“Simply invite the authorities to contact us for those details,” the letter said. “We will be pleased to provide them with a comprehensive report.”
A test batch of the letters was sent out in early September. After a number of positive responses from clients, thousands more were mailed in mid-October.
Bristow, Hackerman, and Moriarty stood back and waited to see what would happen.
The next curve ball in the growth fund litigation was thrown in December 1991. Prudential Securities reached a settlementâbut with Stuart Wechsler, a class-action lawyer in New York. The deal with Wechsler would pay the growth fund investors five cents on the dollar, at best. A hearing to review the settlement was called in federal district court in New Orleans, where a class action had been filed.
Bristow, Hackerman, and Moriarty flew to New Orleans for the hearing on December 11. They were bitterly angry. Prudential Securities seemed willing to do anything to limit its liability. The firm had spent months arguing that the Texas lawyers weren't watching out for the clients' interests, but it thought it was just dandy to deal with a lawyer who would settle the claims for pennies on the dollar.
“That firm only likes lawyers who settle on the cheap,” Bristow said on the flight to New Orleans.
To a large degree, the class-action settlement being proposed by Wechsler and Prudential Securities was an enormous threat to the Bristow litigation. All of his clients had turned over decision-making power in their cases to a committee of investors. But if this settlement was approved, they would be receiving a complex notice in the mail about it. If they didn't opt out, the clients would get their five cents on the dollar and lose the right to pursue the other lawsuits. Bristow had met enough of his elderly and unsophisticated clients by this time to know that explaining to them how to opt out would be difficult. They would simply be confused. Prudential Securities would wipe out a huge portion of Bristow's client base, making it all the easier for the firm to ignore those people's claims. It was a devious tactic.
The hearing before Federal Judge A. J. McNamara started promptly at 9:00 A.M. The courtroom was packed with lawyers. Wechsler made one of the first presentations. McNamara asked him how many clients he represented, not as a class, but individually, and how much they invested in the growth funds.
“To answer your first question, Your Honor, the number of plaintiffs is twelve,” Wechsler said. “I don't have the precise amount of their investments, but they are extremely small.”
Big deal
, Moriarty thought. Here his group represented 5,800 investors. But this New York class-action lawyer was pretending to speak for all growth fund investors because he had found twelve.
Wechsler described the terms of the settlement. The total value, he said, was $49 million. Prudential Securities and Graham Resources would put up $12 million in cash. The remaining money would be used by Prudential Securities to repurchase the growth fund partnership units, at prices of $200 apiece or less.
“But what are the units worth?” McNamara asked.
“The value of the units may be more,” Wechsler said.
The judge looked at Wechsler, puzzled. Most investors didn't clamor to sell assets for less than their actual value. It didn't take much arithmetic to recognize that if Prudential Securities could make a profit on every growth fund unit it purchased, it might be able to finance the settlement with money that belonged to the investors. It didn't sound like that part of the settlement should be counted as a benefit to investors, McNamara said.
Wechsler protested, saying that investors did not know how to sell those partnership units themselves, so at least they would be getting something. A few minutes later, McNamara asked Hackerman how he viewed the buyback proposal.
Prudential Securities was offering clients twenty cents on the dollar to purchase the investments, Hackerman said, even though the firm's own records showed that the units were worth thirty-five to forty-two cents. Essentially, the settlement was structured in such a way that Prudential Securities, one of the authors of the sales fraud, could arguably double its money in profits from the repurchased partnership units.
“They will pay the class members twenty cents, and the class members will give them back something that's worth thirty-five cents and give up all their claims,” Hackerman said.
“You're telling me âMan, this is off the wall,' ” McNamara said. “What's on the wall?”
“I think the plaintiffs in the case when we get it to trial will win,” Hackerman said. “The damages will be essentially a dollar for each dollar investment. I think an offer that doesn't get these people whole in terms of their investment is woefully inadequate.”
The judge circled back to the buyback offer. It would eliminate the risk for the investors in holding the units, he said. Perhaps that made it a better deal for sellers.
As Hackerman listened, an image flashed through his mind of Darrell Haney, the elderly steelworker he represented. He saw Haney, sitting in a room at the Sheraton Hotel in Fort Myers, crying bitterly about his broken dreams.
Hackerman looked up at the judge. Perhaps it wouldn't be a bad deal, he said, as long as the seller knew what he was doing and what the real values were.
“Prudential knows a lot more about these values than Mr. Haney in Fort Myers, Florida,” Hackerman said. “Mr. Haney is seventy-eight years old. And when he picks up all this, he won't have any idea what the values are.”
As the bickering went back and forth, Moriarty began to scowl. He was sick of the lies, deceptions, and bullying tactics of Prudential Securities and Graham. As far as he was concerned, these two companies were evil.
Hackerman finished his presentation. McNamara looked at Moriarty. “Do you want to be heard now, sir?”
Moriarty stood. “I do, Your Honor.”
He identified himself and then set the verbal guns blasting.
“I would like to be the voice from the wilderness, speaking for common sense and fairness and decency,” Moriarty said. “The thought that went through my mind as I sat and listened this morning was something was rotten in Denmark. Let me give you a little overview to the threshold question: Is there any reason to believe this is more than a frivolous settlement? The answer is no.”
He described the sales pitch the firm had made on the growth funds to “the little old men and little old ladies from one end of this country to the other.” He said that the growth funds were supposed to have purchased discounted, overcollateralized bank loans and that investors were told that the deal was virtually guaranteed. Now, Moriarty argued, they wanted to say that a few pennies on the dollar was substantial compensation.
“This is a settlement which is negotiated out of weakness at the wrong time, at the wrong place, and by the wrong parties,” he said.
