Subcommittee members produced Ball's memos from his Hutton years urging the retail sales force to do more overdrafting. But Ball's resolve was unshaken. He insisted that he knew nothing about any improper activities.
“One should not mistake a search for improvement as a willingness to cut corners,” Ball said. “Exhorting branches to increase their interest profits or their stock sales or cost-effectiveness was in no way a call for sharp practices.”
More important, Ball protested, he was not Hutton's top executive. He had no responsibility for the cash management system. No one in that department reported to him. He could not, he said, be held accountable for actions taken in divisions of the firm for which he was not responsible.
“Just out of curiosity,” asked Congressman Romano Mazzoli, a Democrat from Kentucky, “at Prudential-Bache, do you do any of this sort of thing now?”
“No, we do not.”
“You do not do excessive overdrafting?”
Ball explained that Prudential-Bache maintained an agreement with the banks that specified the amount of money the institutions could make off the firm's float each year. He added that he was not sure how much money that was.
“You don't know what's going on in your company now?” Mazzoli asked.
“No, what I'm sayingâ”
“Because you said you didn't understand, apparently, what was going on over at E. F. Hutton.”
“I was not responsible for the practices at Hutton,” Ball protested. “At Pru-Bache, I'm chief executive officer. And number two, being somebody who is not totally stupidâ”
Mazzoli smiled. “So,” he said, interrupting Ball. “You do know what's going on now?”
Ball never answered the question.
Bob Sherman sat on the edge of a couch in George Ball's office, staring intently across a coffee table into his boss's blue eyes. “We just can't fire Rick Saccullo,” Sherman implored. “He's a good guy. We've got to let him stay with the firm.”
Ball nodded.
“Listen,” Sherman said, “Saccullo was duped in this Capt. Crab thing. He may have been negligent, but he's effective. We can't just cut him loose.”
By the fall of 1985, Ball had heard the same impassioned plea from Sherman several times. When Ball first heard about the Capt. Crab investigation, he could not imagine it would go as far as it had. Based on what he had learned from Loren Schechter, the SEC case sounded to Ball like just a small-time problem at a local branch. That was why he had said nothing when Sherman promoted Saccullo to the all-important position of regional director for the Southeast even while the investigation was still going on.
But in the last few months, everything had changed. Schechter had told Ball that the SEC was consolidating the Capt. Crab case with the Kalil matter and looking at both incidents as a sign of a systemic breakdown in compliance at the firm. The agency clearly wanted to make a big splash with the case.
The SEC lawyers had entered into settlement negotiations with the firm but were demanding a heavy price. The enforcement staff wanted to appoint an outside expert to review Prudential-Bache's compliance procedures and remake them from the ground up. For a major brokerage firm, it was a humiliating requirement.
But on top of that, there was the problem with Saccullo. For the regulators, Saccullo had come to personify the cowboy atmosphere at Pru-Bache. He was a manager who had already been nailed once by regulators for failing to supervise. In most cases, there would be no question. Saccullo would be fired. But Sherman was putting everything on the line for him.
Ball stood up. “All right, Bob,” he said. “I hear you. I understand what you're saying. We'll see what we can do.”
Sherman thanked Ball and got up to leave. Ball wasn't quite sure what would be done with Saccullo. He figured that Saccullo could probably continue at the firm only as a broker. Once the SEC filed their complaint, he thought, there would be no way for Saccullo to continue in a management role at Prudential-Bache.
The day broke bitterly cold on January 2, 1986. The New Year's festivities had just ended. After a day of rest, the nation's stockbrokers and traders were coming back to life. It was a slow, easy day. Most businesses were not yet back up to full speed. In the nation's newsrooms, the first working day of the New Year was widely known as one of the dullest.
But in the press room at the Securities and Exchange Commission, excitement was brewing. The commission was releasing a thick pile of documents in what officials promised would be a major securities case. By early afternoon, copies of release number 34-22755 were dropped off to the reporters. At the top of the document, the case citation read “In the Matter of Prudential-Bache Securities Inc.”
