selling the Harrison deals. Did the
brokers in Dallas know something that other people in the firm should know?
“No comment,” Archbold replied.
The other manager tried again to finagle an answer, but Archbold refused to budge. He wouldn’t tell his colleague anything. Within a few minutes of the frustrating call coming to an end, his telephone rang. It was Darr and Sherman on the line again.
“What the hell are you doing saying ‘no comment’?” Sherman asked.
“Well, what do you want me to say?” Archbold replied. “You don’t want me to answer their questions. Tell me what I should say and I’ll say it.”
Darr and Sherman mumbled a response. They told Archbold to be more careful but never told him what to say. Archbold hung up with the uncomfortable feeling that New York was trying too hard to keep Harrison’s background a secret.
Tom Huzella, the biggest-selling partnership broker in Pittsburgh, was flattered to hear that Clifton Harrison was on the phone. “Tommy, thank you for selling the Barbizon,” Harrison said, drawling Huzella’s name out so it sounded like “Tah-may.”
“You are one of my key people,” Harrison said. “Now, you help me with my next deal, and I’ll send you and that lovely Carol of yours to Monte Carlo.”
The ego stroking had its intended effect. Huzella, along with a number of other top brokers, became a huge fan of the Texas developer. It wasn’t just that his deals had enormous tax breaks, or that Harrison knew how to flatter brokers. Probably the biggest selling point was Darr. Whenever he spoke to the brokers, he made it clear that the full resources of his department were behind Harrison.
Huzella had been impressed by that when Darr first introduced Harrison to him in late 1980. While Huzella was visiting New York on other business, Darr called him into his office, where he saw an impeccably dressed man with long, flowing hair.
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