Serpent on the Rock (51 page)

Apparently the
Business Week
story had struck a nerve. Prudential-Bache was stepping up its legal hardball several notches. Schechter had adopted the strategy that the best defense was a good offense. If clients insisted on suing the firm, then Pru-Bache would bury their lawyers with litigation. The more time Boyd Page spent defending himself in court, the less time he could spend attacking Prudential-Bache.

Page read through each page carefully. “Well, I'll be damned,” he said softly.

“This is the most outrageous thing I've ever seen in my life,” Bernstein said. “Who do these people think they are?”

Page looked up at the astonished lawyers. “Well, what do we do now?”

Fridays had become tense at the Direct Investment Group ever since word first came out that Giordano would be taking over. Everyone knew the end was coming. Big layoffs would almost certainly occur on the last day of the week, when a pay period closed. The department was loaded with the condemned, all readying themselves for execution. The days of big sales were over. The only question was who would be thrown out, and when.

Giordano took over on March 8. Within a few weeks, he began dismantling virtually the entire department. The layoffs continued for months. The regional marketers heard the news from Giordano by conference call.

“I'm calling to let all of you know that Pru-Bache has decided that direct investments no longer fit into the marketing plans and they are proceeding to dissolve the department,” he told the stunned group over the phone. “You are all being terminated.”

Before they left, all of the marketers were instructed to pack up the marketing materials and other documents they had collected over the years and ship them to New York, where they were turned over to the firm's lawyers.

The dismissals in New York were swift. Anyone who was fired was barred from returning to the office. Even Bill Pittman, who was fired in the spring of 1990, was listed with the security department as someone to be stopped in the lobby.

David Wrubel heard about his termination directly from Giordano. To a degree, he felt relieved. For months, he had been handling some communication with brokers, and their anguish was beginning to get to him.

Afterward, Wrubel headed out of his office and down the hallway on the thirty-third floor. He saw Russell Labrasca, who months earlier had been named national sales manager of the department. He was sitting in his glass-walled office, tears streaming down his face. He looked as if his world had come to an end.

Wrubel hated Labrasca's public display and thought it was unprofessional. He walked into Labrasca's office.

“Hey, Russ,” he said. “What's the matter with you?”

Labrasca sniffled. “This is so sad,” Labrasca said as the tears kept pouring out. “This was such a wonderful place, and we accomplished so much. There'll never be anything like it again, with the camaraderie and the teamwork and the spirit.”

Wrubel's face wrinkled in disgust. He had been in the department only two years but had seen a lifetime's worth of unprofessionalism and incompetence. He'd seen the wild excesses of spending. He knew how little anyone cared about protecting investors and doing deals properly. He thought everything Labrasca said was a total crock.

“Give me a break, Russ,” Wrubel said. “This was bullshit. That's all it ever was.”

CHAPTER 16

BY THE SPRING OF 1990, brokers and executives throughout Prudential-Bache were ready to choose sides. Responsible brokers desperately wanted to salvage their customers' floundering finances. The Prudential-Bache law department wanted a united front, with the brokers lined up with the firm against their own clients. There were no recordings of what the brokers had said to the clients when they had persuaded them to buy the partnerships and other failed investments. Just because the marketing material made fraudulent claims didn't mean the sales force used that material, the argument went. Somewhere in the thick prospectuses for the investments were convoluted warnings about risk. That would be the defense. With the prospectus as a shield, Prudential-Bache hoped it could eliminate most of its massive liability.

Throughout the country, brokers were facing the choice of defending Prudential-Bache or risking their careers by fighting on behalf of their clients. A modern-day battle was quietly unfolding with many Davids against a single Goliath.

Bill Creedon felt disgusted as he read a copy of a letter that had been sent to his clients by the Prudential-Bache law department. For months, the Los Angeles stockbroker had followed the recommendations of the firm's lawyers and helped his clients write letters about their VMS investments. The letters laid out what the clients had been told about the guarantees, as well as their investment objectives, their ages, and other relevant information. Creedon thought the letters would be reviewed and then settlements offered. After all, the clients had been sold a supposedly guaranteed investment for $10 a share, and now it was trading for fifty cents. The case was a sure loser.

Starting in late April, his clients began calling him in dismay. They had received letters in response from the law department expressing regret at their dissatisfaction but saying that the firm could not offer certainty on an investment. Creedon fumed—that was exactly what Pru-Bache
had
done with all that talk about viable guarantees.

But it was one of the last paragraphs of the letter that Creedon found most noxious. A class-action suit had been filed in Chicago on behalf of VMS investors. The law department's letter told the investors all about the class action and even provided the case number. Reading it, Creedon felt certain that Prudential-Bache was trying to push everyone it could into the class-action suit.

