Serpent on the Rock

by Kurt Eichenwald

  5: Many pieces of marketing material for the investment, VMS Mortgage Investors Fund, repeatedly stressed its guarantees and safety. They include the August 15, 1988, DI Sales Action Worksheet from the firm’s Direct Investment Group and “Southwest Region DIG Product Snapshot.” The guarantees and the stress of safety were also made in undated marketing material by VMS Realty Partners, the fund’s general partner. That material includes documents headlined “The Ideal Qualified Plan Investment” and “Let Your Client Be the Banker.”

  6–9: The magnitude, means, and duration of many elements of the Prudential-Bache fraud are discussed in filings by the Securities and Exchange Commission in the case captioned “In the Matter of Prudential Securities Incorporated,” administrative proceeding file no. 3–8209. The agency’s findings are included in the Order Instituting Public Proceedings, Making Findings and Imposing Sanctions, release no. 33082, which was filed as case number 93 Civ. 2164 in Federal District Court in Washington, D.C., on October 21, 1993.

  Also, see United States of America v. Prudential Securities Incorporated. The criminal complaint in that action was submitted to the Honorable Leonard Berkinow, United States Magistrate for the Southern District of New York, on October 27, 1994. Resolution for that case is scheduled for the fourth week of October 1997.

  In the criminal case regarding the firm’s sale of $1.4 billion of energy partnerships, Prudential’s lawyers with the firm of Davis, Polk & Wardwell admit in court filings that the Direct Investment Group knowingly disseminated false information to the brokerage force that was used in the sales of partnerships.

  CHAPTER 1

  15: The effects of May Day on commission rates are described in “Rate War Rages Among Brokers,” New York Times, May 30, 1975.

  25–27: The description of Darr’s encounter with Herb Jacobi comes from a series of secret tape recordings made by an associate of the men and obtained by the author. Further details are provided in “An Early Warning Haunts Prudential,” New York Times, May 2, 1994.

  When first asked about the matter by the author, Darr, through one of his lawyers, denied that he had received any payments. Later, after the author described the checks and deposit slips, his lawyers acknowledged that Darr received money from both First Eastern Corporation and Rothchild Reserve International.

  They said a $50,000 check from Rothchild was for personal consulting and a $30,000 payment from First Eastern was a fee for a leveraged lease airplane tax shelter that was never completed. The author notes that the second explanation is the same as the cover story discussed with Jacobi.

  In both instances, the lawyers said the payments were approved by Josephthal. Former senior Josephthal executives, including Michael DeMarco, in subsequent on-the-record interviews with the author, denied that they had any prior knowledge of the payments. These executives also said they never would have approved them because of the conflicts of interest they created.

  Darr declined to be questioned personally by the author about the payments. In depositions under oath for lawsuits, Darr’s lawyers have refused to allow him to answer any questions about his relationships with First Eastern and Rothchild, or about anything involving his time at Josephthal. They also objected to his being questioned about his Josephthal days in testimony to the Securities and Exchange Commission in 1991; the government lawyer dropped that line of inquiry.

  The author has interviewed multiple sources who independently said they were questioned by lawyers for the firm about the payments to Darr. Some of these individuals have not had contact with each other in more than a decade; at the time they worked together, they were not close. Yet all of them told stories that are identical in almost every particular. Some said they had personal knowledge that the payments were improper.

  In addition, notes from lawyers’ interviews quote Barry Trupin as saying Darr requested the payments, which were not paid as part of a consulting arrangement.

  25: Darr insists he never did anything improper or questionable during his years at Prudential-Bache. Through his lawyers or in sworn statements, he denies misrepresenting his background or taking any improper gratuity from general partners. He also said that, although he was the man at the top of the limited partnership division, he played little role in the daily running of the division. All partnerships were subjected to rigorous reviews by an investment committee in the department, on which he had a single vote, he said. He also says that all of his investments and outside business activities were approved by superiors.

