Darr remains comfortable financially. Each quarter, as provided in the contract he struck in the 1980s, Prudential Securities pays him part of the cash flow out of a huge number of partnerships. In 1994 alone, he received more than $200,000 from the partnerships. And that was a bad year; since 1990, the firm has cut him checks for well over $2 million, cash that could have gone to the investors whose lives he helped to destroy. Those payments will likely remain a steady source of income for a long time. Under his contract, Darr should continue to receive his huge checks, every few months, well into the next century.
AFTERWORD
THE PUBLICATION OF Serpent on the Rock in the summer of 1995 brought new troubles to Prudential Securities. In particular, the book’s disclosure of Prudential’s continued payments to Darr proved a major embarrassment for the firm. Plaintiffs’ lawyers who had sued the firm demanded details of Darr’s financial deal. More negative publicity hit, with news reports across the country describing Darr’s lucrative arrangement. After believing that the cloud of scandal had almost passed, Prudential yet again was being condemned as disreputable.
“It’s almost impossible to put into words how that information hits someone,” Linda Myers, a partnership investor, said of the payments in an interview with CNN. “It’s unconscionable. And for them to continue this charade is just beyond the realm of even discussion.”
Prudential executives conceded to reporters that Darr was still being paid but said that the firm was legally obligated to do so.
“Under the contract we had with Jim Darr, he has been receiving residual payments from the limited partnerships,” Charles Perkins, a spokesman for the firm, told the New York Times in July 1995. “We have no choice but to honor that contract.”
Within days, Darr’s payments were the subject of numerous discussions at the highest levels of Prudential Securities. The firm’s top officers had long been uncomfortable making the payments; Hardwick Simmons, the chief executive, found it particularly distasteful. He had consulted the firm’s lawyers, asking if there was any way the payments could be stopped. The lawyers told him that, no matter how unpleasant it was, the firm was contractually obligated to keep paying Darr the money.
But in July, as the time came to approve another payment to Darr, Simmons simply could not stomach it. After talking about it with some of the firm’s other senior executives, Simmons made a decision: Prudential was not going to pay. Ever again.
Almost eight years after being forced out of the firm, Darr finally had been cut off. Almost a year later, although his lawyer complained to Prudential about the decision, Darr had not sued for the money.
In August 1995, Prudential was hit by a new setback: For the first time, a broker successfully sued the firm by arguing that Prudential’s lies about the partnerships had destroyed her business.
The broker, Betty Allen, had sold more than $12 million worth of partnerships over seven years while working in Orlando, Florida. By 1993, the accounts of her best customers were in ruins. More than forty customers sued, naming Allen in their complaints. The loss of business, coupled with the complaints on her employment record, crippled Allen’s job prospects in the securities industry. When she sued, she argued that Prudential was legally responsible for the damage.
An arbitration panel agreed with Allen in August 1995, awarding her more than $327,000. The decision was big news among the firm’s brokers who had sold partnerships. Many of them had seen their careers suffer the same fate as Allen’s. Some had already filed suit and now believed they could win. Others planned to sue and sought out lawyers.
Even as brokers were readying their cases, another class action came to Prudential’s rescue. In August, the same month as the loss in the Allen case, Prudential agreed to pay $110 million to settle the last class action stemming from the partnership debacle. It had been filed months before on behalf of investors who, for whatever reason, had not received money from an individual lawsuit or the regulatory settlement fund. Unlike other Prudential class actions, this one appeared harmless. After all, without it, the investors would never get any of their investment dollars back.
But once again Prudential proved itself to be shrewder than the clients and brokers it had defrauded. The firm negotiated the terms of a long, legalistic notice of settlement that was sent to investors around the country. As in the class actions that came before, anyone who did not want to take part in the settlement had to opt out by notifying the Federal District Court in Manhattan, where the case was filed. The deadline for the opt-outs was October 30. Included in the notice was a little-noticed phrase saying that anyone who did not opt out in the case would have all of their claims stemming from the partnership sales wiped out.
And so the trap was set. With the way the notice was written, even investors and brokers already suing the firm could be forced to accept the class-action settlement as long as they failed to opt out. All Prudential needed was for the arbitrations on those suits to continue past October 30.
In the days leading up to the opt-out deadline, Prudential lawyers moved to extend arbitrations that were hours away from completion. Then when the deadline passed, Prudential declared the case settled and threatened to seek contempt charges against the opposing lawyers if they attempted to proceed with the arbitration.
In numerous cases, Prudential declared the lawsuits settled even if the plaintiffs had never received a copy of the class-action notice telling them of the need to opt-out. At the same time, many brokers with employment claims similar to Betty Allen’s case were told that their cases were over as well. Those brokers had invested some of their own money in the partnerships, and Prudential declared that the class-action settlement eliminated all investor claims—even if it was a job-related action.
The tactic was devious but perfectly legal. By outfoxing the clients and brokers it had lied to, the firm saved itself millions. But the plaintiffs’ lawyers saw it as another despicable move by the firm to avoid making good to the people it cheated.