Although investors might not know what that meant, Creedon was sure that the law department did. It was a despicable move. Anyone who didn't take the class action could sue the firm individually. Those investors not only had the opportunity to get all of their money back, plus interest, but they also could win punitive damages.

On the other hand, too many class-action lawyers in serious securities fraud cases behave in ways that make ambulance chasers look like the backbone of the bar. Few of the lawyers take any class actions to trial. Instead, they almost always settle for a few pennies on the dollar. Investors who lost tens of thousands of dollars usually receive a few hundred back. But the lawyers, who take as much as 35 percent of the total settlement, can walk away with millions for very little work. Creedon knew that the only people who would benefit from a class-action sellout on VMS would be the lawyers and Prudential-Bache itself, which would obliterate its huge liability for a small settlement.

Some brokers and managers around Pru-Bache's office greeted the law department's response as a stroke of genius. It was laughingly called “the fuck-you letter.” Some brokers particularly liked the class-action angle. If clients sued individually, those complaints would likely show up on the brokers' permanent records. But class-action settlements never do.

Creedon got up from his desk and headed toward the office of his manager, John Eisle.

“John, I'm really concerned about something here,” Creedon said. “I'd been told that all the clients' cases were going to be looked at on an individual basis, but now they're all getting form-letter brush-offs.”

“This is how we're going to handle this,” Eisle said. “The clients are going to go into the class-action suit. That's how this problem is going to be taken care of.”

Creedon started voicing concerns about pushing clients toward the class action, but Eisle cut him off.

“Look, this is how we're dealing with this, and it's none of your business,” he said. “You're spending far too much time worrying about this.”

“John, it
is
my business. It's my clients that are being hurt.”

“Well, then stop being so concerned about these clients and go find some new ones,” Eisle replied.

Creedon didn't know how to respond. Apparently the firm was prepared to let elderly investors around the country take the hit for the VMS duplicity. At that moment, his confidence in the integrity of Prudential-Bache evaporated.

“Look, John, I think Prudential is making a big mistake here,” he said.

“They're handling this all wrong. All they're going to do is piss everybody off. Everybody knows what really happened here. There's a lot to be gained by being upright and standing behind something when you sell it.”

“Well, that's because you're focusing too much on this,” Eisle said. “Go find new clients. And with your old clients, the only thing you can talk with them about is the class-action suit. Other than that, you should really stop talking to them.”

Creedon stared at Eisle for an instant, unsure of what to say. He was hearing the same instructions that were being delivered to brokers around the country: Betray your clients, sell them out, get new ones.
¹⁷
The broker would emerge unscathed, and the firm would be protected.

Within weeks, Creedon began receiving desperate telephone calls from investors asking what to do. As a test, he referred them to Eisle, his manager. Each time, the investors came back saying that Eisle had told them their only option was joining the class action. Creedon quietly told them to check that claim out with their own lawyers.

In the late summer, clients started to call Creedon asking for his advice about the class-action suit and other legal rights they might have. Creedon said he would have to call them back, and walked down the hall again to visit with Eisle.

“John, my clients are very uncomfortable with the class-action idea,” he said. “They want to know what other options they have. I want to fully disclose their rights. Let them know they can go to arbitration, or at the very least tell them to talk to a lawyer. I think I have a fiduciary duty to do that.”

Eisle pointed his finger at Creedon and began jabbing it as he spoke.

“If you dare tell your clients about their legal options, you will be fired,” he snapped. “Do you understand? You will lose your job and that will be the end of that.”

Eisle stood up from his desk and walked up close to Creedon. “And don't think you can sneak around me either. If a bunch of your clients start showing up with attorneys, you'll still be fired. So sit down and keep quiet.”

Creedon stared straight at Eisle. “This is wrong, John,” he said, “and I can't do it. I think you and the firm are making a big mistake.”

Creedon spun around and stormed out of Eisle's office. In his mind, his job was over. If he couldn't help his clients while working at Prudential-Bache, then he would have to quit. It was the same decision Gene Boyle had made over Risers a few months earlier.

The wall of silence was falling, one broker at a time. But the most important defection was yet to come. It was the one that would begin to expose the secrets of Graham Resources.

The Four Seasons Hotel was one of the most popular lunch spots for the brokers in Prudential-Bache's Houston branch. Besides the image of elegance that the name projected, the hotel's restaurant, with its buffet luncheons, was conducive to one-on-one business meetings. Better still, the Four Seasons was directly across the street. Brokers could get there from the branch by walking through an underground tunnel, without going outside. With Houston's blistering summers, that alone would have made it popular.

In August 1990, Joe Siff, a broker in the office, decided that the Four Seasons would be the perfect place for a lunch meeting with one of his clients, Daryl Bristow, a prominent Houston lawyer. Siff hoped to spend the lunch discussing some investment ideas.