His voice rising, Moriarty pointed toward the table full of lawyers representing Prudential Securities and Graham.
“I would encourage the court to think that the only parties in this room that benefit from this scheme are the defendants who stand the likelihood of extinguishing hundreds of millions of dollars of liability,” he said. “When this scheme unfolds, when we try this case a year from now, and when all this evidence is put before a jury, I want to be the one to say, âI said that five cents on the dollar is ridiculous.' ”
Moriarty lowered his arm and paused. “Thank you, Judge,” he said, and sat back down.
McNamara smiled for a moment. Moriarty was particularly convincing.
“If this was an ex-parte trial,” McNamara said, referring to a situation where only one side in a dispute presents its view to the judge, “you would probably win.”
The final weeks of 1991 were upbeat for Bristow, Hackerman, and Moriarty. McNamara refused to approve the class-action settlement proposal. The lawyers would not have to waste their time trying to inform clients of their need to opt out.
Even better, each day brought new batches of letters to them from securities regulators across the country. Moriarty's computerized mass mailing to clients had hit the target. For weeks, they had been receiving copies of thousands of clients' letters, many in the shaky handwriting of the elderly and infirm. The lawyers loved the letters, in part because the brokerage firm was suffering for having sold partnership after partnership to the same investors. Although Bristow, Hackerman represented the clients only for the growth fund investments, most of them were loaded up with a range of other partnerships. So in addition to the growth fund, the regulators were receiving written complaints about dozens of other partnerships. Each letter instructed the regulators to contact Bristow, Hackerman for more information.
By late December, the regulators had started doing just that. State securities regulators from Florida, Arizona, New Jersey, and a number of other states had requested copies of the documents and records obtained by the law firm. The National Association of Securities Dealers had also asked for information and had begun an investigation of Graham's marketing subsidiary. The New York Stock Exchange and the SEC had opened more than fifty separate informal inquiries into partnership sales practices at the brokerage firm. For every investigation, Prudential Securities had to hire lawyers to respond with voluminous position papers. The Texas lawyers knew that their tactic was costing Pru-Bache a huge amount of time and money.
But the impact of the letters was far greater than that. Finally, more than a decade after the limited partnership fraud began, it was being exposed to law enforcement officials across the country.
Any hope Prudential Securities had of containing the scandal was gone.
Wayne Klein brought a meeting of state securities regulators to order on January 12, 1992. The regulators had gathered for their annual conference that year at the St. Petersburg Hilton in Florida. There they planned to share ideas and discuss emerging trends they were seeing in securities law.
Klein was the chairman of the enforcement meeting in the North Ballroom of the hotel. As the discussion began, it took him only a few minutes to notice the first trend. A number of states reported that in recent weeks, they had been receiving numerous complaints about fraudulent limited partnership sales by the firm now known as Prudential Securities. One at a time, several state regulators laid out what they had heard. Complaints had been filed about fraud in the growth funds, the energy income funds, a number of real estate partnerships, and other deals sold by the firm. It seemed as if suddenly everyone knew where to bring their concerns.
Klein told the assembled regulators that his department had been looking into the partnership problems for some time. After discussion, the assembled regulators decided that they should try to share information in order to speed up their investigations.
By the end of the meeting, Klein had a list of about half a dozen states that wanted to coordinate their efforts. But he also had something more important. Until now, after more than a year of investigating, Klein had felt largely alone in his efforts. At times, lawyers for Prudential Securities subtly played on that, raising doubts in Klein's mind about whether he and his investigators had really found a problem. After all, if they were on the right path, the lawyers suggested, where was everyone else?
All those doubts ended in St. Petersburg. Klein flew back to Idaho relieved. For the first time, he felt certain that his investigation wasn't off base.
The offices of Bristow, Hackerman were packed with lawyers, staff members, and their families over the Memorial Day weekend. They ate pizza, laughed, and stuffed 5,800 envelopes with the notices that Prudential Securities and Graham Resources had agreed to settle the growth fund litigation.
The months of hard battling had paid off. The multiple regulatory investigations appeared to weaken the resolve of the companies to keep fighting the litigation. Already the National Association of Securities Dealers, using information obtained from Bristow, Hackerman, was preparing to bring charges against Graham for improper sales practices. That made victory all the sweeter.
The settlements brought in more than ten times the cash that had been proposed only six months earlier by Prudential Securities and Graham, and would make the investors whole. Clients in the first growth fund would receive fifty cents on the dollar on their investments. Combined with previous distributions, expected future distributions, and the remaining value of the partnerships, a client who invested $1,000 in the first growth fund would receive $1,058. For the second growth fund, the $1,000 investor would receive $1,138.
Under the terms of the agreement, Bristow, Hackerman would not pursue any new claims against Prudential Securities for other investors. The law firm also agreed to give the brokerage firm all of the documents it had obtained. Apparently Prudential hoped to pull the incriminating records out of circulation.
But that condition really didn't matter. By the day that the settlement agreement was signed, the Texas lawyers had copied and boxed up every important document and shipped them all to the Securities and Exchange Commission in Washington, D.C.
Mary Hughes, a securities regulator in Idaho, stepped into Klein's office in the early summer of 1992. She had just been speaking with members of the SEC enforcement staff in Atlanta. The commission was investigating apparent irregularities in Prudential Securities' Atlanta branch that might have violated the terms of the Capt. Crab settlement. The SEC also told her that it was starting to investigate the emerging partnership scandal. That gave Hughes an idea.
Klein looked up as she stepped in.
“Wayne, I've been talking to some people over at the SEC who are looking into the partnership situation at Prudential,” she said. “They've been talking with some people in other states who are running their own investigations.”
“Yes?”