“It’s absurd and ludicrous,” said Phillip J. Duncan, a lawyer trying a case that was tossed out of arbitration because of the tactic just hours before the hearing was to have ended. “It’s hitting below the belt, at the eleventh hour, to ensure that people get knocked out of their day in court.”
Indeed, for many of the plaintiffs’ lawyers, the maneuver showed that, despite all its protestations of being a reformed firm, Prudential had changed very little.
“It’s the same scorched-earth tactics they have been using for years,” said Seth Lipner, a securities lawyer who brought a number of partnership cases against the firm. “Despite all their talk of being a new Prudential, they still won’t deal honorably with the victims of their fraud.”
By June of 1996, the final mop-up of the Prudential scandal was under way. The regulatory settlement fund established by the SEC and the states had resolved most of the filed claims. The investors who had been defrauded either had received their settlements or were uncomfortably adjusting to a life with fewer dreams. Many of the brokers had moved on—to other firms, to other careers. Some were still trapped in the past, raging about the wounds inflicted on them by their employer and each day plotting a new and probably hopeless strategy for revenge.
Meanwhile, the federal government continued to move slowly toward bringing actions against those responsible for the scandal. The SEC in particular was actively investigating executives involved in the debacle; a wide number of executives had been informed that the agency intended to bring charges against them. Coordinating the multiple cases proved more complex than investigators had thought, but the first complaints or settlements involving individuals in the Prudential case were expected by the fall.
The investigation by federal prosecutors appeared far less active. One of the main prosecutors in the case had resigned from the United States Attorney’s office in 1995 to take a job with a law firm that specialized in class actions. By then, even potential defendants in the case were saying they w
ere not much concerned about the criminal investigation. By all appearances, it was dormant. But, in the spring of 1996, the prosecutors stepped up their interviews of witnesses, offering assurances to some that action would be taken soon. But ultimately no charges would ever be brought against anyone involved in the partnership scandal.
For Prudential Securities and its parent, Prudential Insurance, the final toll from the partnership scandal was still being assessed. Largely as a result of the scandal, the insurance company lost more than $900 million in 1994. The poor earnings pushed Prudential Insurance to announce a massive revamping in the fall of 1995. Businesses that had once run independently would be reined in; the home office in Newark would have far greater involvement in daily operations. As many as two thousand Prudential employees would be fired or transferred for the restructuring.
But Prudential lost something far more valuable in the partnership debacle than all its corporate and financial costs. It is almost impossible to overestimate the value of the reputation once associated with the name “Prudential.” Because of its reputation for trustworthiness, doors that would be closed to other names opened widely for Prudential. But in pursuit of short-term profits, Prudential executives abused the name, and the company’s once-stellar image was tarnished forever. Once damaged, a reputation, much like a fine piece of crystal, can never be restored to its original brilliance.
Nor, apparently, does it deserve to be. Indeed, in the end, the fast-buck, hard-sell mentality of the firm may have been simply a reflection of the modern ethos of its parent, Prudential Insurance. In July 1996, Prudential Insurance settled charges that it had engaged in a wholly different scheme, frighteningly similar to the partnership fraud: Over many years, its insurance agents had tricked customers—including the elderly—into replacing their life insurance at added cost for no benefit to anyone but Prudential itself.
In its settlement with thirty state insurance regulators, Prudential Insurance agreed to pay a record fine of $35 million and to compensate the victims of the new fraud, whose numbers potentially reach the millions. The total cost is expected to run as high as $500 million.
With a record like that, it is little wonder that across Wall Street, the name “Prudential” became a conversational shorthand for abusive practices and hardball legal tactics. Executives at competing firms often pronounced how they wanted to avoid the missteps that might make them be perceived as similar to Prudential. Indeed, other sellers of limited partnerships, including those with defenses far more credible than Prudential’s, moved quickly in 1996 to settle the claims arising from that business. New York Life Insurance Company announced in early 1996 that it would liquidate $396 million worth of limited partnerships it had sold and repay every investor. The company quickly won praise for sidestepping Prudential’s strategy. Paine Webber announced that it would pay $230 million to resolve investor claims stemming from its partnership sales; in public comments, the firm expressed deep regret for the past practices and unacceptable behavior that led to improper sales. The settlement and the starkly honest comments, executives with the firm said privately at the time, were a conscious effort to avoid appearing like “another Prudential.”
For those not working at Prudential, Wall Street’s most destructive scandal contains some seeds of hope. After witnessing the damage Prudential caused itself, and the price that was paid for short-term strategizing, the optimistic believe that Wall Street has learned a painful lesson. But the hope is folly. As long as there is greed, as long as crimes go unpunished, as long as Wall Street can make millions even if clients lose money, the scandal at Prudential will be just another chapter in an ongoing saga of financial fraud. The next chapter will begin without warning, and it will not be about partnerships. Some financial company will offer up another investment that will leave its clients’ accounts ravaged and their dreams of the future destroyed. If history is any guide, that is a certainty. The only questions are: Who will do it next time? and When?
