Hawkins said he was calling about Simmons’s comments to the brokers and wanted to know what Klein thought. Klein replied that Simmons appeared to be under pressure from brokers leaving the firm. In Boise alone, Klein said, a branch manager at a competing firm had sent letters to top Prudential Securities brokers inviting them to switch employers.
But, Hawkins asked, was Simmons telling the truth when he said that a global settlement was near?
“We have had no face-to-face negotiations with Prudential,” Klein said. “So any talk of a global settlement is just that: talk.”
Hawkins scribbled down the words, instantly knowing that he had a story.
Why would the firm pronounce that the deal was almost done if they hadn’t even negotiated with the states yet? Hawkins asked.
“It may very well be that they don’t think we can stop a freight train,” Klein replied.
By Labor Day, the broad outlines of the SEC settlement with Prudential Securities were done. The firm would put less than $300 million down as the floor for the compensation fund. It would consent to findings of massive securities law violations not only in the Direct Investment Group but also in nine branch offices around the country. On top of that, it would accept a finding that it had ignored many of the requirements of the Capt. Crab settlement. This time, a court order would be put in place requiring compliance. If it ignored the terms again, Prudential Securities would face contempt charges. The enforcement staff sent the proposed settlement up the line for approval by the SEC commissioners and its chairman.
In September, the answer came back. The commissioners were rejecting the settlement terms. They wanted the firm to pay more up front: $330 million for the fund plus a $10 million fine. If the amount put into the fund was not needed, the firm would forfeit the money.
McLucas informed the firm’s lawyers of the commissioners’ demands. The increase in the amount of money wasn’t particularly large, but Prudential Securities’ management was livid. The firm’s lawyers demanded that McLucas and the enforcement staff meet with Woody Knight, the head of corporate strategy and one of the firm’s top executives. They agreed, and within days, Knight flew down to Washington. He arrived with a retinue of lawyers.
“The numbers you’re talking about are just out of the ballpark,” Knight told the SEC lawyers. “They’ve got no basis in reality. We’ve done a comprehensive internal risk analysis, and our maximum total exposure here is, at worst, $200 million. This $330 million number is ridiculous.”
McLucas just shrugged. It wasn’t up to them. Their client was the commission, and the client had demanded $330 million. That was the price.
It wasn’t right, Knight complained. All this was doing was taking money out of Prudential Securities and shipping it to the Treasury. This settlement was supposed to be about repaying investors. These numbers had nothing to do with that.
McLucas wouldn’t budge. Knight and his lawyers left, saying that they would consider the situation and be back in touch.
Later that week, McLucas heard from them again. Prudential Securities’ management didn’t like the terms, but they would accept them.
An agreement in principle to settle the SEC charges was complete. Now the firm had to deal with the states.
The five members of the Prudential multistate task force walked out of the SEC’s Washington headquarters and headed for lunch at a nearby Chinese restaurant. That morning, they had been meeting at the commission for a final briefing by the enforcement staff on the federal settlement. If the commissioners approved it, the deal would be done. Negotiations between the firm and the states were scheduled to begin in the next few days.
A sense of expectation hung over the table. The task force had maintained a united front for nine months. They just had to keep that up for the next few days. Because of the mammoth size of the fraud, several regulators had found it easier to focus on what their efforts meant for one individual. Nancy Smith, for example, always kept in mind an elderly widow she met in New Mexico who had lost much of her money in the partnerships. During lunch, Smith mentioned that whatever deal they struck, it had to be something that the widow would see as fair.
Throughout the meal, they planned strategy. After they finished, the waiters came and took away the dishes, leaving behind five fortune cookies. Klein picked one up, opened it, and pulled out the fortune. Then he burst out laughing.
“What’s so funny?” one of the regulators asked.
Klein passed his fortune around. “Is this an omen?”
One at a time, the regulators read the fortune and laughed. Finally, after circling the table, it came back to Klein. With a smile on his face, he looked at the words on the fortune once more.
“Everything will now come your way.”
The final negotiations between Prudential Securities and the multistate task force began the next day in the Grand Canyon Room at the Hyatt Regency in Washington, D.C., just two blocks from the Capitol building.
The mood was somber in the long, narrow meeting room. The states had won several skirmishes, but this was the crucial battle. Without a decent settlement that repaid defrauded investors, their previous victories would be hollow.
Each member of the task force handled a different piece of the negotiations. There were a number of minor terms, such as a demand that Prudential Securities be barred from the partnership business. But the talks became hung up on money very quickly. On top of whatever the firm had agreed to pay for the settlement fund, the regulators wanted fines of $500,000 each for every state, plus Puerto Rico and the District of Columbia. If every state agreed, it would cost the firm $26 million.
Schechter balked. That was too much, he said.
The haggling continued for hours. After a lunch break, Schechter became more resolute. He had contacted executives in New York, he said. They would not accept the fines that the states were demanding. The talks were already approaching a standstill.
