After almost two years of investigation, the firm had settled both the Capt. Crab and Kalil investigations with the SEC. In the Capt. Crab case, the SEC brought charges against Saccullo. In their announcement, the SEC said that Saccullo had settled the charges and accepted a censure and an eighteen-month bar from serving in any managerial role at a brokerage firm. Kalil’s former manager in Jacksonville also accepted a censure and a bar of one year. Prudential-Bache agreed to hire the outside consultant to review the firm’s supervisory procedures.
The order itself would have been an embarrassment to most brokerages. But the firm’s spin on the sanctions was highly unusual, if not downright dishonest: The settlement showed the high esteem the SEC had for Prudential-Bache.
“We appreciate the SEC acceptance of this approach as a reflection of our continuing determination to conduct business as a leader should,” said Peter Costiglio, a firm spokesman.
Still, in speaking with reporters, Gary Lynch, the enforcement division chief, made clear that the commission considered the problems at Pru-Bache to be widespread. “The two cases demonstrate that there were very serious supervisory problems at Bache,” Lynch said. “It’s time for a very hard look, an extensive reevaluation of their procedures.”
Few investors or regulators would have guessed that, at that very moment, the firm’s abusive sales practices were continuing—and getting worse.
Ball tapped on the large, wooden door in the Dallas branch office. J. Frederic Storaska, one of the firm’s biggest-producing brokers, stood up with an expression of absolute delight on his face.
“George, how wonderful to see you,” Storaska said. “Welcome to Corporate Executive Services.”
It was January 24 at eleven o’clock in the morning, just a few weeks after the Capt. Crab settlement. Ball had arrived to meet with the man he considered to be one of his best hires for the retail system. The two had met in Ball’s last years at E. F. Hutton, where Storaska had been a stand-out broker. In 1984, Ball had personally recruited Storaska to join the Pru-Bache team.
Storaska, a hulking, heavyset man with thick, dark hair and a seemingly boundless ego, was not like most brokers. Instead of spending his days toiling on the telephone, cold-calling potential clients, Storaska focused only on the cream of the investment world. He hunted down newly wealthy entrepreneurs, such as businessmen who had recently sold their companies. Storaska knew that no matter how much these people understood the line of business that brought them their wealth, they were most likely novices when it came to investing. Over the years, he perfected the pitch that they would run their businesses while he protected their money. It had been a fabulously successful strategy for Storaska at Hutton and later at Kidder Peabody. When Ball saw the millions of dollars that Storaska was bringing in, he knew he wanted that for Prudential-Bache.
Even with Ball’s reputation for showering big brokers with money and goodies, the deal he struck with Storaska raised eyebrows throughout the firm. Storaska was offered what was essentially his own department within the Dallas branch, called Corporate Executive Services, or CES. He had his own sales staff and clerks. For every $750,000 in revenues he generated, the firm would pay for another CES staff member. Storaska traveled by limousine and would soon have his own airplane. As the final sweetener, Ball offered Storaska almost a quarter of a million dollars up front. By this morning in early 1986, it seemed like money well spent. Little more than a year after CES opened, Storaska was one of the top ten brokers in the firm.
“So, Fred, is everything else here to your satisfaction?” Ball asked.
Storaska nodded. His branch manager, Charles Grose, and his regional director, Bill Hayes, had been extremely helpful, he said.
“Good,” Ball replied. “I told Bill to make sure he took care of you.”
After some idle talk about Storaska’s family, the forty-five-minute meeting came to an end, and Ball stood up to leave.
“Keep up the good work,” Ball said. “You’re setting an excellent example for others to follow.”
Ball might not have known it, but he had set in motion what would become a major compliance problem for the firm. Within a month of Storaska’s hiring, the firm was notified that he was under investigation by the Chicago Board Options Exchange for allegations of improper trading before he was terminated by Kidder.10
It would only be a matter of months before the first customer complaint arrived at Prudential-Bache, charging that Storaska was improperly making trades at his own discretion without written approval. It was the kind of complaint that should have sent up red flares throughout the compliance department of Prudential-Bache.
