A number of the brokers who had gathered at Manhattan’s Waldorf-Astoria Hotel for a national sales conference shifted uncomfortably in their seats. Ever since taking over for Sherman, Sichenzio often expressed this attitude of “my way or the highway.” Still, the brokers gathered for the opening-night event in October 1989 were stunned to hear a senior executive be so blunt. Particularly since so many of the products they had been told to sell blindly had blown clients away.
The event was unlike any other in the history of the Direct Investment Group. The conference focused on a single partnership, the Silver Screen Entertainment Fund. Over the years, Silver Screen Partners, the deal’s general partner, had built up a reputation with its partnerships—mostly sold through Hutton and then Shearson—which financed a number of movies, including Three Men and a Baby and Cocktail. This time, Prudential-Bache had won Silver Screen’s business for an ambitious partnership. The deal would invest money with Viacom Inc., the giant entertainment company, to finance programming on its Nickelodeon and MTV cable stations. It would make loans against art with Sotheby’s, the art auction company. It would even acquire an interest in the Texas Rangers, the major-league baseball team.
The meeting was loaded with glamour. Executives from Viacom and Silver Screen were there. George W. Bush, the son of the president and one of the owners of the Texas Rangers, also attended to give a booster speech to the brokers selling this partnership for him. Sichenzio took personal charge of the sales meeting, predicting that $50 million worth of the Silver Screen partnership would be sold in a matter of months.
Sichenzio finished his speech to a polite smattering of applause. Whatever else might be said for it, the speech inspired a lot of discussion. But little of it was about Silver Screen. Instead, brokers and managers were still in shock from Sichenzio’s insistence that none of them could question the judgments of New York. That one statement became the centerpiece of conversation.
At a table near the front of the room sat Joseph Haick, Sichenzio’s top deputy. He was surrounded by a number of retail executives: Roger Parsons, the manager of the Baltimore office; Bill Mitchell, the manager in Washington, D.C.; Marvin Coble, the regional administrative director for the Southeast; and several other managers from Florida and Georgia. All of them discussed the speech, and Haick offered his own thoughts.
Parsons, who had a reputation for being direct, piped up with a question. “In light of what we just heard, is there a place for a manager in Prudential-Bache who just wants to do clean business, stay out of trouble, and keep the profitability up? That’s all I want to do, even if it means not selling Prudential packaged products. Is there a place for me?”
Haick looked as if he might jump out of his skin. “What do you mean, is there a place?” he barked, sounding greatly agitated.
Parsons held up his hands. “Whoa, sorry,” he said. “Let’s talk about something else.”
Haick leaned across the table toward Parsons. “No!” he snapped. “What do you mean? I want you to tell me what you mean by ‘is there a place for me?’ ”
Parsons, nervous, started talking with his hands. “All I’m trying to ask, basically, is whether there is a place for someone to think for themselves. If they do what they think is right, can they still keep their job as a manager?”
Everyone at the table started talking. Haick looked furious. Parsons decided to rephrase his question one more time. This time, he would put it in the real context of what was actually happening at the firm.
“We’ve sold a lot of the packaged products that haven’t worked out,” he said. “Not only is that wrong, but it’s bad business. It hurts the clients. It hurts the office. It hurts the manager. But Sichenzio is saying that we have to sell what New York puts out, no questions asked. So are there going to be any changes to deal with what has happened in the past when we didn’t ask enough questions?”
Haick threw up his hands in exasperation. “What happened in the past has nothing to do with anything,” he exclaimed. “What does this have to do with doing honest business?”
“Let me take a specific instance,” Parsons replied. “If we just settle all the lawsuits on just one of the Riser products we sold, it would wipe out my branch’s profitability. Sichenzio says we should sell these products without question. But when they fall apart, is New York going to pay for settling all the lawsuits? If not, it’s going to come out of the branch’s profits. That’s where my bonus comes from. So I’m paying the price for things I’m not supposed to question.”