“Listen,” Schechter said near the end of the day. “Woody Knight is one of our top executives. He’s in charge of corporate strategy. He’d like to come down here tomorrow and talk to you about this. He wants to explain the numbers.”
The regulators agreed to meet with Knight, and the day’s negotiations ended.
Knight came in the next morning. Right away, his cocksure attitude alienated a number of the regulators in the room. An old friend of Wick Simmons, Knight had been at Prudential Securities only a short time. But already he seemed to personify the firm’s arrogance and lack of contrition for its fraud. He told the task force that their demands were excessive.
“You just don’t understand,” Knight said. “You are asking for way too much money. You’re out of the ballpark. Now, we’ve already taken care of all this with the SEC. That should do it. Didn’t you all know that when we were talking with them, we had an empty seat at that table representing you?”
“Yes,” Schechter interceded. “You were always there with us in an invisible chair. We knew that we had to try to satisfy the things the states were interested in. And we did that.”
Invisible chair? The five regulators did their best not to roll their eyes.
“The SEC was negotiating on the issues that they needed to deal with,” Klein responded. “They don’t speak for us, and can’t speak for us. They do not have that authority, and we’ve made that clear to you from the beginning.”
Regardless of whether there was an invisible chair in the room or not, Klein said, clearly the states’ concern had not been resolved.
“We’re telling you now what it’s going to take in order to bring the states into this,” he said. “Whether you kept us in mind in your talks with the SEC is irrelevant.”
“But everything you’re asking for we’ve already negotiated and settled with the SEC,” Knight snapped, exasperated. “So now you’re trying to take advantage of the best of the SEC’s deal and then add your own terms on top of that. That’s not fair to Prudential Securities.”
The re
gulators said nothing in reply. After the amount of damage the firm had done, none of them was much concerned about what was fair to Prudential Securities.
Lewis Brothers, the Virginia securities commissioner, brought his hand up to his chin. His face seemed to visibly harden.
“We’ve given everything we can,” Knight continued. “You know, some members of the board and some of the top management already think we have given away far more than we have to.”
The room was crackling with anger from the regulators’ side. Brothers’s face stiffened more.
“You know, a lot of them think we should stop taking our lumps and chuck it all, because you’re asking too much,” Knight said. “We’d fight the SEC and we’d fight the states. And we’d win. Most of our partnerships were sold properly. Any problems that happened weren’t systemic and are behind us. They aren’t going to happen again.”
As Brothers cleared his throat, everyone turned to look at him.
“Mr. Knight,” he said softly, his voice tinged with rage, “I’ve been in this business for many years, and over that time I’ve seen lots of frauds and lots of problems.”
He stared straight at Knight as his voice began to tremble. “But I have never seen a problem this egregious, or a fraud this massive, with a major brokerage firm lying to its customers. Do you have any idea what this firm has done? Do you know how much damage it’s caused? Do you know how many lives it has destroyed? It doesn’t give me any solace at all to hear you tell me you won’t do this again. I’ve heard that before from you people. I will not go back to the citizens of Virginia and tell them that they don’t need to worry about all the pain they’ve suffered at the hands of Prudential because the firm says they won’t do it again.”
No one was moving. No one was talking.
“No, sir,” Brothers said. “I cannot go back to my state in good conscience and say that we have accepted anything less than what is on the table right now. This is essential to remedy this problem for the investors in our states and to punish the firm for what it has done. And even still I wonder whether we have gone far enough.”
He pointed a finger at Knight.
“Because, Mr. Knight,” Brothers said, “given everything that it’s done, I question whether or not this firm should be permitted to survive.”
The room was silent. Brothers’s fellow regulators stared at him in awe.
“I think this is a good time to take a break,” Schechter said.
The representatives from Prudential Securities left the room. After an instant, the state regulators converged on Brothers, congratulating him on his eloquence. It was the best statement any of them had heard about the Prudential Securities scandal. For the first time, someone had shot down the firm’s breezy dismissal of the fraud’s magnitude and, instead, underscored its gravity. Perhaps, one of them suggested, Brothers’s speech should be the final point they make in their negotiations.
About twenty minutes later, Schechter returned. Woody Knight was not with him. Schechter said he had left to go home.
“We’re at an impasse,” Schechter said. “You’re just going to have to realize that you’re not going to get what you’re asking for. You need to make some concessions, so I think you ought to consider that overnight and we’ll meet on it again tomorrow.”
“No,” Klein said. “We’ve presented our position. You know our bottom line. We don’t see any value in meeting tomorrow. We’re going home.”
“No, no,” Schechter said. “Let’s get together tomorrow. We can close the distance.”
“No,” Klein repeated. “We’re going home.”
The regulators gathered their things and left the room. The talks with Prudential Securities had broken down.
