Serpent on the Rock

by Kurt Eichenwald

  Eisle pointed his finger at Creedon and began jabbing it as he spoke.

  “If you dare tell your clients about their legal options, you will be fired,” he snapped. “Do you understand? You will lose your job and that will be the end of that.”

  Eisle stood up from his desk and walked up close to Creedon. “And don’t think you can sneak around me either. If a bunch of your clients start showing up with attorneys, you’ll still be fired. So sit down and keep quiet.”

  Creedon stared straight at Eisle. “This is wrong, John,” he said, “and I can’t do it. I think you and the firm are making a big mistake.”

  Creedon spun around and stormed out of Eisle’s office. In his mind, his job was over. If he couldn’t help his clients while working at Prudential-Bache, then he would have to quit. It was the same decision Gene Boyle had made over Risers a few months earlier.

  The wall of silence was falling, one broker at a time. But the most important defection was yet to come. It was the one that would begin to expose the secrets of Graham Resources.

  The Four Seasons Hotel was one of the most popular lunch spots for the brokers in Prudential-Bache’s Houston branch. Besides the image of elegance that the name projected, the hotel’s restaurant, with its buffet luncheons, was conducive to one-on-one business meetings. Better still, the Four Seasons was directly across the street. Brokers could get there from the branch by walking through an underground tunnel, without going outside. With Houston’s blistering summers, that alone would have made it popular.

  In August 1990, Joe Siff, a broker in the office, decided that the Four Seasons would be the perfect place for a lunch meeting with one of his clients, Daryl Bristow, a prominent Houston lawyer. Siff hoped to spend the lunch discussing some investment ideas.

  Siff arrived at the Four Seasons with anxiety clearly evident on his face. He had sold more Graham partnerships than almost any broker at Prudential-Bache. He had believed everything he had read in the marketing material and thought that the partnerships were safe, secure investments. He had been particularly enamored with the growth funds, and had persuaded many of his clients to purchase those partnerships. But when distributions went down even as oil prices went up, Siff had begun to believe that something had gone terribly wrong. Half of Siff’s day was spent answering questions about why the partnerships were not performing as projected. Many of his clients, including some of his most important ones, refused to do business with him anymore.

  Bristow arrived shortly after Siff found a table. They chatted for a few minutes and headed for the buffet. Bristow could see that something was disturbing Siff. They returned to their table, plates full, and Siff asked a few questions about Bristow’s law practice. The lawyer mentioned with obvious pride some cases he had recently won for plaintiffs. Then he asked Siff how his business was going.

  “I’m drowning,” Siff said. “A lot of my day is spent taking questions from clients. And I can’t get answers for them. They want to know why their partnership investments are doing so badly.”

  “Well, what do you tell them?” Bristow asked.

  “To be honest, I don’t have an answer. Every time I try to get one from the people at Prudential-Bache, or from the general partners, all I hear is a lot of double-talk. No one’s being straight.”

  Bristow just listened. Siff could already see the wheels starting to turn.

  “And, Daryl, it’s not just me,” Siff said. “I’m talking to brokers all over the country who are having the exact same experience. My only asset is the time in my working day. And, by not answering my questions, that’s being usurped by the very management that’s supposed to be supporting me. All they’re doing is undermining me.”

  Siff knew that he sounded as if he were whining. But he didn’t care. This was the first chance he’d had to get his frustrations off his chest. After a few minutes, Bristow looked at him with a deadly serious expression.

  “Joe, it sounds to me like you need to decide who you work for,” Bristow said.

  “What do you mean?”

  “You need to decide if you work for the firm, or if you work for your clients.”

  For an instant, Siff felt a little offended. “Well, you’re one of my clients,” he said. “Who do you think I work for?”

  “I know what the answer is, but I don’t think you’ve thought about the question.”

  “I think about it every waking moment of my business day. I’m working as hard as I can.”

  “That’s right, Joe,” Bristow said. “You’re working so hard for your clients that you’re going to have to leave the firm.”

