Table of Contents
Title Page
Dedication
Epigraph
Praise
PREFACE
THE MAIN CHARACTERS
PROLOGUE
PART ONE - BEGINNINGS
CHAPTER 1
CHAPTER 2
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
PART TWO - BETRAYAL
CHAPTER 7
CHAPTER 8
CHAPTER 9
CHAPTER 10
CHAPTER 11
CHAPTER 12
CHAPTER 13
PART THREE - DISCOVERY
CHAPTER 14
CHAPTER 15
CHAPTER 16
CHAPTER 17
CHAPTER 18
EPILOGUE
AFTERWORD
NOTES AND SOURCES
Acknowledgments
APPENDIX
ALSO BY KURT EICHENWALD
Copyright Page
For my wife, Theresa,
whose love, support, and patience
made it possible
O, that deceit should dwell
In such a gorgeous palace!
—William Shakespeare, Romeo and Juliet, Act III, Scene 2
As a firm, we must continuously measure what we do against a barometer that is calibrated in integrity. Our standing should be second to none.
—George L. Ball, chairman and chief executive, Prudential-Bache Securities, July 21, 1988
—Loren Schechter, general counsel, Prudential Securities, June 29, 1992
It is fair to say that Prudential-Bache Securities’ reputation within the securities industry is deplorable.... [The firm] is well known for its abusive sales practices, lack of adherence to compliance procedures, securities law violations and abusive practices towards its own employees.... Prudential-Bache Securities is, quite simply, the author of its own unfortunate reputation.
—John P. Cione, former lawyer with the Securities and Exchange Commission, in a sworn statement of July 1990
MORE PRAISE FOR SERPENT ON THE ROCK
A COMPELLING BOOK . . . details a pattern of misconduct, corporate backstabbing, in-fighting and attempts at cover-up at the highest levels of Prudential’s management. There also are tales of wild parties, exotic trips for the sales force, and secret deals with shady characters. —Miami Herald
RIVETING . . . in keeping with the tradition of American financial writing that has been emerging since the best-selling story of the takeover of RJR Nabisco, Barbarians at the Gate. —The Economist
POWERFUL . . . RICH IN DETAIL AND INSIGHT, it is sure to be the definitive book on the scandal. Indeed, it should be required reading for investors, brokers, and brokerage-firm managers. —Business Week
ABSORBING AND DEFINITIVE . . . A masterful reconstruction of a substantive financial scandal, one that bears comparison with such landmark exposés as Barbarians at the Gate, Den of Thieves, and The Predators’ Ball. —Kirkus Reviews
A SHOCKING STORY OF GREED AND FINANCIAL MANEUVERING. —Dayton Daily News
By the time readers finish this well-reported tale, they’ll want to string Pru’s manager up by their power ties . . . an appalling indictment of the firm’s managers, who did dozens of deals with a convicted embezzler, spent millions of investors’ dollars on lavish trips to places like Cancun and Maui, and made cozy arrangements with developers to make themselves rich no matter how their clients fared. —Newsweek
AN ENTERTAINING AND AN IMPORTANT WORK. —Publishers Weekly
FOR A BOOK TO RAISE YOUR BLOOD PRESSURE, READ SERPENT ON THE ROCK . . . A STUNNING ACCOUNT. —Jane Bryant Quinn
What are the ingredients to a world class scandal? Abuse of power. A cover-up. Kickbacks. Sleazy characters in nice suits. Innocent victims. Some sex, a few drugs. You name it, the long, sordid tale of Prudential Securities’ disastrous foray into the limited partnership business has it . . . a fast paced, skillful rendering . . . engrossing, written in a breezy style and full of revealing details. —Institutional Investor
A RIVETING ACCOUNT. —National Law Journal
The story would rival a good fictional counterpart in characters, plot, and storytelling. But Serpent on the Rock is true. —San Diego Union Tribune
A casebook of how not to manage a financial business. —The Financial Times
SIZZLES . . . A TELL-ALL BOOK . . . A FANTASTIC PIECE OF WORK. —South Florida Business Journal
A MUCKRAKING BOOK. —CNN
Eichenwald goes after Pru-Bache big shots with prosecutorial zeal. He exposes many of them as, variously, liars, bullies, bigots, drunks, cads, and vulgarians. —USA Today
AN ELECTRIFYING ACCOUNT . . . don’t give this one to your broker. It might give him ideas. —The American Spectator
Written in the breathless tradition of The Predators’ Ball, Den of Thieves and Barbarians at the Gate. —Barron’s
AN INCREDIBLE STORY . . . A GRIPPING ACCOUNT . . . The next time someone offers you an investment opportunity too good to refuse, head straight to your library or bookstore for a copy of Kurt Eichenwald’s Serpent on the Rock, and don’t commit a dime until you’ve read every word. —The Press Democrat (Santa Clara, California)
I raved about (Serpent) to everyone . . . its narrative unfolds at a breathless pace, and the book is chock-full of richly demonic and quietly heroic characters, lending it a moral vision. —Insight
PREFACE
As long as there is greed, as long as crimes go unpunished, as long as Wall Street can make millions even when clients lose money, the scandal at Prudential will be just another chapter in an ongoing saga of financial fraud . . . if history is any guide, that is a certainty. The only questions are: Who will do it next time? And when?
