Cartons of documents about the Archives partnership were piled around a conference room in the midtown Manhattan offices of Manufacturers Hanover Trust. The records about the partnership sponsored by Clifton Harrison had been produced in early 1988 after the bank received a discovery request in the McNulty lawsuit.
Charles Cox, the Minneapolis lawyer who represented McNulty, had flown up to New York to pore through the documents with a legal assistant. Neither Cox nor his assistant, Nancy Trimbo, knew exactly what they were looking for. But Cox felt sure that somewhere in the morass of paper were the documents that would help his case.
The minutes slid into hours. Cox reviewed the lending documents, construction budget records, and appraisal materials. The information seemed good. It was clear that Prudential-Bache and Clifton Harrison had been irresponsible in the management of the Archives partnership. But with what he had so far, it would be a very hard-fought case.
Cox stretched as Trimbo passed him another file folder from the boxes. He opened it and dug through the various records. One document, which had the word “Confidential” stamped across the top, attracted his attention. It was some sort of security report, written many years earlier about Harrison.
Cox set the document on the table, flipped open the cover page, and started reading. Before he finished the first page, his eyes opened wide.
“In 1967, Clifton S. Harrison pled guilty to federal charges of misappropriation of bank funds and mail fraud as a result of which he was sentenced to serve three years,” the report read.
The more Cox read, the more amazing it became. Harrison’s embezzlement had involved a securities fraud as well. The report said he had been caught embezzling only because the bank officers realized he was spending more money than he made. Whenever he ended up short, he just figured out a way to defraud the bank and finance his high living. This was exactly the reason that the disclosure rules in the federal securities laws had been written.
Cox jumped up. “Jackpot!” he called to Trimbo. “Take a look at this!”
As she read the file, he watched with enjoyment as the shock registered on her face.
We’ve got them now, Cox thought. We’ve got them.
Clifton Harrison needed some money. Even with the millions of dollars in fees he received from his huge deals sold through Prudential-Bache, by the spring of 1988, he was still spending more money than he made. Despite his years of financial trouble, Harrison had never cut back on the elegant restaurants, valuable antiques, rental homes for the summer, and other indulgences. Until now, whenever he ran out of money, his friends at Pru-Bache always bailed him out.
This time was different. Since the Bessemer–Key West disaster, Harrison’s relationship with Prudential-Bache had been in tatters. Even his old friend Darr seemed to be avoiding Harrison now. The Direct Investment Group would not sell any more of his deals. He couldn’t use new fees to pay off his old expenses. His giant game of financial musical chairs had come to a stop, and Harrison couldn’t find a seat anywhere. But eventually, Harrison realized there was one last chair he could use to win the game. It might not be something that Pru-Bache would approve, but at that point he didn’t care. The option of cutting back on his spending was not acceptable.
Harrison rummaged through his desk and found the checkbook for Stamford Hotel LP, a deal that the Direct Investment Group had sold three years earlier. He opened it and picked up a pen. On the first check at the top, he brought the pen down just behind the words “Pay to the Order of” and wrote his own name. He filled the check out for tens of thousands of dollars.
Over the next several months, Harrison would pocket close to half a million dollars from the Stamford Hotel partnership. The man who twenty years earlier embezzled money from a bank to cover his extravagant expenses was simply taking partnership cash that did not belong to him.
Angry brokers and managers drove to the Holiday Inn off Highway 41 near Fort Myers, Florida. After parking in the lot, they traipsed through the lobby to a meeting room. They found seats around a series of long tables set up in a U shape. At the head table sat executives from Graham Resources and the Direct Investment Group. No one in the room was smiling, and for good reason.
This meeting in July 1988 was billed as the first time the Direct Investment Group would tell brokers why the Graham energy partnerships— particularly the growth fund—were unraveling. At that point, no information was more important to the brokers. Every quarter, after the shrinking distribution checks were mailed, they had been forced to spend hours on the telephone trying to explain to clients why all the promises they had made were not coming true. But they didn’t know the answer.
As a group, the brokers were angry. Among themselves, they repeatedly said that the firm lied to them. Everything had been described to them as so safe, so assured. Then it all collapsed. None of the brokers understood the details, but many of them felt sure that something slippery had taken place.
All the big brokers in the area had traveled to Fort Myers for the meeting. Up at the center table sat a few senior officers from the Direct Investment Group in New York, including Barron Clancy, Joe DeFur, Joe Quinn, and Russell Labrasca. Jim Parker, the firm’s partnership marketer for Florida, was also there. He sat beside Bob Jackson, Graham Resources’ marketer for the region.
Clancy stood up and walked to the center of the head table. “We’re all here today to talk about what’s been happening with some of the Graham partnerships,” he said. “We want to lay out all of the events that have been affecting these partnerships so you can understand where everything stands.”
The brokers glared at Clancy. They had been hearing the excuses coming out of the Direct Investment Group and Graham Resources for months. They weren’t in the mood for another rendition of the explanations that seemed like little more than lies.