  Bristow’s words were like a splash of cold water. Until that moment, Siff had always considered himself a loyal company man. He had worked at the firm since 1979, when it was just plain old Bache. He’d ridden through the silver crisis, the Prudential purchase, the Capt. Crab scandal, and he always came out still loving the firm. But Bristow’s words made him realize that he had finally reached the end. If he was going to help his clients, he had to leave.

  “You know, Daryl, a lot of my clients know that I have a lot of lawyers in my client base,” Siff said. “They ask me sometimes if I can recommend a lawyer to them. Would you mind in the future if I gave them your name?”

  “Not at all.”

  Siff looked down at his food and thought for a moment. “One other thing, Daryl.”

  “Yes?”

  “Would you represent me? I think I’m going to need some help. Something really rotten is happening here, and I don’t want to get hurt.”

  Bristow smiled. “Of course I’ll represent you, Joe.”

  The luncheon meeting at the Four Seasons set off a snowball effect. Over the next few weeks, Siff referred a number of his clients who had invested in the Graham partnerships to Bristow. In turn, he showed his new lawyer certain marketing materials the firm had distributed.

  Bristow took the information to one of his partners, Stephen Hackerman, a lanky, soft-spoken Texan with a talent for digging through financial records. Based on their conversations with Siff’s clients, as well as a review of the documents, they decided to focus their investigation solely on the energy growth funds. Those partnerships seemed like a much clearer case of fraud, and Bristow did not want to bite off more than his firm could chew.

  About the same time, Siff received a telephone call from William Webb, another big seller of Graham partnerships. Webb, who worked in the Prudential-Bache branch in Fort Myers, Florida, told Siff that he needed help. For years, ever since the fraud in the growth funds became evident to him, Webb had secretly been telling his clients to seek legal advice from a New Orleans law firm called Adams & Reese. He hoped that the lawyers there would use his clients to launch sweeping litigation that would crack open the secrets of the growth funds. But nothing seemed to be happening. He wanted to find a new law firm.

  Webb told Siff that he needed lawyers for his clients and himself. Siff set up a conference call with Bristow. By the end of the call, Webb agreed to recommend the Houston law firm to his clients. He also agreed to retain Bristow himself. After all, by destroying his client base, Prudential-Bache had defrauded him, too.

  With Bill Webb, Bristow obtained a critical advantage. Not only did the broker have one of the largest number of clients invested in the growth fund, but he had been collecting documents on the partnerships since he first became suspicious in 1988. He was a walking warehouse of evidence and plaintiffs.

  After looking over Webb’s evidence, Bristow and Hackerman thought they had a great case on the growth fund. But they needed more information about Prudential-Bache itself. They had heard about a lawyer in Atlanta named Boyd Page who had a reputation as a nemesis of the firm. In mid-1990, Hackerman decided to place a call to Page. Maybe, Hackerman thought, Page might be able to help out. Maybe they could even join forces.

  Getting sued by Prudential-Bache was one of the best things that ever happened to Page & Bacek. The news of the lawsuit had been reported in some b
rokerage industry newsletters. Within a few weeks, the floodgates opened. Scores of Pru-Bache brokers and executives, most of whom would have never heard of the small Atlanta law firm, began contacting Boyd Page. Documents were arriving by the carton. Almost every day, Page had new, previously unknown evidence of wrongdoing at the brokerage firm. It was as if by suing the law firm, Prudential-Bache had placed a stamp of approval on Page & Bacek for the hundreds of bitter, angry brokers and managers who no longer trusted their superiors. Schechter’s foolish legal strategy had transformed Page & Bacek from an annoyance into a national clearinghouse for damaging information about Prudential-Bache.

  Even better, the lawsuit itself was proving to be a joke. One of its big claims was that Page had damaged Pru-Bache’s reputation. But with all the evidence Page had found of crimes and fraud in the Direct Investment Group, it was clear by the fall of 1990 that the firm’s reputation deserved to be far worse than it was. Page & Bacek countersued, charging that the original lawsuit was part of a racketeering conspiracy by Prudential-Bache to cover up its dark past.

