The ready financing from First South and Prudential-Bache not only further enriched George Watson and Tracy Taylor. It also freed up capital that allowed them to make even larger profits investing in raw land for their own account. Some of the deals were phenomenally profitable in less than twenty-four hours. On one day, Watson & Taylor purchased about ninety-three acres of land in the morning and, thanks to some rezoning arranged through political connections, resold it that same afternoon for a pretax return of 4,771 percent. Another property of almost eight acres gave them a 12,463 percent pretax return. And a large parcel of about 130 acres snapped up and sold in one day brought a 68 percent return. Those were the wild, woolly days of Texas real estate, and profits were virtually guaranteed, so long as the market held up.
It was in this atmosphere that Watson approached Darr about investing with his company in the raw land deals. The first involved a 15.6-acre property called Trinity Mills, which Watson & Taylor purchased on February 1, 1983. Although the property was fully financed, Watson allowed Darr to invest $107,274 in exchange for 10 percent of the profits. That money was used to pay down part of a bank loan, even though no principal payments were due until November. Darr's investment did little to decrease the interest costsâtwenty-eight days later, or about two weeks after Darr's check would have cleared, Watson & Taylor signed a contract to sell the property. Darr made $46,539. With that success under their belt, on October 3, Watson met with Darr in his office at the Direct Investment Group in New York and told him about the Lombardi deal on Stemmons Freeway, offering him a stake of more than 3 percent. Watson showed him nothing but some newspaper articles that mentioned the property, but Darr quickly agreed to invest.
Darr mentioned the Watson & Taylor deals both to Bob Sherman, his boss, and to Loren Schechter, the general counsel. Years later, Schechter would have no memory of ever hearing about the investments. But at the time, based on whatever Darr told him, he did not see any problem with a senior officer at the firm investing in lucrative private deals with a general partner.
Weeks after the Lombardi deal closed, Watson gave friends another tip: First South, the Arkansas savings and loan that financed so much of Watson & Taylor's business, was about to go public. Watson was sure the stock would be a fabulous buy.
“This stock is going to go up right away,” Watson said one day to Bill Petty. “I'll see if I can get you some.”
In the end, Watson did not get Petty any of the stock, but it was not for lack of shares. Both he and Taylor loaded up on First South stock when the thrift went public in November 1983. They had decided to become the biggest investors in the institution that they owed tens of millions of dollars. Both men purchased just below 5 percent of the company's stock in their own names. If they purchased any more for their own accounts, they would have to disclose their stake in a Schedule 13-D, filed with the SEC. This document is extremely important because it lets investors know when a takeover might be under way or when a single investor might bear a degree of control over a company's direction. But even though both George Watson and Tracy Taylor kept buying First South stock, they sidestepped the disclosure requirements. Instead of buying the stock in their own names, shares were purchased for their children or by close business associates. Eventually, the government would determine that, through these various accounts, Watson & Taylor secretly controlled more than 26 percent of the total shares in First South. The rest was purchased by the public.
Darr now had a friend with access to close to a billion federally insured dollars. That would quickly come in very handy.
Alan Warrick, a First South executive who handled its investments, looked up from his desk when he heard the knock at his door. It was the secretary for his boss, Howard Wiechern. She had just come from her desk outside the executive office and was standing in the doorway.
“Alan,” she said, “Howard would like to see you for a moment.”
It was early 1984. Warrick set down the papers he was reviewing. Wiechern was friendly enough, but Warrick knew that when he asked to see someone, he wanted them right away. Warrick adjusted his tie and followed Wiechern's secretary back to the chairman's office, knocked on the door, and was invited in.
Wiechern was meeting with three businessmen and seemed delighted to be entertaining his guests. Warrick recognized two of the men as George Watson and Tracy Taylor, whom he knew were First South's biggest shareholders and biggest borrowers. He figured something important was up, because Watson and Taylor usually came to Pine Bluff only to work on big deals with First South. Warrick did not recognize the third guest in the room, a white-haired man whose expensive clothes signaled his affluence.
