A year later, Webb met up with Noah Sorkin, a member of the Prudential-Bache law department. They were both attending an arbitration. Casually, Webb asked Sorkin if he had ever heard why he had been fired.
“Oh, yeah,” Sorkin said. “I understand that you were suggesting to your clients that they seek legal counsel.”
The damage inflicted on Webb affected brokers and managers throughout the firm. In the days before Webb was fired, a group of about ten brokers had been speaking with him, angry about the losses suffered by their clients. All of them vowed to work with Webb and planned to refer their clients to Daryl Bristow.
Webb's firing ended all that. The brokers never came forward. They left their clients to fend for themselves. Their decision to protect themselves seemed justified a few months later, after Joe Siff left the firm. The law department launched a massive, countrywide effort to find dirt on Siff and to get his securities license pulled. The lawyers let him know it. Brokers were terrified.
By then, Prudential-Bache clients had a new and unlikely ally working for them. In the western town of Boise, Idaho, a securities regulator had heard strange things about Pru-Bache a few months before from a single investor. It wasn't much to go on. But once he started following the trail of evidence, that regulator would prove to be one of the most intractable opponents the firm would ever face.
Wayne Klein, the Idaho securities commissioner, looked up from the portable computer on his desk when he heard a knock at his office door. It was late on a Friday afternoon in September 1990. Wendi Adams, a receptionist for his department, stood in the doorway.
“Wayne,” Adams said, “I've got a gentleman here who has come to see Bill Blessing, but he's gone for the day. What should we do?”
Blessing was one of the department's top examiners. Anyone who needed to see him was probably in trouble. Klein saved the files on his computer and pushed back from his desk.
“Let me see if I can help him,” he said.
Klein's modest second-floor office in downtown Boise was just off the reception area for the Securities Bureau, a division of the state department of finance. It made Klein the most accessible person in the office other than the receptionist herself. He often spoke to Idaho residents who dropped by with fears that they had been swindled. Many of the bureau's employees worked flexible hours and were out of the office after four o'clock. Anyone who dropped by that late stood a good chance of meeting with the boss.
Klein stepped out into the reception area and saw a casually dressed older man sitting on one of the chairs that lined the wall.
“Hello, sir,” Klein said. “I'm Wayne Klein, the chief of the Securities Bureau.”
The older man stood up and shook Klein's hand. “My name's Doug Burnett. I've been speaking with Bill Blessing about something and was bringing by some information for him.”
“Well, Bill's not here now. But if you'd like, you can come into my office and speak with me.”
Burnett agreed, and walked the few steps into Klein's office, where both men sat down. Burnett told Klein that he was retired. Years earlier, he had owned a nursing home and sold it for a profit. With his new nest egg, he went shopping for a broker in Boise. Burnett himself had been an agent with Prudential Insurance many years before and thought the company had high integrity. On that alone, Burnett decided to take his business to Prudential-Bache. He opened an account with Louise Schneider, who was then one of the firm's brokers in its Boise branch.
“I told her I was retired and that I didn't know much of anything about the markets,” Burnett said. “I just wanted safe, steady, and secure investments. She assured me that she could do that.”
Burnett showed Klein a copy of a document that listed his investment objectives as safety and preservation of capital. Then Burnett handed him some of his account statements.
“They sold me things that they said were safe and conservative,” Burnett said. “But they have been performing very poorly. I was supposed to get these great returns, but the checks that come get smaller and smaller every quarter. They're nowhere near what I was told I could expect.”
Klein glanced through the account statements. Most of the investments seemed to be limited partnerships, with names that were not familiar. A large number of them were in the oil and gas business. On the statements, they had names like P-B Energy Income and P-B Energy Growth. Klein knew from the names that these were proprietary partnerships that only Prudential-Bache sold.
Burnett said he had a range of other documents, which he handed to Klein. Most of the records pertained to the energy income partnerships, which were cosponsored by Prudential-Bache and a company called Graham Resources. Klein had never heard of the oil company before. But with just a cursory examination of Burnett's material Klein was sure of one thing: There was no way that these risky partnerships could have been properly sold to an investor like Burnett, who wanted his savings preserved.
As he reviewed the documents, Klein also sized up Burnett. The elderly man seemed articulate and sincere. If this case ever went to trial, Klein felt comfortable that a jury would find him a credible witness.
Klein finished thumbing through the material. “Let me make a copy of these documents so we can get something moving here,” he said.
He and Burnett walked to the office copying machine. As Klein fed the documents through, Burnett continued to spell out how he felt he had been deceived by his broker on the partnership investments.
Klein nodded. “We're going to want to investigate this and find out if there indeed is a violation here,” he said. “Then if there is, we have two desires. We'll want to get your money back, and we want to make sure that the people responsible are reprimanded so that it doesn't happen again. Our job is to ensure that people who are licensed to sell securities do it by the book.”
Sometime after five o'clock, more than an hour after Burnett had come into the office, Klein finished his copying and his questioning. He shook Burnett's hand.
“Mr. Burnett, thank you very much,” he said. “I'll forward this on to our examiner, and we'll get back to you if we need more information.”
He stood up and escorted Burnett out. Then Klein headed back into his office, looked through the documents one more time, and stacked them on his desk. He felt relieved that he was dealing with a firm like Prudential-Bache instead of some bottom feeder. At least, he thought, the firm will be open and cooperative in helping to get to the bottom of this. Probably, he thought, this whole thing could be resolved in a few weeks.
Klein had no idea that he was on the threshold of what would become a three-year war.