“A lot of the things that have happened were simply beyond everyone’s control,” Clancy said. No one, not even the top executives in the Direct Investment Group, could have possibly predicted the events that had unfolded, he said. The collapse of the price of oil in 1986 wreaked havoc on the early partnerships. Gas prices never came up. Tax reform in 1986 pulled the legs out from under many partnerships. These were all external events. Neither Graham Resources nor the Direct Investment Group was responsible for any of it.
As Clancy spoke, Parker and Jackson glanced around the room. They knew these brokers well enough to tell what was happening. The excuses were driving them absolutely nuts, particularly since a lot of what they were learning made no sense. The marketing materials had said that tax reform would have no impact on the tax benefits of the Graham partnerships. When the price of oil went down, the distributions fell. When the price of oil went up, the distributions fell. Even the distributions from the growth funds, which were created at the bottom of the oil market, were falling.
“Barron, this is just so much bull,” one of the brokers called out. “We were told these were safe investments. Are you guys saying you didn’t figure out that the price of oil might go down? What, was it safe only as long as prices went up?”
“Now, that’s not what I’m saying,” Clancy said. He went back, trying to explain again about the unforeseen events. Then he turned to DeFur, who backed him up.
“What are you guys talking about?” another broker barked. “That might explain the trouble in one or two of these partnerships. But all of them? There’s got to be something else there.”
As the noise of the crowd increased, Clancy and DeFur walked through the same points again. That just made the brokers angrier.
“Face it, you guys lied to us,” a manager called out. “Look at the growth funds. We were totally misled about that. How come they stopped buying bank loans, like they were supposed to?”
“Now wait a minute,” one of the Direct Investment Group executives said. “Go back and look at the prospectus for the energy growth fund. We never said that we were definitely going to buy those discounted loans. That was jus
t a hypothetical in the marketing material, something we said we might do. We never committed to that.”
With that, the room exploded.
“This is bullshit!” a broker called out. “A hypothetical? What are you talking about? You told us they were going to be buying discounted bank loans! It was no goddamned hypothetical!”
“You misled us!” another one shouted. “We’re the ones who are paying the price for your dishonesty. We’re the ones losing our clients and listening to them accuse us of lying. So what the hell are you going to do about it?”
The meeting broke down completely. Brokers were shouting questions, one after another, without waiting for answers. They were beating Clancy and DeFur badly. It was as if the anger that had built up over the months of deteriorating performance by the partnerships was all pouring out at once in this meeting room at a Holiday Inn.
“You guys have been covering up the facts on the growth fund,” one broker shouted. “What the hell happened?”
“The disclosure on the First City loans can’t be true,” another said. “What’s the truth? Stop hiding it from us.”
Before they could offer an answer, another broker stood up. “You guys better think fast, because you’ve got a scandal of big proportions building up here.”
The broker stared straight at the senior executives in the front. Solemnly, he uttered one last statement.
“This is Grahamgate.”
Al Dempsey hung up the phone after talking with Bob Jackson. What he heard on July 5 about the meeting in Florida disturbed him greatly. Clancy and DeFur had not been prepared to deal with the brokers’ rage. Graham Resources itself was facing a deep credibility problem. If the company didn’t figure out a way around the problem quickly, its sales of partnerships could rapidly fall off.
Dempsey sat at his desk and wrote a confidential memo to Graham’s top marketers. He described some details of the Florida meeting and offered some suggestions about how to handle the energy growth fund, which he labeled EGF, and its deal with First City National Bank, which he called FCNB.
“For a lot of valid reasons, many of the details of our EGF investments, particularly FCNB, have been kept secret,” he wrote. “I think the time has come for full disclosure” to the company’s regional marketers.
He spelled out a few ideas for crisis management that he wanted adopted immediately.
“I believe this approach will help to solve our EGF credibility problem,” he wrote, “and will avoid a ‘spill-over’ into energy income fund and other products we may introduce in the future.”
The strategy would largely succeed. Graham would continue selling its energy partnerships through Prudential-Bache for years to come. Even with all of the damage that had been done, Graham would still find brokers who were willing to believe. Prudential-Bache itself was still tapping into that faith. After all, there was always another high-commission product that could be sold. And Pru-Bache needed the money.
Richard Sichenzio, the second in command to Bob Sherman, almost growled through the telephone in September 1988.
“Why aren’t you getting more involved in pushing the Risers?” Sichenzio asked Jim Trice, the regional director for the Southeast. “We’re about to do another offering. I want your guys to step up their sales.”
Trice just shook his head. Risers was the shorthand name for an enormously complex investment that Prudential-Bache had recently begun pushing. It stood for Residual Income Stream Equity REIT. Risers offered clients a way of purchasing an investment collateralized by residential mortgage loans. They had been marketed as safe investments for conservative clients, but few brokers in the Prudential-Bache system could figure out the concept, and their clients understood even less. But senior executives, and particularly Sichenzio, pushed Risers hard. It was a product manufactured by Pru-Bache. If sales were strong, the firm could make great profits.
But Trice wasn’t about to push brokers to sell investments they couldn’t explain.