“Alan, come in, come in,” Wiechern said. “You know George and Tracy. I'd like to introduce Jim Darr. He's an executive at Prudential-Bache Securities and a close friend and business associate of George and Tracy.”
Warrick nodded to Watson and Taylor and shook hands with Darr. He had never heard of him. But since he was from Prudential-Bache, Warrick figured that Darr was there to discuss some investment opportunities for First South. That was right up Warrick's alley.
“Alan, sit down for a minute,” Wiechern said. “Look. First South's going to be making a home loan to Jim Darr. I want you to get somebody in lending to help work out this deal for him.”
Warrick agreed but felt puzzled. He didn't handle mortgages; he was much higher up in the organization than any loan officer. Clearly, this was a loan that meant a lot to Wiechern. And if Wiechern wanted the loan approved, it would be.
As they discussed the terms of the proposed loan, Warrick began to understand why Wiechern was involved. This was no ordinary mortgage: Darr wanted $1.8 million to buy a mansion in one of the wealthiest sections of Greenwich, Connecticut. The loan would cover the entire purchase priceâon closing, Darr would not put any cash into his new home at all. But despite the huge risks for First South, they would charge him a relatively low interest rateâthe prime rate plus one point.
It was an incredible deal. As far as Warrick knew, this would be the single largest home loan ever granted by First South. Now he understood why Darr had flown all the way to Arkansas to finance a home in Connecticut. It certainly paid to have friends in the thrift business.
The meeting broke up, and Warrick stood. Darr shook his hand.
“I look forward to working with you guys here at First South,” Darr said. “Looks like you have a great organization.”
Warrick walked out of Wiechern's office. This was going to be a loan of great value to First South. Just by stretching a bit to let Darr buy his mansion, First South now had an ally in one of the most powerful departments of one of the biggest brokerages on Wall Street. Warrick was sure that First South and Darr would do business again.
“Goddamn it, Virg!” George Ball snapped. “Have you got anything specific or not?”
Ball felt exasperated. Yet another person, this time Virgil Sherrill, had come to him with more bad rumors about Jim Darr. By 1984, Ball had been besieged by whispers that there was something crooked about Darr, something wrong with his Direct Investment Group, something that could harm the firm. But the more Ball heard, the more frustrated he became. Even though the rumors were rampant, no one was able to tell him exactly what Darr had done. Ball knew Darr was one of the best-paid people at Prudential-Bache. For all he could tell, what he was hearing was the jealous backblow from the usual Wall Street compensation envy.
The conversation with the patrician Sherrill was typical. Sherrill had strolled into Ball's office minutes earlier, saying that they needed to speak privately. Then, with the door closed, Sherrill said that he had been hearing things, horrible things, about the head of the Direct Investment Group. He felt obliged to let Ball know.
“From what I hear, Jim Darr is a bad man,” Sherrill said. “We need to be careful.”
But when Ball pressed Sherrill for details, he had none to give. Ball asked who the source of the information was. Sherrill demurred, saying “I gave my word that I would keep that confidential.”
Ball threw up his hands in despair. What was he supposed to do with this? Ball respected Sherrill immensely, but he didn't think he could make any judgments on such thin information. It wasn't something he could just dismiss out of handâPeter Bernard, a dapper head of corporate finance, had told him that he thought Darr was dishonest. He even heard the rumors from Alan Hogan, the short, brash executive whom Ball selected as his chief administrator. But none of them would give him anything concrete.
“All right, Virg, thank you for telling me.”
After Sherrill left, Ball sat at his desk, pondering his next move. He didn't have the time to waste playing Twenty Questions. Prudential-Bache had ended up being a much bigger disaster area than he had ever anticipated. The firm had its share of incompetents, but Ball was shocked at the huge trove of sleazy executives who had roosted over the years in middle and senior management. The bumblers were easy to spot and boot out, but no one walked the halls with name tags saying “Sleazebag.” Ball had too much else on his plate to hunt them all down. Very little at the firm seemed to be managed well. About the only departments Ball did not worry about was the Direct Investment Group. It was one of the few that ran on all cylinders. Left to its own devices, the department brought in as much as $40 million in annual profits. Ball thought Darr deserved the lion's share of the credit. Although Darr struck him as a shameless self-promoter with lousy people skills, there was no arguing that he knew how to sell partnerships.