But the letter of complaint was just filed away. With Storaska anointed by none other than George Ball himself, it would take a lot more than an exchange investigation and a few customer complaints for Prudential-Bache to do something about him. A lot more.
In Jacksonville, Rick Harris, the new manager of the local Pru-Bache branch, was slogging through the last leg of the Kalil affair. The SEC settlement rekindled a flurry of bad publicity for the branch, and Harris worked hard to keep his brokers focused on their business. He walked about the office, complimenting his best brokers on their latest sales, while offering weaker ones suggestions on how to improve.
But each day it was getting harder for Harris to stay upbeat. Since being assigned to clean up Jacksonville a few months before, he had developed a direct pipeline into the New York rumor mill. Lawyers for the firm contacted him every day, and he frequently heard stories about problems in New York that horrified him. Then, over drinks, an executive for VMS, a partnership sponsor, had told him an amazing story about the company getting Bob Sherman an apartment. The VMS executive anguished about it, and Harris was appalled.
Still, he tried to keep his mind off the horror stories. Within a few days of the SEC settlement, Harris saw a prospectus for a new real estate deal that he thought might be a good investment for his branch’s clients. Unlike some other products, the deal was not a proprietary deal at Prudential-Bache but was being offered at firms all over Wall Street. Harris had reviewed the prospectus for the deal as soon as it arrived in the office and immediately went out to speak to his brokers.
“Hey, I want everybody to take a look at this,” he said. “It looks like it’s properly structured, and the prospectus is pretty straightforward. This is probably the kind of investment that is worthy of a small percentage of some client’s portfolio.”
The brokers liked the deal, and within a few days, they had sold a huge amount of it to their clients. Harris was pleased. His brokers were showing that the Jacksonville branch was still alive and kicking, despite all the bad press.
A few weeks later, in early February, an offering of a similar real estate deal, called Duke Realty Investments, came out from Prudential-Bache in New York. Even though this deal was proprietary, Harris didn’t give the prospectus a second look. He figured any professional in the business would know that clients had to keep their portfolios diversified. Almost every client of the branch who could consider such a real estate investment had already been approached with something comparable.
Worse, the deal was also the latest Clifton Harrison offering. Harris had already heard the scuttlebutt about Harrison being a convicted felon and was not comfortable selling his products. So, even though this deal was sponsored by his firm, the branch was not selling any of it.
Within a few days, the first phone call came from New York. “Why aren’t you guys selling Duke Realty?” the New York product manager asked.
“Look,” Harris said. “We just sold one of these. The branch doesn’t have an appetite for another one. The customers don’t need it, and the brokers aren’t interested.”
The explanation did nothing to quell the anger in New York. As far as the marketers there were concerned, if a branch sold a lot of a product weeks earlier, then it should be able to sell even more of the same thing later. Harris’s arguments about the need for portfolio diversifi
cation fell on deaf ears. The calls with complaints from New York kept coming for days.
Harris did not know it, but the pressure for sales was coming from Darr himself. Darr had pushed Sherman heavily into promoting the Duke deal, and Sherman, in turn, had begun pressuring the people who worked for him in ways he never had before. The push to sell was going on across the country, and would be unrelenting until the deal was closed.
Finally, Harris called a special meeting of the Jacksonville brokers.
“Guys, New York and the region are putting particular pressure on us to sell this Duke product,” he said. “It’s a proprietary offering, so I can appreciate that they want to do a good job. So if for whatever reason you had four or five people who were out of town when that first deal came through, or if you had people who said no, contact them all and offer this.”
Harris thought for a second and added something to make sure none of his brokers misunderstood. The last thing he wanted was his brokers getting into a hard sell of a deal clients didn’t want, just days after the SEC settlement.