If the firm did not revise its position quickly, it would be too late. In a little more than a week, the state securities regulators’ fall conference would be held in Orlando. If nothing changed, Klein would have to inform his colleagues that the task force had been unable to reach an agreement.
Then, one at a time, regulators around the country would start to file their lawsuits against Prudential Securities. Many of them were already prepared to pull its license to do business. This game of brinkmanship was pushing the firm precariously close to disaster.
Klein sat alone in his office on the evening of Tuesday, September 21, typing on his computer. The rest of the securities bureau had gone home long ago. He had stayed behind to finish up a progress report for other states on the negotiations with Prudential Securities. It had been less than a week since the talks with the firm had collapsed, and he had heard nothing since. Already Idaho was preparing to file its enforcement action against Prudential Securities. If nothing changed, the brokerage stood to lose its license in the state within a few months.
Klein was finishing up a section of his report when the telephone rang. It was Schechter. He got right to the point.
“All right, we’ve got a deal,” he said. “It’s subject to certain conditions. We want to retain the right to conduct any business we’re permitted to under our license. And we want this settlement to be a general release with the states for all prior activity.”
“Well, there may be some problems with those conditions,” Klein replied. “But we’re a lot closer. I think we have room to talk.”
They agreed to meet in two days in Atlanta so that the regulators could fly to Orlando for the conference immediately afterward.
Klein hung up, feeling a strange sense of detachment, almost as if it weren’t happening. The game of chicken had been tiring. But now it looked like it would all work out.
Maybe this long ordeal is finally over, he thought.
Klein telephoned the other task force members, telling each one to get to Atlanta the next day. On September 23, they gathered in a conference room at the downtown Hilton. They were soon joined by a large team from Prudential Securities, including Schechter, Finley, Mathews, Dan Bell, and Nathalie Maio, the executive who would be in charge of the proposed settlement fund.
The meeting began with Schechter raising all the issues that divided the two sides. After some time, the states agreed to drop the condition that would prevent Prudential Securities from going into the partnership business again. Schechter said that the firm’s new management saw that as an unfair criticism of them, since they were not at the firm when the partnership problems occurred.
Both sides were tense, but they gradually made progress. Finally Schechter raised the last issue: Prudential Securities needed a clean slate. The firm wanted the settlement to include every violation from its past. Essentially, the states were being asked to waive their ability to pursue Prudential Securities for any improper activities that they had not yet discovered.
“We don’t want to do this settlement and then have you come back and hammer us again on something else that might be hanging out there,” Schechter explained.
Some of the regulators wondered if Schechter knew of some other problems at the firm that they hadn’t found yet. But others just assumed that Prudential Securities didn’t trust the motives of anybody on the other side of the negotiating table.
“We can’t possibly sign away our statutory responsibilities like that,” one regulator said. “No one gets a walk on everything just for settling one case.”
“Well, what other issues are out there that the task force is investigating?” Schechter asked. “What else might be coming down the road?”
“It’s not appropriate to get into anything like that,” Klein said. “That has nothing to do with this settlement.”
“Well, how do we know this isn’t just some plan to take one piece out of us and then come back again?” Schechter responded. “We need a general release. Otherwise, we could sit back with a final settlement and then get additional sanctions right after that.”
“I’m sorry, but that’s ridiculous,” Smith said. “That was never on the table in these negotiations. I would have to go back and do an extensive investigation of Prudent
ial Securities for about a year before I could possibly sign off on a general release.”
Schechter looked at Smith with fury in his eyes. “You’re being disingenuous,” he snapped.
“Loren, what are you talking about?” she asked.
“You know!” he exclaimed. “You have an investigation going. You’ve audited a branch. And now you’re just waiting to spring something on us when the settlement is signed.”
Smith stared back at him, floored. Her office had conducted an audit of a New Mexico branch of Prudential Securities many months before. But that was just standard regulatory oversight. Nothing had been found, and there was no investigation.
“Loren, I don’t know what you’re talking about,” Smith said. “But I find your comments to be very offensive.”
Without warning, Schechter suddenly leaped up from his seat. He went red in the face and began screaming at Smith and the other regulators.
“You’re being disingenuous!” he yelled. “You’re dealing in bad faith!”
Smith crossed her arms. “So basically, you’re saying that I’m lying.”
“Well, you know you have this investigation going,” Schechter yelled. “You just don’t want to include it. Then, after we sign this settlement, you’re going to spring it on us and go after our license for this other thing.”
Smith tried to control herself. Never before had her honesty been attacked like this. She couldn’t believe that Schechter was behaving in such an unprofessional manner. It was almost as if the pressure finally caused him to blow.
“I find your remarks incredibly offensive,” she said tersely. “You’re questioning my integrity, and you’re questioning my good faith. And I won’t stand for that.”
Don Saxon of Florida broke in. “I don’t much like what you’re saying either,” he said. “I’ve worked with Nancy a lot, and I have the highest respect for her ethics and integrity. And I’m appalled that you would try and call that into question.”
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