After almost two years of investigation, the firm had settled both the Capt. Crab and Kalil investigations with the SEC. In the Capt. Crab case, the SEC brought charges against Saccullo. In their announcement, the SEC said that Saccullo had settled the charges and accepted a censure and an eighteen-month bar from serving in any managerial role at a brokerage firm. Kalil's former manager in Jacksonville also accepted a censure and a bar of one year. Prudential-Bache agreed to hire the outside consultant to review the firm's supervisory procedures.
The order itself would have been an embarrassment to most brokerages. But the firm's spin on the sanctions was highly unusual, if not downright dishonest: The settlement showed the high esteem the SEC had for Prudential-Bache.
“We appreciate the SEC acceptance of this approach as a reflection of our continuing determination to conduct business as a leader should,” said Peter Costiglio, a firm spokesman.
Still, in speaking with reporters, Gary Lynch, the enforcement division chief, made clear that the commission considered the problems at Pru-Bache to be widespread. “The two cases demonstrate that there were very serious supervisory problems at Bache,” Lynch said. “It's time for a very hard look, an extensive reevaluation of their procedures.”
Few investors or regulators would have guessed that, at that very moment, the firm's abusive sales practices were continuingâand getting worse.
Ball tapped on the large, wooden door in the Dallas branch office. J. Frederic Storaska, one of the firm's biggest-producing brokers, stood up with an expression of absolute delight on his face.
“George, how wonderful to see you,” Storaska said. “Welcome to Corporate Executive Services.”
It was January 24 at eleven o'clock in the morning, just a few weeks after the Capt. Crab settlement. Ball had arrived to meet with the man he considered to be one of his best hires for the retail system. The two had met in Ball's last years at E. F. Hutton, where Storaska had been a stand-out broker. In 1984, Ball had personally recruited Storaska to join the Pru-Bache team.
Storaska, a hulking, heavyset man with thick, dark hair and a seemingly boundless ego, was not like most brokers. Instead of spending his days toiling on the telephone, cold-calling potential clients, Storaska focused only on the cream of the investment world. He hunted down newly wealthy entrepreneurs, such as businessmen who had recently sold their companies. Storaska knew that no matter how much these people understood the line of business that brought them their wealth, they were most likely novices when it came to investing. Over the years, he perfected the pitch that they would run their businesses while he protected their money. It had been a fabulously successful strategy for Storaska at Hutton and later at Kidder Peabody. When Ball saw the millions of dollars that Storaska was bringing in, he knew he wanted that for Prudential-Bache.
Even with Ball's reputation for showering big brokers with money and goodies, the deal he struck with Storaska raised eyebrows throughout the firm. Storaska was offered what was essentially his own department within the Dallas branch, called Corporate Executive Services, or CES. He had his own sales staff and clerks. For every $750,000 in revenues he generated, the firm would pay for another CES staff member. Storaska traveled by limousine and would soon have his own airplane. As the final sweetener, Ball offered Storaska almost a quarter of a million dollars up front. By this morning in early 1986, it seemed like money well spent. Little more than a year after CES opened, Storaska was one of the top ten brokers in the firm.
“So, Fred, is everything else here to your satisfaction?” Ball asked.
Storaska nodded. His branch manager, Charles Grose, and his regional director, Bill Hayes, had been extremely helpful, he said.
“Good,” Ball replied. “I told Bill to make sure he took care of you.”
After some idle talk about Storaska's family, the forty-five-minute meeting came to an end, and Ball stood up to leave.
“Keep up the good work,” Ball said. “You're setting an excellent example for others to follow.”
Ball might not have known it, but he had set in motion what would become a major compliance problem for the firm. Within a month of Storaska's hiring, the firm was notified that he was under investigation by the Chicago Board Options Exchange for allegations of improper trading before he was terminated by Kidder.