Haick just shook his head in anger. “Why in the hell should we settle?”
Maybe because we sold it as safe at $10, and a few months later it’s worth $2, Parsons thought.
“I’ve spoken to some of the firm’s lawyers,” he said. “They don’t think there’s a real defense here. They say we’re just going to settle the cases.”
Haick glared at him. “I don’t want to talk about this. Why don’t you just leave the table, and we’ll discuss this at some other time?”
Parsons looked relieved. “I need to visit the restroom anyway,” he said, standing up and heading out of the room. He took the hint and didn’t come back.
The next morning, Parsons woke up early to make sure he would be on time for the sales meeting. He headed down to the hotel lobby, where he waited for transportation to Prudential-Bache headquarters. After a few minutes, Marvin Coble, the regional administrative manager for the Southeast, came down into the lobby and saw him. Coble walked over with a smile on his face.
“Very tactful last night,” Coble said with a laugh.
Parsons didn’t take it as funny. “Do you think I ought to be catching the early train back to Baltimore?”
“No,” Coble said. “I found what you had to say interesting. I don’t think it’ll cause you any trouble.”
Later that day, Parsons was waiting in the firm’s auditorium for the sales meeting to begin when he saw Marvin Coble heading toward him.
“Roger, I need you to come with me,” Coble said.
Parsons stood up and started to follow Coble.
Coble stopped. “No, Roger,” he said. “Bring all your stuff.”
Parsons scooped up his belongings and trailed Coble out of the auditorium. Coble escorted Parsons to another room and told him that Michael McClain, the regional administrator for the Southeast, wanted to speak to him.
“Looks like you were wrong about last night,” Parsons said.
Coble shook his head. “I don’t know what’s going on.”
In a few minutes, Parsons sat down in front of McClain.
“Joe Haick is very upset about what happened last night,” McClain said. “He doesn’t want you at the meeting. He wants you to go home and not go back to the office.”
Parsons felt his stomach drop. “Mike,” he asked softly, “am I being fired?”
“I really don’t know, Roger,” McClain said. “Joe said to go home and think about it.”
Parsons went home. He wasn’t allowed back into the office for several weeks. Finally he called McClain and heard the bad news: Haick wanted Parsons removed as a manager.
Parsons hung up the phone in shock. He had lost his job—just for asking if there was a place at Prudential-Bache for an honest manager. Just for implying that New York’s due diligence needed to be challenged. Just for suggesting that there were serious problems. The word of what happened spread through the retail branches like wildfire. For many managers, Parsons’s fate reinforced New York’s theme: It’s my way or the highway. Either they make sure their brokers sell in-house investment products, or they leave the firm.
A few weeks later, on November 14, 1989, the full truth about the sloppiness of Prudential-Bache’s due diligence finally became undeniable.
On that day, VMS, the sponsor of the Mortgage Investment Fund, announced that it was “experiencing liquidity problems” in its operations. It would have to start selling real estate to obtain cash for financing its business. Although senior ex
ecutives with the company protested that they were not filing for bankruptcy anytime soon, it was apparent that VMS might well go belly-up.
The truth was unmistakable to brokers throughout Prudential-Bache. VMS, whose most recent product had been deemed so safe by the firm that sales were concentrated on retirees and other risk-averse investors, was about to go under. It had been only seven months since the Mortgage Investors Fund started trading. All of these problems had to have been there from the start. The people in New York either missed the problems or, worse, just ignored them.
In Los Angeles, Bill Creedon read the announcement from VMS in dismay. Shares in the fund sank like a rock. In just one trading session after the announcement, they lost close to 20 percent of their remaining value, closing at $5.50.
Like most brokers at Pru-Bache who had been deceived into selling the Mortgage Investment Fund, Creedon was dazed. His telephone started ringing immediately. Customers were demanding to know what was happening with their life savings.