Still, if people as disparate as the patrician Sherrill and the street-smart Hogan thought there was a problem, Ball could not ignore it. He picked up the telephone and called Schechter's law department. He had decided to have Darr secretly investigated. For what, Ball wasn't sure. But he felt confident that once someone looked into Darr's activities, the man would either be cleared or be sent packing.
How could anybody run up an $1,800 hotel bill in just one weekend? Bill Petty was so stunned by the bill on his desk from Dallas's elite Mansion Hotel that he reviewed it again and again. He could not decide what was more outrageous: that Jim Darr and his wife ran up a bill that high in just two days or that Darr expected the Watson & Taylor partnership to pay it for him. Why was it partnership business to host a Prudential-Bache executive and his wife to a lavish weekend on the town?
Petty first heard about the bill from Paul Proscia, the senior product manager with the Direct Investment Group, who told him that Darr's bill was on its way to Watson & Taylor.
“Why?” Petty asked, astonished.
“Because Darr and his wife had dinner with George and his wife,” Proscia said. “And this is the way Jim wanted to handle it.”
Petty was not going to stand for it. There was no way the retail investors in the public Watson & Taylor partnership should pick up the tab for Darr's extravagance. Petty picked up his telephone and called down to Watson's office. He wanted him to hear what Darr was pulling.
“George, I've got this $1,800 bill here for Darr and his wife, and Paul Proscia wants us to pay it,” Petty said.
“Yeah, OK,” Watson said. “Go ahead and pay it.”
Petty sat back in his chair, stunned. “You've got to be kidding. George, this is $1,800
for one weekend
.”
“That's OK,” Watson said. “Pay it.”
Petty hung up. He could not believe how cavalier Watson was about throwing the money away. Particularly since it was money that belonged to his investors.
Loren Schechter read Darr's contract several times on a day in early 1984. He had never seen anything like it. As far as Schechter was concerned, Darr's deal with Prudential-Bache had to be one of the most amazing in the history of Wall Street.
The contract showed that Darr was getting a huge share of the cash flow going through the subsidiary corporations that were serving as coâgeneral partners. Other executives in the Direct Investment Group had similar contracts, but none anywhere as lucrative as Darr's. Essentially, without having to put a penny into the deals, Darr was the largest single recipient in the world of partnership cash distributions. Even if a single partnership distributed only a few thousand dollars, that had to be multiplied by scores and scores of others sold by the firm. Darr's bank account was like an ocean fed by endless little raindrops of cash.
Some of the other terms of the contract were even more unbelievable. The way the contract read, Darr could well keep being paid even if he left Prudential-Bache to work for a competitor. Schechter had never seen an agreement that more thoroughly divorced the interests of an executive from the interests of the firm. But there was nothing he could do about it. The contract had been signed and delivered long before he started handling the firm's legal work.
Besides, even if Schechter wanted to change the contract, he would probably meet stiff resistance. Darr was bringing in huge amounts of cash to the firm. And cash was Ball's bottom line. So Darr could operate his department as his own personal fiefdom and demand most anything he wanted. Unless Schechter caught him doing something heinous, Darr was probably untouchable.
The prospectus for Prudential-Bache/Watson & Taylor Ltd. 2 arrived at the Securities and Exchange Commission on March 16, 1984. A clerk in the commission's Office of Applications and Report Services picked up the document, stamped it “Received,” and placed it in a box for filing by a coworker. There was nothing unusual about the four-inch prospectus, nothing that made it stand out from the other records stacked around the office.
In fact, the document was immensely important, mostly for what it did
not
disclose. The prospectus was the first to be filed since George Watson started giving Darr the opportunity to invest in the private land deals, investments that had reaped Darr a return of more than 100 percent. But nothing about those side deals was disclosed to the 3,764 investors who poured $25.6 million into the second public deal for Watson & Taylor sold by Prudential-Bache. Even the section “Conflicts of Interest” was silent about Darr's investments.