10
It would only be a matter of months before the first customer complaint arrived at Prudential-Bache, charging that Storaska was improperly making trades at his own discretion without written approval. It was the kind of complaint that should have sent up red flares throughout the compliance department of Prudential-Bache.
But the letter of complaint was just filed away. With Storaska anointed by none other than George Ball himself, it would take a lot more than an exchange investigation and a few customer complaints for Prudential-Bache to do something about him. A lot more.
In Jacksonville, Rick Harris, the new manager of the local Pru-Bache branch, was slogging through the last leg of the Kalil affair. The SEC settlement rekindled a flurry of bad publicity for the branch, and Harris worked hard to keep his brokers focused on their business. He walked about the office, complimenting his best brokers on their latest sales, while offering weaker ones suggestions on how to improve.
But each day it was getting harder for Harris to stay upbeat. Since being assigned to clean up Jacksonville a few months before, he had developed a direct pipeline into the New York rumor mill. Lawyers for the firm contacted him every day, and he frequently heard stories about problems in New York that horrified him. Then, over drinks, an executive for VMS, a partnership sponsor, had told him an amazing story about the company getting Bob Sherman an apartment. The VMS executive anguished about it, and Harris was appalled.
Still, he tried to keep his mind off the horror stories. Within a few days of the SEC settlement, Harris saw a prospectus for a new real estate deal that he thought might be a good investment for his branch's clients. Unlike some other products, the deal was not a proprietary deal at Prudential-Bache but was being offered at firms all over Wall Street. Harris had reviewed the prospectus for the deal as soon as it arrived in the office and immediately went out to speak to his brokers.
“Hey, I want everybody to take a look at this,” he said. “It looks like it's properly structured, and the prospectus is pretty straightforward. This is probably the kind of investment that is worthy of a small percentage of some client's portfolio.”
The brokers liked the deal, and within a few days, they had sold a huge amount of it to their clients. Harris was pleased. His brokers were showing that the Jacksonville branch was still alive and kicking, despite all the bad press.
A few weeks later, in early February, an offering of a similar real estate deal, called Duke Realty Investments, came out from Prudential-Bache in New York. Even though this deal was proprietary, Harris didn't give the prospectus a second look. He figured any professional in the business would know that clients had to keep their portfolios diversified. Almost every client of the branch who could consider such a real estate investment had already been approached with something comparable.
Worse, the deal was also the latest Clifton Harrison offering. Harris had already heard the scuttlebutt about Harrison being a convicted felon and was not comfortable selling his products. So, even though this deal was sponsored by his firm, the branch was not selling any of it.
Within a few days, the first phone call came from New York. “Why aren't you guys selling Duke Realty?” the New York product manager asked.
“Look,” Harris said. “We just sold one of these. The branch doesn't have an appetite for another one. The customers don't need it, and the brokers aren't interested.”
The explanation did nothing to quell the anger in New York. As far as the marketers there were concerned, if a branch sold a lot of a product weeks earlier, then it should be able to sell even more of the same thing later. Harris's arguments about the need for portfolio diversification fell on deaf ears. The calls with complaints from New York kept coming for days.
Harris did not know it, but the pressure for sales was coming from Darr himself. Darr had pushed Sherman heavily into promoting the Duke deal, and Sherman, in turn, had begun pressuring the people who worked for him in ways he never had before. The push to sell was going on across the country, and would be unrelenting until the deal was closed.
Finally, Harris called a special meeting of the Jacksonville brokers.
“Guys, New York and the region are putting particular pressure on us to sell this Duke product,” he said. “It's a proprietary offering, so I can appreciate that they want to do a good job. So if for whatever reason you had four or five people who were out of town when that first deal came through, or if you had people who said no, contact them all and offer this.”
Harris thought for a second and added something to make sure none of his brokers misunderstood. The last thing he wanted was his brokers getting into a hard sell of a deal clients didn't want, just days after the SEC settlement.