“Look, Rich,” he replied. “A lot of brokers and managers don’t understand this product. It’s very complicated. They don’t feel comfortable with it, so they don’t understand it.”
“Well, that’s your job,” Sichenzio barked. “Make them understand it so they can sell it.”
“Richie, let me tell you, I don’t understand it in some ways. On top of that, I don’t like the way this is being shoved down people’s throats.”
Trice also mentioned that, even though this product was being sold as safe and secure, the Prudential-Bache analyst who examined Risers had already suggested over the in-house communications system that their outlook was not good. Why on earth would the firm start selling another one, this one called RAC Mortgage, when the analyst seemed so doubtful?
“The analyst didn’t know what he was talking about,” Sichenzio said. The analyst had already made a revised presentation on the firm’s communications system to correct any misimpression.
“So your job is to get behind the effort to sell more of these,” Sichenzio said.
The conversation came to an end. Trice said he would see what he could do.
Trice was right to be worried. That same month, Merrill Lynch, which also offered Riser products, distributed a research report to its brokers. It covered the latest Riser being sold by Merrill and Prudential-Bache. But the analysis would only be seen by Merrill brokers. The word “safety” was nowhere to be seen in the report.
Instead, under the bold heading “Merrill Lynch Research Suitability Comment,” the report contained this warning: “Research considers the common stock to be suitable only for SPECULATIVE accounts.”
At Merrill, only the customers most willing to gamble would be sold the newest Riser product. At Prudential-Bache, the sales focused instead on the elderly and the retired. Merrill was right.
Paul Tessler, an executive in the Direct Investment Group, dropped the financial statements for one of the Harrison partnerships on his desk and reached for the telephone. Something in the numbers for the partnership, called Stamford Hotel, didn’t make sense. As an asset manager, his job was to review the performance of the partnerships that had already been sold and make sure everything was running correctly. Normally, that involved looking at the numbers, running them through a few times, and signing off. But this time, in the fall of 1988, Tessler couldn’t figure out the statements for the Stamford partnership. If he didn’t know better, he would have bet that several hundred thousand dollars of the partnership’s money was missing.
Still, Tessler wasn’t worried. He was sure there was some routine explanation for the apparent discrepancy. He dialed Harrison Freedman Associates and asked for Gayle Gordon, one of the company’s accountants. He told her about the document he was examining.
“I’m having a little trouble finding this number,” he said. “Could you help me out here?”
Slowly Gordon took him through the numbers, and Tessler followed along. By the time she finished, he was no better off than when she started. He still came up several hundred thousand dollars short. It was too large a discrepancy to shrug off.
“I still don’t get it, Gayle,” Tessler said. “Could you send me some of the backup on this?”
Gordon said she would send him the supporting documents soon.
About a week later, Tessler was feeling anxious. He still had not heard from Gordon, so he called her again.
“Hi, Gayle,” he said. “I still need some help here. Can you send me what I need? I don’t understand what these numbers are. I just really need to check.”
Again Gordon said she would send the materials soon, and the call ended.
The next morning, Tessler’s boss, Joe Quinn, the head of asset management, asked him to come to his office immediately. Tessler walked in and shut the door.
“We’ve got a real problem, Paul,” Quinn said. “Gayle Gordon resigned. Apparently it had something to do with you questioning the numbers on the Stamford partnership.”
Tessler was fla
bbergasted. Until that moment, the questions he had asked had seemed nothing but routine. He had simply been making the workaday demands of his job. But any time an accountant resigns from a company, antennae go up on Wall Street. Gordon must have found something she couldn’t tolerate. Before Tessler had another moment to think about it, Quinn answered all his questions.
“Apparently she found out that there’s some money missing,” Quinn said, his voice completely calm. “We have to move very quickly on this.”
Within a few minutes, Tessler and Quinn had Harrison on the line. Slowly, they began to browbeat the man about where the money had gone.
“This is not a problem,” Harrison said. “I’ve just been borrowing some money against future fees.”
“Well, how much money are we talking about?” Tessler asked.
“About $200,000.”
That amount sounded enormous. Under the terms of the Stamford deal, Harrison had no right to advance himself fees. It wouldn’t take too clever a plaintiff’s lawyer to argue that he had been embezzling partnership money. Quinn and Tessler told Harrison they would be over to see him immediately.
At ten o’clock in the morning on October 11, 1988, Quinn and Tessler arrived at Harrison’s office. When he saw Harrison, Tessler could not believe his eyes. The gregarious, upbeat fellow he knew from the past was gone. In his place was a shaking, downtrodden, highly emotional man. Both he and Quinn had known about Harrison’s enormous cash flow problems. Only now did they realize the emotional toll those financial troubles were wreaking on him.
The interrogation made things worse.
“So,” Quinn asked, “the full amount you took out was $200,000? We’re not going to look at the numbers and find any other surprises?”
Harrison took a deep breath and sighed. “No,” he said, shaking his head. “It wasn’t just $200,000. It was more.”
Over the next few minutes, Harrison admitted that the amount was in fact closer to $500,000. He had been taking the money, a small bit at a time, for much of the year.
Serpent on the Rock Page 42