  Prudential-Bache’s lawyers spent months trying to find out what Page knew by seeking access to his documents and by deposing members of his firm. It was all largely a waste of time. The lawyers walked away with only a small number of documents, and the depositions provided little helpful information.

  Then it was Page’s turn to start taking statements. Notices for depositions were delivered to midlevel members of the law department as well as a number of senior officers of the firm, including Schechter and Ball.

  On October 9, 1990, Schechter flew down to Atlanta for his deposition. It started at 5:00 P.M. Over the next two and a half hours, as he was questioned by William Sumner, the lawyer representing Page & Bacek, Schechter would learn that Page had uncovered some of the dirtiest secrets of Prudential-Bache.

  Sumner produced a document that showed that Pru-Bache was paying someone involved in the case, even though he did not work for the firm. Under questioning, Schechter said that he personally had authorized the payments as part of a consulting agreement. The questions roved through a number of details about Risers and about personnel problems at the firm.

  Then the bombshells started dropping, one at a time.

  “Who is James J. Darr?” Sumner asked.

  Schechter provided some background about Darr. Sumner then moved on to some questions about Sherman. It seemed he was done with that sensitive topic.

  Then it came back.

  “Have you ever had the occasion to investigate Mr. Darr’s business relationship with the First South Savings & Loan of Arkansas?” Sumner asked.

  “I believe so,” Schechter said. “At one point in time, I directed an inquiry be made into Mr. Darr’s relationship with that institution.”

  Sumner produced certified copies of Darr’s first and second mortgages from First South. Schechter looked at them and said he had never seen them before.

  “What was the conclusion of your investigation into the relationship between Mr. Darr and First South?”

  Schechter said that he had the matter investigated and that nothing improper had been found in the mortgages.18

  “Have you ever received any information concerning the payment of monies to Mr. Darr by First South S&L by virtue of the refinancing of his home?” Sumner asked.

  Schechter replied that he only knew that Darr had a mortgage.

  “Well, does Prudential-Bache intend to file suit against Mr. Darr or Mr. Sherman?” Sumner asked.

  Schechter said no. With that, the deposition came to an end.

  A week later, just before the scheduled deposition of George Ball, the case was settled. Page & Bacek walked away with pocketfuls of cash. Prudential-Bache required that the terms of the settlement forever remain secret.

  The first picket sign from a partnership investor outside of Prudential-Bache’s Manhattan headquarters came in November 1990. Newspaper reporters and television cameramen crowded the sidewalk outside the building as they interviewed the protester, Eloise Burg, a sixty-one-year-old Florida widow. Burg had lost more than $600,000 in limited partnership investments. But unlike some of her fellow investors who suffered their losses quietly, she refused to stay silent. Instead, she walked back and forth on the sidewalk outside the firm, carrying a sign that read “Prudential-Bache has financially and immorally raped me. Investors beware!”

  Burg told reporters her story again and again. She had invested the money her husband left her and asked for safety. She had been pushed into limited partnerships and lost most of it. When she made a claim against the firm, an arbitration panel awarded her only $45,000. She complained to the firm, but executives there would hear none of it. As far as they were concerned, the case was closed.

  With her protest, Burg accomplished something that few other people had: She forced reporters from a range of newspapers and television stations to finally tell part of the story from the partnership debacle. Her protest was widely covered in the East Coast press, appearing in the New York Post, the Daily News, and a number of Florida newspapers. The story went national when the Wall Street Journal reported it. Investors who might not have seen Burg in the newspaper had the chance to catch her on television after Cable News Network videotaped her protest for its Moneyline program. She vowed repeatedly not to rest until Prudential-Bache returned all of her money.

  In interviews, Pru-Bache executives attempted to play down the controversy Burg was setting off. Schechter dismissed her as part of a “vocal minority” among the firm’s huge number of investors. Still, when executives attempted to persuade her to come inside to talk, she refused.