Whatever happened from here, Creedon knew one thing. He was going to fight for his customers to make sure that Prudential-Bache did right by them. He wanted them compensated for the fraud they had suffered. And at that moment, he knew that he would do whatever it took to make sure that happened. Whatever it took.
By December 1989, the problems with the Riser investments had blown up into a full-scale disaster. The potential liability of Prudential-Bache appeared to be in excess of $150 million. The firm’s law department analyzed the situation and informed some managers and brokers that they were going to recommend settling the cases with clients. But the senior management of Pru-Bache would hear nothing of it. No one was going to receive a settlement. The firm had to play hardball.
Eugene Boyle, a broker with the Prudential-Bache branch in Wayne, New Jersey, watched the evolution of the Riser situation with great dismay. He had placed about $1.5 million of his clients’ savings into the investment. He had believed the firm’s assurances about their safety. When the losses mounted, Boyle felt confident that the firm would do the right thing and settle with the defrauded clients. One of the firm’s lawyers even told him that the Risers case was virtually indefensible.
Then, early that month, Boyle heard that everything had changed. Carlos Ricca, a Pru-Bache lawyer in New York, told Boyle in a telephone call that the firm’s senior management had decided to disregard the department’s recommendations and not settle the Riser claims. As Boyle understood it, the firm believed that putting up a fight might discourage some clients from pressing their claims. And the ones who did get a lawyer would be more likely to settle for less if they knew the firm planned to battle them all the way. After all, Prudential-Bache had more money to pay for lawyers than any of its clients did.
Boyle was appalled. The strategy struck him as the most immoral thing he had heard in all his years as a broker.
“Carlos, I wouldn’t be able to tolerate that,” Boyle said. “If that’s the way the firm wants to handle it, then I would have to recommend that my clients find lawyers. Then I’m going to have to cooperate with their lawyers in the cases against the firm. It’s my duty to make sure they get back as much money as they’re owed.”
Ricca paused for an instant. “You do that, Gene, and Pru-Bache will not only fire you,” he said, “but then we’re going to tie you up in court for seventeen years.”16
The next day, Boyle wrote a letter to his manager, telling him that the plans Ricca had described were compelling him to resign.
After the conversation, “I was faced with the dilemma of choosing between my firm and my clients,” Boyle wrote. “In all good conscience, I cannot stand by passively on the sidelines and watch my clients try to fend for themselves, when I know what the real issues are and I know how indefensible the firm’s position really is.”
Within a few months, Prudential-Bache appeared to be living up to Ricca’s threat. A number of written complaints had been submitted to the firm before Boyle’s departure. All of them chastised Pru-Bache, and none made claims against Boyle. In fact, some of the submissions actually praised Boyle for his assistance.
But Prudential-Bache reported the matter somewhat differently on Boyle’s permanent record, maintained by the National Association of Securities Dealers. The firm said that the claims were submitted against Boyle, who was alleged to have deceived the clients about the Risers. Boyle learned of the firm’s false statement when he was informed that he was under investigation by the New York Stock Exchange because of the claims. It would take months for him to be cleared.
To the brokers of Prudential-Bache, the message was clear: Don’t take on the firm.
It was a critical message for senior officers to convey. Controversy could smudge the firm’s image. A bad image might cut the price Pru-Bache could fetch if it was sold. And at that moment, the firm, in whole and in part, was secretly on the block.
By 1989, the Blackstone Group was one of the most respected of the boutique investment banks sprouting up all over Wall Street. The firm was founded a few years before by Peter G. Peterson, the former chairman of Lehman Brothers, along with one of his Lehman colleagues, Stephen Schwarzman. Whenever a company was being shopped, there was a good chance some information about the proposed deal would pass across the desks at Blackstone.
That year, Schwarzman received a telephone call from one of his fellow investment bankers at Lazard Frères & Company. The Lazard banker had a proposal: Would Blackstone be interested in buying the arbitrage department of Prudential-Bache?