When I wrote those words in 1996 for the paperback edition of Serpent on the Rock, I knew next to nothing about two fast-growing corporate darlings of the 1990s, Enron and WorldCom. About the time the paperback arrived in bookstores, the first of a long series of crimes at Enron—which would collapse in a spectacular scandal in 2001—had begun. WorldCom’s first significant crimes were still four years off. But those corporate names, and those dates, were the answer to the rhetorical question I had left with readers. Enron and WorldCom, facilitated by Wall Street investment banks eager to lap up fees, would be the next corporate villains, the next significant culprits in the long line of businesses that have turned to fraud and, in the process, wrecked the lives of untold numbers of Americans.
As I covered the unfolding Enron and WorldCom scandals for the New York Times—and later transformed Enron into a book, Conspiracy of Fools— at times, I could not help but think that we as a nation were reaping what we sowed. The outrage at Prudential had been just one in a long series of warnings about weaknesses in our financial system, signals that had all too long been ignored. I am something of a fatalist on this issue—as long as big money can be made from fraud, corporate scandals will always be with us. But even I would have thought that the embers from Prudential would have been long cooled before the next fire was lit. For all my pessimism, I was too optimistic.
Why did we learn nothing? Why did corporate America continue down this self-destructive path? To me, the answer is obvious: Despite the vast wreckage caused by Prudential’s fraud, no individual was ever held accountable. No one went to jail, no individual was cited by the Securities and Exchange Commission. There were plenty of reasons why—mostly revolving around the statute of limitations. But the limited government action contributed to the full story never being understood by much of the public.
Perhaps the biggest missed lesson was one
for business itself. The Prudential scandal demonstrated in myriad different ways the damage inflicted on a corporation when managers fail to pay sufficient attention to protecting the brand name. Rather than simply facing what the firm had done and admitting it, Prudential launched a legal and communications strategy designed to conceal, deny, and mislead. That may have served the firm for a time in the courtroom—although I am hard-pressed to believe that Prudential would have been compelled to pay more than the billions it ultimately coughed up. But there is no doubt that this effort forever damaged the name Prudential, leaving it eternally linked to scandal.
The type of obfuscation strategy employed by Prudential—and numerous other institutions wrapped up in such debacles—often backfires. The reason is simple: Regardless of how tainted a corporate culture becomes, most business executives want to do the right thing. They want those who do business with them to walk away happy with the experience and eager to return. They want, in short, to be part of an honorable institution, one that gives them pride.
That is why many widespread frauds—particularly those that damage individual customers and investors—often become public. Even if leaders of an institution—whether it be corporate, political, or governmental— decide to cover up, there are always people on the inside who, for a variety of reasons, will try to make sure the wrongs are righted. At both Enron and WorldCom, these types of whistle-blowers played important roles in forcing the scandals to the surface. Sometimes, whistle-blowers work through the system, going up the line of an institution in hopes of finding a remedy. When that fails, they will turn to outsiders—law enforcement, Congress, or sometimes reporters like me.
In the course of my coverage of the Prudential scandal, numerous executives stepped forward on a confidential basis to confirm key pieces of information, details I could never have learned from an outside source. Their motives varied: some were using the press for their own bureaucratic reasons, some were bitter, some were angry. But a surprising number were simply outraged by what Prudential had done, and had come to believe that only the truth would cleanse the company. Many of these executives had seen the destruction of the careers of other Prudential executives who tried to stop what was happening—stories related in these pages—and chose to no longer trust the institution with their concerns. Instead, they went outside the family with their evidence of wrongdoing.
Months into my reporting, there were executives at so many levels of the firm working with me that Prudential’s secrets became easy to discover. When the firm was preparing to notify the SEC that subpoenaed records could not be located, a copy of those documents ended up in my possession. When a meeting was held at the highest reaches of the firm to discuss how to keep secret some potential litigation, I was made aware of the meeting, the decision, and the underlying legal claim before the week was out.
Prudential’s method of dealing with this was almost funny: Repeatedly, senior executives of the firm would go on the internal squawk box, lambasting my reporting to Prudential’s thousands of employees. It was a delightful miscalculation. I could always tell when I had been criticized to the employees; it was as if Prudential was advertising me to potential sources. For days after each squawk box statement, I would receive telephone calls from executives and employees in Prudential offices around the country, offering up leads and tips for stories that I might never have discovered.
The senior executives of Prudential dealing with this scandal never seemed to understand that truth was their ally. If they had simply stopped trying to deny what so many people inside the firm already knew, many of my sources of information would have dried up overnight. If they had stood up and taken responsibility for the horrible things that had happened there, they would have reinforced that the Prudential name still stood for integrity and honor, not obfuscation and deceit.