“If your clients say no, don’t worry about it,” he said. “I’ll take the heat.”
A few days later, Harris checked around. His brokers had sold only about five hundred shares of the Harrison deal. They had checked with their clients. Nobody wanted it.
Those results angered the firm’s senior executives even more. Finally, the regional sales manager called Harris, demanding that his branch push their clients harder.
“Look, I don’t care what they want to do in New York,” Harris said. “What they’re asking us to do is not appropriate. I’m not going to do it.”
Harris had never seen so much pressure to sell a deal that clients did not want. He assumed that by throwing down the gauntlet with the sales manager, maybe now they would leave him alone.
The next day, Harris was walking through the branch when his secretary called out for him. Peter Archbold, the regional manager in Florida and Harris’s boss, was on the line. He wanted to speak with Harris immediately. Harris walked back to his office, shut the door, and picked up the telephone.
“Hey, Peter,” he said. “What’s up?”
“I want to talk to you about this Duke Realty deal,” Archbold said. “You’re going to sell a lot of it. And if you don’t, you’re fired.”
Harris was floored. He’d heard war stories about managers’ jobs being threatened for not cramming enough of a particular deal down clients’ throats, but he always took those stories with a grain of salt. He never believed anyone could do something so unprofessional.
“Peter,” he asked after he collected himself. “Are you telling me that my job is in jeopardy if we don’t sell a lot of this offering?”
“That’s right.”
Harris hung up the phone. At that moment, he couldn’t afford to lose his job. He stroked his temple as he thought about what to do. He could not believe the firm was pushing him to do something so improper after the SEC settlement.
Finally Harris reached a decision. He would put together some sort of incentive, like a cash prize or some sort of brownie points, for his brokers to sell the Duke deal. Essentially, he would offer them a bribe. Harris walked out into the branch to tell his brokers about it.
“I’m not proud of this,” he said after explaining some of the situation, “but if you can find a way to get it done, then do it.”
This is disgusting as hell, Harris thought. He was ashamed of himself.
Harris took a deep breath. He needed to make some preparations and to get things lined up. It would take him a few weeks, he knew, but he was going to get the hell out of the place. The dirt at the firm seemed everywhere.
The dark sedan pulled into the basement garage at Prudential headquarters in Newark. James Trice, a regional administrator for Prudential-Bache on the West Coast, hopped out of the backseat. An escort immediately whisked him upstairs to an anteroom outside the company’s boardroom. As he entered the room, Trice saw George Ball sitting in an overstuffed chair.
“Jim,” Ball said as he stood up. “How are you? How’s your son?”
Trice smiled and told Ball about his family. Then Ball got to the point.
“Listen, Bob Sherman spoke to me and he really wants you to go to the Southeast as regional director,” Ball said. “He really feels strongly about it.”
Of that, Trice had no doubt. More than a year earlier, Sherman had tried to get him to swap jobs with Jack Graner, who was the regional director during the Capt. Crab disaster. Graner, another Sherman favorite, had been subpoenaed by the SEC in the investigation. Graner was petrified and wanted to get out of Atlanta. Sherman had suggested that Trice would take his place. But Trice liked California and had refused. Graner came to California anyway, taking a demotion to be regional sales manager. Sherman had replaced him in Atlanta with Saccullo, the manager who was a target of the SEC investigation.
Now that Saccullo had been barred from holding a supervisory position, Sherman had launched a full-court press to again try to persuade Trice to take the Southeast job. Just before the meeting with Ball, Trice had met with Sherman in a private dining room at Prudential-Bache headquarters. Sherman had offered him a raise, a company car, and a slot on the Pru-Bache board if Trice would agree to go. Then he had said that Ball wanted to speak with him out at Prudential Insurance, where he was attending a meeting with the company’s board.
Despite the royal treatment, Trice didn’t want the job. He told Ball that it was not a good time for him to be leaving California because of some family problems.