Schwarzman rejected the offer out of hand. He didn’t even ask to see any documents on the proposal. He hung up and thought nothing of the call. So Prudential Insurance was trying to sell pieces of its brokerage firm. That came as no surprise. It was Wall Street’s worst-kept secret. After seeing Pru-Bache racked by a decade of losses, Prudential Insurance would be remiss if it didn’t try something new.
In truth, the attempt to sell pieces of the firm was only the beginning. Prudential Insurance finally was launching a full-scale attempt to turn its huge losses around. It had even set up negotiations with a competitor, Paine Webber, about merging the two brokerage firms. Prudential Insurance wanted out—if not of the whole business, then at least a large part of it.
George Ball set a thirty-seven-page document down on his desk. At that point, in January 1990, it was the most secret set of papers in all of Prudential-Bache. Ball had demanded that the document be written. Only a small handful of his most trusted executives knew about it. Ball was pleased with the results. In a document just an inch thick, every important financial detail about Prudential-Bache was laid out.
Ball thought it was an excellent private investment memorandum. On its cover, the document was simply called an “information package.” Regardless of its name, the document meant one thing: George Ball was trying to find new investors for Prudential-Bache. He wanted some financial institutions to take over part of the role being played by Prudential Insurance. After reviewing the potential candidates with his trusted advisers, they decided to send the document to a few German and Swiss banks that would be likely candidates for investing in a brokerage house. If any of the banks were interested, the firm would send them more information. Otherwise, the recipients had to return the document to Prudential-Bache or destroy it. The last thing Ball wanted was to have extra copies floating around.
The information package had high praise for the performance of the firm—it described Prudential-Bache as “the largest sponsor of public limited partnerships in the U.S.”—but failed to mention the investor losses. It ignored the monstrous, unrealized liabilities that were washing up relentlessly. In essence, it told nothing of the firm’s unfolding disaster.
Ball’s attempt to find a new outside investor for Prudential-Bache had all the earmarks of a last-ditch effort to stave off the inevitable. Prudential Insurance had injected well over $1 billion into the firm during his reign. All the Pru had to show for it was the endless stream of losses. A
lthough the Direct Investment Group had pulled in money, overall the firm just seemed to hemorrhage cash. Ball’s credibility in Newark was suffering greatly. Some executives believed Ball hoped another investor would lessen the financial pressure on Prudential Insurance. Apparently he was hoping to create a new master and save his job. And the evidence was growing that his time was running out.
Ball had heard rumors that the executives in Newark were trying to sell Prudential-Bache. He even heard that Lazard Frères had been retained for the job. He worried that Prudential Insurance might be getting ready to dump the firm and walk away.
But he felt better after speaking with Garnett Keith and Bob Winters, Prudential’s chairman. He told them about the Lazard rumor he had heard and asked if it was true. Both Keith and Winters told Ball not to worry. He still had the full confidence of Prudential. There was nothing to these rumors about Lazard, they told him.
Meanwhile, Lazard continued contacting prospective buyers.
Just four weeks after the information package had been sent to the German and Swiss banks, the whole effort seemed to have been a bust. Not a single positive response came back. After copies of the packet were returned from all over the world, Ball tried a new tack.
On February 7, 1990, he met with Jean-Louis Lalogeais, a respected specialist on the securities industry who worked with Booz, Allen & Hamilton, a consulting firm. The time had come for action, Ball told Lalogeais. Prudential-Bache had to focus on its core businesses. The noncore businesses had to be profitable, or else they would be cut off.
With that, Ball began discussing the entire portfolio of the firm’s businesses, labeling each as either “core” or “not core.” He listed retail sales, risk arbitrage, merchant banking, and equity underwriting as core businesses. But he also ticked off the names of some businesses that he clearly thought would soon be going by the wayside if they didn’t make money: public finance, investment-grade debt, foreign exchange. At one point, Ball made a statement that turned around the attitude of the last decade and signaled the failure of one of his central strategies.
Serpent on the Rock Page 45