Moreover, they never would have had to deal with this book. I remember the moment I realized how necessary this book was. Prudential had finally cut a deal with criminal prosecutors, receiving a deferred prosecution agreement. Under that deal, the firm admitted violating the law and defrauding customers, and was put under what is akin to a form of probation.
I returned from that court proceeding eager to hear what Prudential executives had to say, now that the firm had confessed. In a telephone call, one of its senior executives dismissed the admission of guilt: that was just a business decision, the executive said. Everyone inside, he said, still knew that Prudential had done nothing wrong.
I hung up the phone, astounded. Clearly, Prudential planned to continue denying what the evidence showed. That knowledge lit a fire under me. I had to show the world, all in one place, everything that unfolded inside of Prudential.
So as you read the stories of the horrible secrets of Prudential, remember one thing: Many of these tales may well have stayed buried forever, if the firm had simply been honest once it discovered the extent of the wrongdoing inside. To paraphrase an epigraph of this book, Prudential— and Enron, and WorldCom, and all of the other corporations that have become enmeshed in scandal—are truly the authors of these tales. And, sad to say, they and companies like them will keep on writing such stories long into the future.
—Kurt Eichenwald
September, 2005
THE MAIN CHARACTERS
In the late 1970s, as change is sweeping across Wall Street
Harry Jacobs, chief executive
Virgil Sherrill, president
Robert Sherman, head of retail for branch group west
Leland B. Paton, head of marketing
Guy Wyser-Pratte, head of arbitrage
Bill Jones, head of security
With the Tax Shelter Department
Stephen Blank, head of division through the summer of 1979
James J. Darr, head of division in the fall of 1979
James Ashworth, regional marketer
David Hayes, regional marketer
Curtis Henry, originator
Dennis Marron, marketer and originator
John D’Elisa, originator
Wally Allen, product manager
The investors in Bache stock
Samuel Belzberg, chief executive, First City Financial
Nelson Bunker Hunt, a Texas billionaire
Lamar Hunt, a Texas billionaire
AT JOSEPHTHAL & COMPANY, NEW YORK
Michael DeMarco, president
Norman Gershman, national sales manager
Neil Sinclair, head of real estate marketing for tax shelters
AT E. F. HUTTON, NEW YORK
Robert Fomon, chairman
George Ball, president
Loren Schechter, deputy general counsel
THE CORPORATE LAWYERS
Martin Lipton, Wachtell, Lipton, Rosen & Katz, New York (counsel for Bache and the Belzbergs)
Clark Clifford of Clifford & Warnke, Washington, D.C. (counsel for Bache)
Alan Gosule of Gaston & Snow, Boston (counsel for Josephthal’s tax shelter department)
THE GENERAL PARTNERS
Barry Trupin, head of Rothchild Reserve International, New York
Matthew Antell, president, First Eastern Corporation, Boston
Herb Jacobi, general counsel, First Eastern Corporation, Boston
In the early to mid-1980s, as the partnership business is booming
AT PRUDENTIAL-BACHE SECURITIES, NEW YORK
George Ball, chairman and chief executive
Loren Schechter, general counsel
Robert Sherman, head of retail
Richard Sichenzio, senior vice-president and, later, head of retail
In the Direct Investment Group
James J. Darr, director
William Pittman, product manager and, later, head of all due diligence
Paul Proscia, product manager
David Levine, real estate due diligence
Freddie Kotek, real estate due diligence
Joseph Quinn, real esta
te due diligence
Douglas Holbrook, energy due diligence
Joseph DeFur, product manager
James Parker, regional marketer
John S. R. Hutchison, product manager
David Wrubel, regional marketer
Frank Giordano, lawyer
Kathy Eastwick, product manager
In the Retail Branches
J. Frederic Storaska, director, Corporate Executive Services, Dallas
Charles Grose, branch manager, Dallas
Carrington Clark, regional director for the Pacific North
John Graner, regional director Southeast and, later, Pacific South
James Trice, regional director Pacific South and, later, Southeast
Richard Saccullo, Atlanta branch manager
AT PRUDENTIAL INSURANCE, NEWARK, NEW JERSEY
Robert Beck, chairman through 1986
Robert Winters, chairman from 1986
Garnett Keith, vice-chairman and supervisor of Prudential-Bache
Matthew Chanin, head of energy investments
AT HARRISON FREEDMAN ASSOCIATES, DALLAS, TEXAS
Clifton S. Harrison, principal
Michael Walters, national sales manager
AT GRAHAM RESOURCES, METAIRIE AND COVINGTON, LOUISIANA
John J. Graham, president and chief executive
Anton Rice III, chief financial officer
Mark Files, vice-president
Paul Grattarola, marketer
Pete Theo, marketer
Alfred Dempsey, executive vice-president
John Corbin, regional wholesaler
Robert Jackson, regional wholesaler
AT THE WATSON & TAYLOR COMPANIES, DALLAS, TEXAS
George Watson, principal
Austin Starke Taylor III, principal
William Petty, national sales manager
AT THE SAVINGS & LOANS
Howard Wiechern, chairman of First South Savings, Pine Bluff, Arkansas
John Roberts Jr., president, Summit Savings, San Antonio, Texas