“Well,” Ball said, “you can go back whenever you want to, if you need to. That’s not a problem. We’ll take care of it. It won’t be any cost to you.”
Trice raised an eyebrow. They were offering him free airfare back and forth across the country. This package was really getting rich.
“Jim, we’d greatly appreciate this,” Ball said. “We realize it’s an imposition on you, but we really would appreciate it. We’ll remember it.”
Trice sat back in his chair. “I want to ask you a question,” he said. “If I refuse to do this, do you want my resignation?”
Ball smiled. “Oh, absolutely not. That’s not the intention of this. We want you to go down there because we need you.”
Less than a week later, Trice called Sherman and told him he’d take the job. Jack Graner was promoted to Trice’s old job, giving him supervisory responsibility for the firm’s golden branches on the West Coast.
That left open Graner’s job as California’s regional sales manager. Sherman thought he knew the perfect person: He selected Rick Saccullo, the former Atlanta branch manager who had just been sanctioned by the SEC. Once his eighteen-month bar from supervision was over, Saccullo would be more influential than ever.
The day the firm announced Saccullo’s selection for the job, Carrington Clark, the regional director, received a telephone call from Robert Leecox, the manager of Prudential-Bache’s St. Louis branch.
“Hey, is it true that we’re getting Saccullo as the regional sales manager?” Leecox asked.
“That’s the word, Doc,” Clark said.
“Well, why don’t we just hire Al Capone?” Leecox asked. “I mean, if we’re going to use somebody in trouble with the government, at least Capone’s a more visible guy.”
On February 27, 1986, Jim Trice and his assistant, Marvin Coble, caught the red-eye from Los Angeles to Atlanta. They were ready to get started running the troubled Southeast region of Prudential-Bache. For the first time, they would get a firsthand look at the mess left behind by Rick Saccullo and Jack Graner.
Within a few days of arriving in Atlanta, both Trice and Coble thought that the region was far worse than they had imagined. It was a hotbed of sloppy broker activity, with little to no discipline imposed from above. Many of the brokers just went about doing their own thing without worrying about their higher-ups.
“This place is running like a country club,” Trice told Coble.
/> On his first full week in the job, Trice toured the region to meet his branch managers. On Tuesday, March 4, Trice held a dinner meeting in Richmond, Virginia, with all of the branch managers in that state. He chatted with each manager, and the evening seemed to be going well. Finally he struck up a conversation with Joseph Schwerer, manager of the firm’s Norfolk branch. Schwerer told Trice he had a problem.
“What’s the matter?”
“I’ve got two problem brokers in my branch who seem to be getting into some trouble,” Schwerer said. Schwerer told Trice that the two brokers had been violating numerous rules. They had even set up their own dummy company that engaged in bogus trades with some of their own clients.
Trice’s good mood gave way to shock. This sounded horrible.
“Well, my God,” Trice said. “Why don’t we just get rid of these guys?”
“That’s the problem,” Schwerer said. “The legal department told me I can’t.”
Trice assured Schwerer that he would take care of the problem as soon as he returned to Atlanta. A few days later, he telephoned a lawyer in the legal department. He laid out everything he had just heard about the two brokers in Norfolk.
“Why haven’t we fired them?” he asked. “They sound like a major problem.”
“We can’t,” the lawyer replied. “We’re already in the soup with these guys, and we have some pending litigation. If we fire them, we’ll have them as adverse witnesses against us. We can’t afford to do it. So we’ll just have to sit with it and hope it will just work itself out.”
“So we’re keeping these characters around to make sure we don’t lose a couple of lawsuits?” Trice asked. “That just isn’t right.”
Trice hung up, called another lawyer, and then called Bob Sherman. Each time, he was told the same thing: Regardless of the allegations, the brokers had to be kept on at the firm. The potential liability from them was just too large.
Serpent on the Rock Page 31