  These statements, however, have been contradicted in interviews with dozens of people who worked with the department and other divisions of the firm and in sworn statements and internal documents. For instance, Darr denies claiming to have served in Vietnam or the CIA—the author has spoken to more than a dozen people who independently say they heard him make such statements. He has denied having conversations that were recorded in contemporaneous notes taken by other participants. He disputes specific events that others have described under oath.

  At bottom, the author wishes to stress that almost every allegation about impropriety by Darr comes from sworn statements, including several made to the SEC in records that are still sealed; from contemporaneous documents; or, in a few cases, from multiple interviews with different people making similar claims. Allegations that could not be so supported in that way were not published in this book.

  For a succinct description of the allegations involving Darr’s department, the Direct Investment Group, the author cites Objection to Settlement and Motion to Intervene, filed October 31, 1994, in Starr v. Graham Energy et al. in the Superior Court of New Jersey for Middlesex County, docket number MID-L-1165-92. That court document states:

  Darr was actually running a corrupt organization, in which 1) sponsors were either selected for or spontaneously demonstrated their willingness to grant benefits or side deals to Darr rather than chosen on the merits of the particular deal or sponsor; 2) the partnerships were sold to investors on misrepresentations that they were safe, reliable, high-yield and/or tax sheltered alternatives to bank “CDs” (certificates of deposit) when the partnerships were rather among the riskiest of investments, sometimes structured in such a way that they were destined to fail ab initio; 3) the general partners often gouged the partnership with extravagant expenses, excessive “allocated” G&A (general and administrative) charges paid to the general partner on top of the actual direct expense reimbursement; and 4) used manipulative accounting practices to fraudulently conceal the wrongs described above.

  Finally, a number of Darr’s apparent conflicts of interest and certain questionable activities in the partnerships sold during his tenure were first publicly reported by Chuck Hawkins, with Leah Nathans Spiro, in “The Mess at Pru-Bache,” Business Week, March 4, 1991.

  25: The amount of money given to Darr from First Eastern and Rothchild comes from the checks and deposit slips to his bank account, copies of which were obtained by the author.

  27: Some details of Eugene Darr’s work history from the Worcester Telegram & Gazette, April 20, 1964, and from the Worcester Sunday Telegram, October 12, 1975.

  27: Darr’s high school background from interviews and the West Boylston High School yearbook for 1964. College background from interviews and the Holy Cross yearbook for 1968.

  27: A copy of Darr’s military service record with the U.S. Air Force was obtained by the author.

  28: Dottie Darr’s background from interviews, her obituary in the Worcester Telegram, May 6, 1992, and a personal letter she wrote in 1975 describing her beliefs.

  28–29: Details of Richard and Dottie Bailey’s land investments from interviews and documents in the deals. The documents include records pertaining to contract number DN 4449 with the General Mortgage Corporation for the purchase of lot 37 in Deerwood North, as well as to the Manchester Bank’s mortgage loan number 06–732–470–5, given to the Baileys for the purchase of the New Hampshire property. In addition, documents from the Richey Company,
a real estate concern in Barnstead, New Hampshire, confirm Darr’s involvement in the deal.

  30–32: Details of Darr’s work at Merrill from interviews, with some information provided in the sworn testimony of Anton H. Rice III before the SEC on December 16, 1991, for case number NY-5975, captioned “In the Matter of Certain Limited Partnership Offerings.” The testimony, which was obtained by the author, is not publicly available.

  31: Description of Barry Trupin’s house in Southampton from the New York Times, April 1, 1984, and March 31, 1989.

  32: The description of Darr’s demand for $50,000 based, in part, on notes of lawyers’ interviews with Barry Trupin.

  The description of Darr’s visit to United States Trust Company comes, in part, from the deposit slips of January 30, 1978, which were obtained by the author. The payment to Merrill in the Mattel deal is described in the June 2, 1977, letter from Bertram C. Izant, general counsel of Itel Investment Corporation, to Janet Bascatow of Merrill Lynch Leasing Inc.

  33: Darr’s statements at the January luncheon meeting are from a letter from him to DeMarco, dated January 16, 1978.