NOTES AND SOURCES
This book grew out of my coverage of the Prudential scandal for the New York Times over more than two years. It is based on more than six hundred interviews, many of which were tape-recorded, as well as hundreds of thousands of pages of documents. The interviews were conducted with a range of people with firsthand knowledge of the events described, including many of the principals. Still, some were not prominent players on Wall Street, and their names might be unknown even to some participants. They were in the position of the cat watching the queen—seeing all, but taking part in nothing.
Nearly all of the interviews for the book were conducted on condition that my sources not be identified. The requests were understandable— many of these sources still feared potential criminal indictments or were subject to investigation by the SEC. A number of others had never been contacted by the government but worried that, if identified, they would be caught up in the ongoing Prudential litigation. Still others work in the securities industry and worried about potential retribution.
The documents included personal diaries, marketing material, internal memos and letters, investigative reports and notes, corporate filings with the Securities and Exchange Commission, police and coroners’ records, telephone logs, personal expense files, medical reports, military records, sworn statements and testimony, court filings, video recordings, as well as newspaper and magazine articles and books.
Some executives involved in these events for their own reasons felt compelled to secretly tape-record their colleagues. A number of those audio recordings were obtained for this book. Most references to those recordings in these notes are purposely oblique to protect the confidentiality of sources.
Through Freedom of Information Act requests, I obtained records and testimony from several SEC investigations of Prudential. In some instances, those FOIA requests were denied because the information involved an ongoing investigation. Through other sources, I obtained SEC testimony from those continuing inquiries, including the depositions of James J. Darr, Anton Rice III, William Petty, and others.
Descriptions of individual settings come from interviews, documents, or my personal observation. Most details of weather conditions are taken from the records on file with the National Climatic Data Center.
All dialogue and quotations come from participants or witnesses to the conversations, documents that describe the discussion, or recordings and transcripts of the actual words. In a few rare instances, secondary sources were reliably informed of a conversation by a participant. If these secondary sources agreed on what they were told, the dialogue was used. Such dialogue never amounted to more than a single statement, and was never incriminating. Because of the many sources used in reconstructing dialogue, the reader should not assume that any individual participant in a conversation is the source of the statement, or even among the sources.
Of course, these reconstructions of conversations, taking place over more than a decade, are not a transcript of the event. I do not claim that the statements quoted are the exact words used by the participants. They do, however, represent the best recollections of those words and more accurately reflect reality than mere paraphrase would.
When someone is described as having thought or felt something, the description either comes directly from that individual or from someone to whom the person in question directly described it. Sentences in italics involve thoughts by an individual that were described by that individual to me or to someone else who spoke with me.
As could be expected, disagreements arose about certain details of precise events. Over a decade, memories cloud. People remembering the same event at times would offer conflicting information about things such as dates and locations. In each such case, I endeavored to find documentary evidence that would support one version of events, or use other related interviews to fix time frames and locations.
For an allegation of wrongdoing, denials are cited on the page in which it is described. The documentation that led to the author’s conclu
sion is then described in this section.
Most allegations of wrongdoing come directly from sworn statements and other records of trials, arbitrations, government investigations, and congressional hearings. In those instances where no sworn statements or court records existed, I obtained original documents or other corroborating evidence supporting the descriptions of those events.
PROLOGUE
1–4: Details of Fannie Victor’s investments and the circumstances surrounding the loss of her condo were disclosed in the transcript of the November 30, 1993, proceedings in Victor v. Prudential Securities , arbitration no. 93–00160.
In January 1994, her broker, Stephen Ziomeck, was censured by the New York Stock Exchange for his inappropriate sales of limited partnerships to his customers. The decision, number 93–156114, involved customers other than Victor. Ziomeck, who agreed to be suspended from the exchange for four weeks, settled the charges.
4–6: The connection between Piscitelli’s physical and mental problems—including his thoughts of suicide—and the Prudential partnership scandal comes from interviews and from a series of medical reports. Those documents include a November 10, 1993, report by Dr. Mark S. Lipian, a psychiatrist; a November 10, 1993, report by Dr. Dominick Addario, a psychiatrist; periodic progress reports by Dr. M. Gene Ondrusek, a psychologist; and an April 26, 1993, report by Dr. James R. Nelson, a neurologist.
Dr. Lipian’s evaluation was conducted at the request of Prudential Insurance because of Piscitelli’s disability claim. In his report, Dr. Lipian summarized the findings of Piscitelli’s other health care professionals, saying, “When Mr. Piscitelli attempts to function in his capacity as a Prudential Securities broker, and is confronted with the stress of not only the normal duties involved in this profession but also of the legal entanglements surrounding current government investigations into Prudential’s alleged misconduct, the stress becomes overwhelming and Mr. Piscitelli becomes unable to function. . . . The general consensus among these professionals, however, seems to be that removed from the stress of Prudential’s current legal entanglement—placed in an equivalent vocational position without the legal hassles and without the bad feelings surrounding his Prudential experience—Mr. Piscitelli would do fine.”
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