When Burnett brought in his complaint, Klein had already established a strong reputation as a no-nonsense securities regulator. He was named the chief of the bureau in 1986, becoming a rare Republican working for Democratic governor Cecil Andrus. An enforcement purist who won the respect of both parties for his success in rooting out fraud, Klein firmly believed that dishonesty in the investment world polluted the free market. It was a conviction he had developed at a young age.
One of twelve children in a devoutly religious Mormon family, Klein grew up poor in Utah. He had always wanted to be a policeman, long after most of his friends began thinking about other jobs. His first exposure to the markets came in sixth grade, when a classmate received fifty shares of stock for a birthday present. It fascinated Klein. Here was a boy his own age who owned a piece of a giant company. Klein recognized that money could be earned from the capitalist system not just through physical labor but also by putting savings to work. The system offered anyone, even him, the chance to step out of poverty.
In high school, a friend of his brother told Klein about some investment ideas. Klein took the little money he had and used it to purchase the inexpensive stocks. Some of the investments fared well, some poorly. But he walked away from the experience with a tidy profit. After working his way through collegeâincluding two years spent in Brazil as a Mormon missionaryâKlein was accepted by George Washington University law school. In the 1980 school year, he found a job with the Washington office of Fried, Frank, Harris, Shriver & Kampelman. There he worked with Harvey Pitt, a former general counsel with the Securities and Exchange Commission and one of the most respected securities lawyers in the business.
After graduating from law school, he worked for a year with a Washington, D.C., law firm. But he and his wife wanted to return to the West, and by 1983, Klein was working in the Idaho Securities Bureau. Three years later, he was running it.
As the fast-money days of the 1980s unfolded, Klein was horrified by the number of investment scams that came through Idaho. In his first years on the job, his department uncovered a scheme that raised $1.2 million from Idaho residents. The investment was supposed to offer 120 percent returns after the money was shipped to the Bahamas. But it was all a scam. Klein arranged a complex “sting” that tricked the crooks into returning almost $1 million to Idaho, where it was recovered. The investors got most of their money back.
As bureau chief, Klein committed himself to protecting the financial futures of investors throughout the state. To keep himself focused, he hung two framed stock certificates of ten thousand shares each on the wall of his office. He had purchased the shares in 1972, and now they were largely worthless. The stock was his daily reminder that whenever he reviewed an investment proposal, he wanted Idaho investors to end up with something worth more than wallpaper. That, Klein believed, was the only way to maintain public confidence in the marketplace.
That dedication ensured that Burnett's complaint would be aggressively pursued by Klein's department. The following Monday morning, Klein took the stack of information from Burnett down to Bill Blessing's office and discussed what he thought the documents showed. Blessing said that he would contact the firm in New York for copies of any other necessary records. He also would look into the accounts of some of the other clients of Louise Schneider, Burnett's broker. If inappropriate investments were sold to Burnett, chances were good they were sold to someone else, too.
Klein agreed and headed back down to his office. He felt comfortable that Blessing would easily get to the bottom of this. Big firms didn't want bad brokers in their midst.
“
Eight?
” Klein asked, sounding appalled. “The same thing happened to eight other customers?”
Bill Blessing nodded. “That's what we found when we went through Schneider's accounts.”
Blessing had been investigating the Burnett complaint for a few weeks. He had obtained information from New York and had also stopped by the Boise branch unannounced to pore through their records. What Blessing found disturbed Klein deeply. Eight of Louise Schneider's clients had been elderly people who were sold limited partnerships with descriptions of the investments as safe and secure. All claimed to have been told that they could expect a high rate of return on the investments. All had suffered tremendous losses.
Klein knew that even the best of brokerage firms could not help it when a bad broker turned up in its midst. But that was why compliance procedures were supposed to be so tight. That way, when a broker did something wrong, red flags would get raised and the problems would be halted. A few would always get through. But eight customers apparently cheated by the same broker amazed him. Somebody had been slacking off on the job.
“How did the branch manager let it happen to so many people?” Klein asked rhetorically. “For goodness' sake, for that matter, how did New York let it happen?”
“It looks pretty bad,” Blessing said.
The two men discussed the investigation for another few minutes and decided that they needed to branch out. If one broker took advantage of the apparent lack of supervision at the branch, Klein said, others might have, as well. The regulators would start checking the records of other brokers in the branch. And perhaps, Klein suggested, the time had come to speak with Louise Schneider.
Blessing and a colleague, Mary Hughes, spent months checking records, calling customers, and interviewing brokers. In early 1991, Blessing updated Klein on what they had found. Other brokers in the branch had also sold a number of limited partnerships, he said. Although none of those brokers had so great a concentration of unsuitable sales as Schneider, their customers still complained. In interviews, most of the clients who purchased limited partnerships said that they, too, had been assured that the risky investments were safe and promised high returns.
Finally Blessing said they had interviewed Schneider herself to find out her side of the story. She no longer worked at Prudential-Bache, having left the year before to take a job at Shearson Lehman Brothers. Blessing seemed ready to laugh out loud.
“And, Wayne, get this, you're going to love her excuse,” Blessing said. “She said that all she did was read off the sales material that was created by Prudential-Bache in New York. So she says we shouldn't blame her for saying what New York told her to say.”
Blessing smiled. “That's a new one for me.”
Klein looked out his window for a moment, deep in thought. Something about this case had been bothering him from the beginning. When his investigators had called Prudential-Bache in New York, Klein figured they would react in horror that one of their brokers had done something so wrong. Maybe they would launch their own investigation. Perhaps even fire the branch manager. But instead, the lawyers at Pru-Bache didn't seem particularly concerned. It was almost as if this were something the New York executives had heard about before.
Still, Schneider could easily just be trying to shift the blame onto her superiors. Klein had seen a lot of finger-pointing in cases before. There was only one way to find out what was true. He turned back to Blessing.