  The trail of payments for the $30,000 that eventually went to Darr was reconstructed by the author from copies of the original checks and deposit slips. The price and equity of Darr’s house in Stamford, Connecticut, come from the mortgage and deed for the property filed with the Stamford town clerk, reference number 2459–179. The sale closed on April 24, 1978.

  36: Darr’s transactions with the Josephthal cashier on July 17 is based, in part, on a check he wrote on that date, which was obtained by the author.

  37: Darr’s proposal to Graham and details about Merrill’s investigation of Rice come from Rice’s 1991 SEC testimony. In that testimony, Rice said that he believed the lunch occurred in 1981, which would be long after Darr joined Bache. In a subsequent interview, his lawyer, Stephen Kupperman, said that the testimony was wrong and that his client was sure the meeting occurred while Darr was still at Josephthal.

  38: The tombstone advertisement announcing Bache’s hiring of Darr from the Wall Street Journal, November 9, 1979.

  CHAPTER 2

  40: The date and time of the airport meeting between Jacobs and Belzberg is from “How Bache’s Message Angered the Belzbergs, Intensifying the Battle,” Wall Street Journal, March 11, 1981.

  42–43: Details on the death of Jules Bache from the New York Times, March 24, 1944, and interviews with people close to the Bache family.

  Terms of Jules Bache’s will from “Bache Estate Put at $3,000,000 Net,” New York Times, September 26, 1948, and “Bache Willed Art to Metropolitan,” March 30, 1944.

  42–48: No history of the firm could be told without reference to the seminal article, “The Botching of Bache,” by Chris Welles, published in Institutional Investor in September 1980. Many details of Harold Bache’s battle for control after his uncle’s death, his subsequent political moves, and his personal idiosyncrasies were first disclosed in this account.

  43: The financial terms and number of new investors Harold Bache found for the firm after his uncle’s death is from Current Biography, May 1959.

  43–44: The growth of Bache under Harold Bache from the New York Times, March 16, 1968.

  45–46: Some details of Leslie’s time in power from Welles, Institutional Investor, September 1980.

  The performance of the stock market in 1970 from John Brooks, The Go-Go Years.

  46: The story of Jacobs’s plane crash, and some details of his career, from a September 21, 1994, letter written by him.

  47–48: Some details of Jacobs’s helicopter ride with Tsai from The Year They Sold Wall Street by Tim Carrington.

  55–60: Two books that examine the silver crisis are Stephen Fay’s Beyond Greed, published in 1982, as well as Harry Hurt III’s excellent examination of the Hunt family, Texas Rich, published in 1981. A number of delicious details about the scandal cited in this book come from those two works.

  55: The quote from Jacobs’s letter to the Hunts from the statement of facts from the Hunts’ 1982 settlement with the SEC of securities law violations charges.

  CHAPTER 3

  61: Some descriptive details of the Securities Industry/United Way Challenge Race from the DLJ Confidential, an internal newsletter of Donaldson Lufkin & Jenrette, for the weeks of October 1, 1980, October 8, 1979, and September 21, 1979.

  Background of Bill Pittman from his sworn testimony of February 10, 1992, in the case captioned In Re: Prudential-Bache Energy Growth Funds, MDL docket number 867, filed in the U.S. District Court for the Eastern District of Louisiana. This testimony, which is not public, was obtained by the author.

  62: D’Elisa’s performance in the Securities Industry Race from a 1980 log of racing times.

  65: Hutton’s performance in tax shelter sales from James Sterngold’s Burning Down the House, his path-breaking 1990 book on Hutton’s demise.

  68: Some details of Trace Management from the August 1, 1991, testimony of James J. Darr before the SEC in case number NY-5975, captioned “In the Matter of Certain Limited Partnership Offerings.” The testimony, which was obtained by the author, is not publicly available.

  70–71: Some details of the Integrated Energy deal, including the background of its principals, from its prospectus dated March 24, 1981.