Siff arrived at the Four Seasons with anxiety clearly evident on his face. He had sold more Graham partnerships than almost any broker at Prudential-Bache. He had believed everything he had read in the marketing material and thought that the partnerships were safe, secure investments. He had been particularly enamored with the growth funds, and had persuaded many of his clients to purchase those partnerships. But when distributions went down even as oil prices went up, Siff had begun to believe that something had gone terribly wrong. Half of Siff's day was spent answering questions about why the partnerships were not performing as projected. Many of his clients, including some of his most important ones, refused to do business with him anymore.

Bristow arrived shortly after Siff found a table. They chatted for a few minutes and headed for the buffet. Bristow could see that something was disturbing Siff. They returned to their table, plates full, and Siff asked a few questions about Bristow's law practice. The lawyer mentioned with obvious pride some cases he had recently won for plaintiffs. Then he asked Siff how his business was going.

“I'm drowning,” Siff said. “A lot of my day is spent taking questions from clients. And I can't get answers for them. They want to know why their partnership investments are doing so badly.”

“Well, what do you tell them?” Bristow asked.

“To be honest, I don't have an answer. Every time I try to get one from the people at Prudential-Bache, or from the general partners, all I hear is a lot of double-talk. No one's being straight.”

Bristow just listened. Siff could already see the wheels starting to turn.

“And, Daryl, it's not just me,” Siff said. “I'm talking to brokers all over the country who are having the exact same experience. My only asset is the time in my working day. And, by not answering my questions, that's being usurped by the very management that's supposed to be supporting me. All they're doing is undermining me.”

Siff knew that he sounded as if he were whining. But he didn't care. This was the first chance he'd had to get his frustrations off his chest. After a few minutes, Bristow looked at him with a deadly serious expression.

“Joe, it sounds to me like you need to decide who you work for,” Bristow said.

“What do you mean?”

“You need to decide if you work for the firm, or if you work for your clients.”

For an instant, Siff felt a little offended. “Well, you're one of my clients,” he said. “Who do you think I work for?”

“I know what the answer is, but I don't think you've thought about the question.”

“I think about it every waking moment of my business day. I'm working as hard as I can.”

“That's right, Joe,” Bristow said. “You're working so hard for your clients that you're going to have to leave the firm.”

Bristow's words were like a splash of cold water. Until that moment, Siff had always considered himself a loyal company man. He had worked at the firm since 1979, when it was just plain old Bache. He'd ridden through the silver crisis, the Prudential purchase, the Capt. Crab scandal, and he always came out still loving the firm. But Bristow's words made him realize that he had finally reached the end. If he was going to help his clients, he had to leave.

“You know, Daryl, a lot of my clients know that I have a lot of lawyers in my client base,” Siff said. “They ask me sometimes if I can recommend a lawyer to them. Would you mind in the future if I gave them your name?”

“Not at all.”

Siff looked down at his food and thought for a moment. “One other thing, Daryl.”

“Yes?”

“Would you represent me? I think I'm going to need some help. Something really rotten is happening here, and I don't want to get hurt.”

Bristow smiled. “Of course I'll represent you, Joe.”

The luncheon meeting at the Four Seasons set off a snowball effect. Over the next few weeks, Siff referred a number of his clients who had invested in the Graham partnerships to Bristow. In turn, he showed his new lawyer certain marketing materials the firm had distributed.

Bristow took the information to one of his partners, Stephen Hackerman, a lanky, soft-spoken Texan with a talent for digging through financial records. Based on their conversations with Siff's clients, as well as a review of the documents, they decided to focus their investigation solely on the energy growth funds. Those partnerships seemed like a much clearer case of fraud, and Bristow did not want to bite off more than his firm could chew.

About the same time, Siff received a telephone call from William Webb, another big seller of Graham partnerships. Webb, who worked in the Prudential-Bache branch in Fort Myers, Florida, told Siff that he needed help. For years, ever since the fraud in the growth funds became evident to him, Webb had secretly been telling his clients to seek legal advice from a New Orleans law firm called Adams & Reese. He hoped that the lawyers there would use his clients to launch sweeping litigation that would crack open the secrets of the growth funds. But nothing seemed to be happening. He wanted to find a new law firm.

Webb told Siff that he needed lawyers for his clients and himself. Siff set up a conference call with Bristow. By the end of the call, Webb agreed to recommend the Houston law firm to his clients. He also agreed to retain Bristow himself. After all, by destroying his client base, Prudential-Bache had defrauded him, too.

With Bill Webb, Bristow obtained a critical advantage. Not only did the broker have one of the largest number of clients invested in the growth fund, but he had been collecting documents on the partnerships since he first became suspicious in 1988. He was a walking warehouse of evidence and plaintiffs.