  Instead, she continued her picketing, and the matter became a fight in the press between her and Prudential-Bache. She said that her broker had told her the partnerships were as safe as certificates of deposit. The firm announced that the broker denied saying that.

  Eventually the pressure on Prudential-Bache became too great. After several months of protesting, Burg was invited to visit with Schechter personally. He offered her full restitution. The picket in front of the firm immediately disappeared, as did the terrible publicity. It seemed like Prudential-Bache got its money’s worth.

  Steve Hackerman’s decision to call Boyd Page had paid off. The two law firms began swapping documents, helping them both fill in a number of evidentiary holes. By the fall of 1990, Page had teamed up with Hackerman and Daryl Bristow to represent more than two hundred clients in litigation against Prudential Securities. With their combined information, they knew more about the frauds that had emerged from the Direct Investment Group than almost anyone in the country.

  At the same time, Bristow and Hackerman pursued the growth fund litigation, filing suit on behalf of a client for access to the partnership investor lists. Even though, under the partnership agreements, the lists had to be turned over on an investor’s request, Prudential-Bache refused. The firm knew that with those lists, Bristow and Hackerman could prospect for more clients and increase the firm’s liability. But despite a strong fight, Pru-Bache’s arguments failed. The court ruled that the firm had to abide by its agreements. It turned over the lists.

  The attempt to take the offensive with plaintiffs’ lawyers had obviously not worked. The law department went back to attacking the brokers.

  Bill Webb picked up the message slip that his secretary had left on his desk. It was marked “urgent” and was from Emerald Johnson, a member of the Prudential-Bache law department. Webb dialed the phone and reached Johnson on the first try. She needed something from him, she said.

  “You’ve got to box up all those sales materials and everything else you have on growth fund one and two and get it up to us right away,” she told him.

  Webb sighed. Every day of that week in November 1990, he had been getting the same message. With all the lawsuits coming from his clients, the law department seemed eager to dig into the information. But Webb couldn’t understand why they needed it so badly from him. It wasn’t as if th
e materials sent to Florida weren’t also sent everywhere else in the country. And Webb had simply been too busy.

  This time, he thought he had a simple solution.

  “Well, I’m meeting with some lawyers from Prudential and Graham on Monday,” he said. “I’ll just give it to them then.”

  Johnson agreed and hung up. Webb was getting tired of all the lawyers and all the meetings. The one scheduled for Monday had been arranged by Jane Hewitt, one of Prudential-Bache’s lawyers from Davis, Polk & Wardwell, the prestigious New York law firm that was handling the partnership mess. Robert Fiske, one of the firm’s senior partners, was the lawyer in charge.19 Hewitt had told Webb that she wanted to review with him how the growth fund had been marketed. The whole meeting made no sense to him—just a few months before, the lawyers had interviewed him for several hours on just that topic. He thought the whole thing was a waste of time.

  On the night of November 12, a group of lawyers arrived at the Fort Myers office to speak with Webb. He was late for the meeting, and nervous. He quickly realized that the supposed reason for the meeting had been a lie. The lawyers spent only a couple of minutes talking about marketing. Instead, they wanted to ask him about Daryl Bristow and Adams & Reese.

  Hewitt was joined by Frank Massengale, a lawyer for Prudential-Bache, and Stephen Kupperman, a lawyer for Graham. As the questioning began, Kupperman pulled out a sheaf of papers that listed Webb’s clients.

  “Bill,” Kupperman said. “All of these clients have filed lawsuits against the firm. I’d like to ask you some questions about them.”

  “All right.”

  “Now, five of these clients have all hired the same New Orleans law firm,” Kupperman said. “Do you know how that happened?”

  Webb’s face went red. He felt like he’d been caught.

  “Wh-what do you mean?” he stammered.

  “How is it that five retirees from Florida all retained the same New Orleans law firm?” Kupperman asked.

  Webb took a deep breath. “They asked me for a recommendation. I heard the name of Adams & Reese and passed it on.”