  77–82: Some information regarding the investment structure of Harrison Freedman Associates and the role of Raymond Freedman in the company, from Freedman’s testimony of August 31, 1993, in First v. Prudential-Bache, number 91–CV–0047, filed in the U.S. District Court for the Southern District of California.

  Harrison’s relationship with Phillips N.V. is also described in the Freedman deposition.

  78–79: Some details of Harrison’s childhood and background from his sworn deposition of April 28, 1994, in First v. Prudential-Bache , as well as from his deposition of November 7, 1988, in McNulty v. Prudential-Bache, filed with the U.S. District Court for the District of Minnesota, Fourth Division.

  79: Some details of Harrison’s crimes from a confidential security report dated July 25, 1980, by Cartel Security Consultants, and documents filed in the case United States of America v. Clifton Stone Harri son, number CR-3-984, with the U.S. District Court for the Northern District of Texas.

  81: In his sworn deposition of April 1994, Harrison would claim that he received recommendations for a pardon from Judge W. M. Taylor Jr., the man who sentenced him to prison, as well as Henry Wade, the legendary district attorney in Dallas who had been scheduled to prosecute Lee Harvey Oswald for the assassination of John F. Kennedy. But an internal memorandum of the U.S. Justice Department, dated October 9, 1974, which lists everyone who provided a recommendation to President Ford for Harrison’s pardon, does not list the names of any of those people.

  81: The collapse of Harrison’s real estate investments and his falling out with his partners is described in Raymond Freedman’s deposition of August 31, 1993.

  82: Freedman’s “hell no” statement from his deposition, cited above.

  83: Harrison’s purchase of three magnums of Dom Perignon for the Bache lawyers is documented by a receipt for the purchase that was obtained by the author.

  89: Paton’s promotion of Darr as a regret for the investigation is described by Darr in his testimony before the SEC on January 21, 1992. This testimony was also given in case number NY-5975, captioned “In the Matter of Certain Limited Partnership Offerings.”

  CHAPTER 4

  84: Details of Bache’s effort to track down information about Belzberg were first reported in Carrington, The Year They Sold Wall Street. Details of the customs report about Hymie Belzberg’s contacts with Meyer Lansky in part from Carrington, The Year They Sold Wall Street, and the Wall Street Journal, March 11, 1981.

  94–101: Many of the details of the birth of Prudential Insurance come from two fine histories of the company. They are The Prudential: A Story of Human Security, by Earl Chapin May and Will Ousler, published in 1950; and Fr
om Three Cents a Week, by William H. A. Carr, published in 1975.

  Also, see Robert Sheehan, “That Mighty Pump, Prudential,” Fortune, January 1964, and Robert Bendiner, “The Governor Who Couldn’t Stop Stealing,” Real Magazine, 1956. Also, see the Wall Street Journal, August 15, 1960.

  101–4: Dates and details of the Prudential negotiations with Bache from interviews and the Schedule 14D-1 describing the deal that was filed with the SEC on March 27, 1981. Also, see Fortune, April 20, 1981, and the New York Times, March 19, 1981. Also, see “Your Friendly Broker, the Pru,” Fortune, April 20, 1981.

  CHAPTER 5

  105: Some details about Bill Pittman’s background from his deposition of February 10, 1992.

  107: Some details about Paul Proscia’s background from his deposition of March 25, 1987, in McNulty v. Prudential-Bache et al., civil number 4–85–765, U.S. District Court for the District of Minnesota, Fourth Division.

  115–16: Details of the signing ceremony for the Economic Recovery Tax Act from the New York Times, August 14, 1991, as well as Newsweek, August 24, 1981, and Time, August 24, 1981. Some details of ERTA from the Congressional Quarterly, 1981 Chronology.

  116: Details of Regulation D from Inc., October 1981, and The American Banker, September 17, 1981.

  118–23: Some details of the troubles at Bache after the Prudential merger from “After a Year, Prudential’s Takeover of Bache Mostly Causing Problems,” the Wall Street Journal, July 16, 1982. Also, some financial details of the firm’s performance at that time from Fortune , January 24, 1983.