Serpent on the Rock (7 page)

On July 17, Darr followed the advice. He wrote a check for $30,000 to Josephthal, saying he was turning over a fee. Then, since he had generated the money, Darr demanded $15,000 back as a finder's fee, and got it. The threat of huge lawsuits for both Josephthal and Darr was effectively eliminated.

Jacobi's advice only solved Darr's potential legal problems; his career was still tenuous. On his days away from Josephthal, Darr hunted for a new job. But he was not looking much for a position on Wall Street—instead, he tried to sell his own tax shelters. He spoke with people he knew in the business, bouncing around possible ideas for an oil deal. He called Jerry Leach, an old colleague from Merrill who now ran the tax shelter division at Smith Barney, Harris Upham & Company.

The two men met for lunch at a restaurant near Wall Street. After a few pleasantries, Darr told Leach that he had gotten together with some associates in the energy business and was putting together a tax shelter with them. Darr would be one of the general partners on the deal. Did Leach think that Smith Barney might be interested in selling the deal?

Leach smiled politely. No, Smith Barney would not be interested in participating in any such deal.
With you
, he thought.

Leach already knew about Darr being caught taking money. The rumors he heard from a buddy at Merrill were that Josephthal essentially had dismissed Darr but was keeping him on staff while he tried to find a new job. That was enough to make Darr radioactive in his eyes. Leach wanted the general partners in his firm's deals to be squeaky clean; there was no way he would do business with Darr. The lunch ended amicably, but with Darr empty-handed.

Darr's meeting with Anton Rice III, another Merrill alumnus, did not go much better. Rice, known to everyone as Tony, had been somewhat of a success off Wall Street—since leaving Merrill, he had plunged headlong into the energy business and was now a senior officer with Graham Resources, a Louisiana oil company. Like Darr, Rice knew the pains of being accused of improprieties. After Rice had left Merrill, executives from the firm investigated allegations that he had held a financial interest in some of the land he helped arrange for sale to various Merrill partnerships. In other words, the deals for public investors might have been benefiting him personally. But after questioning executives, Merrill dropped the investigation.

At the lunch, Darr told Rice that he and a friend wanted to take over as the master salesmen for all of the Graham energy partnerships. Graham would pay them to travel the country and persuade brokers at different firms to sell the deals to their customers. After two hours of haggling, Rice rejected the proposal. Darr wanted too much money; Graham could not possibly afford it.

Darr's luck seemed to have run out. Then, in the fall of 1979, his fortune changed: He received a telephone call from John Holmes, a former investment banker with Oppenheimer & Company who was running a management-consulting firm. There had been a shake-up at the tax shelter department of Bache, Holmes told him. Steve Blank, the longtime head of the department, had been dismissed a few months earlier. The firm was looking for someone with experience in running a tax shelter division. Would Darr be interested in the job?

Darr launched on a series of interviews, and the Bache executives liked what they saw—Lee Paton, the head of marketing, who was assuming reporting responsibility for the department, was particularly impressed. Darr seemed to be the kind of fellow who knew that his job was to sell as much product as possible. All they needed was to conduct the usual background check with former employers. If there were no surprises, Darr had the job.

The telephone call to Josephthal came in November 1979. An investigator from Fidelifacts, a background-checking firm, spoke with Raymond Mando, an executive vice-president with Josephthal. Mando had few ties to the tax shelter division—he headed administrative operations for Josephthal, including personnel. No one had told Mando about the Darr investigation.

A competitor wanted to hire Jim Darr, the Fidelifacts investigator said. What did Mando think of him?

Darr was dependable, cooperative, and reliable, Mando replied. His work performance was excellent. Well, the investigator asked, what about Darr's integrity?

“There was never any reason to question his honesty,” Mando said.

“We are pleased to announce that James J. Darr, first vice-president, has joined our firm as Director of our Tax Investment Department.”

Bache's small, boxed advertisement, known in the securities business as a tombstone, ran in the
Wall Street Journal
on Friday, November 9, 1979. It was buried near the bottom of page 34, between a tombstone announcing the sale of two egg farms and another ad about the sale of some assets by an electronics company. But, given the attention the Bache ad attracted among the people who knew Darr, it may as well have run on the front page. Josephthal executives who had heard of Darr's troubles could not believe that a firm as big as Bache would hire a man like Darr without doing some intensive investigation.

Herb Jacobi was as stunned as anyone. The Darr investigation had driven First Eastern under. Only Josephthal had sold the company's tax shelters, and since learning of the payments to Darr, it refused to do business with Antell. Jacobi now worked as a lawyer with a regional brokerage firm. Still, after seeing the announcement of Darr's new job, he knew he had a big opportunity. After all, he had helped save Darr; he was sure the man would be grateful. Now he had an executive at a major retail brokerage firm in his debt. This, he thought, was his lucky day.

Jacobi called Bache's main number. An operator transferred him to Darr's line. Apparently his secretary was not in place yet—Darr picked up the phone himself.

“Hey, I saw you in the newspaper today,” Jacobi said. “Sounds like a great job. Congratulations.”

Darr paused. It was a cold, awkward silence. “It's not nearly as good as you think,” he said crisply. “And I can't do anything for your clients.”

Without another word, Darr hung up.

After his months of anguish, Darr clearly didn't think he needed Jacobi in his corner anymore. Not when he had landed on his feet at a place like Bache. Now, with a firm that size standing behind him, he really had the power to do some business his way.

CHAPTER 2

HARRY JACOBS, THE CHAIRMAN of the Bache Group, was ready to face the enemy, that interloper who had caused him anguish for so long. That Canadian who hadn't built his career on Wall Street, as he had. Jacobs was sure Sam Belzberg would like nothing more than to raid his firm just to fire him.

After a final check of his notes, Jacobs stepped out of his chauffeur-driven car. As a light snow fell around him in the brisk air, he strode toward the door of the American Airlines terminal at New York's La Guardia Airport. At fifty-nine, he was not much to look at. Bald, thin, and short, Jacobs looked more like a friendly shoe salesman than the man at the top of a major retail brokerage firm.

It was December 16, 1980, a Tuesday, at about 4:00 in the afternoon. Bache's battle with Belzberg, a hard-driving entrepreneur and the firm's largest shareholder, was getting vicious. Belzberg had been buying Bache stock for years and made no secret of his disdain for its managers. In his mind, they had transformed one of Wall Street's prestige names into a joke. Once considered a contender to surpass the size of the giant Merrill Lynch & Company, Bache had tumbled in less than a decade from the country's second-largest brokerage to the eighth. Its past successes lent the firm enormous influence among retail investors, but Wall Street competitors derided it as a “schlock house,” good for little more than peddling second-rate securities to naive investors. Belzberg argued that he could turn things around for Bache. He was demanding seats on the firm's board.

Jacobs staunchly opposed the idea. Sure, the firm had a lousy reputation. And yes, it often didn't make much money even when competitors thrived. But now, after thirty-four years with Bache, Jacobs thought he could fix that. He had been named chairman the previous year, after more than a decade of quietly, patiently waiting in the wings. He knew the firm's byzantine workings and its peculiar internal politics. He had won many admirers there through his genial charm and knowledge of the business. He wasn't about to surrender the firm to an outsider now. That meant fighting Belzberg with every bit of ammunition he could find, using the brass-knuckle rules of Bache politics.

Walking past American's ticket counter, Jacobs headed toward the entryway of the Admiral's Club, which offered a comfortable lounge and bar for the airline's best customers. It was here that Jacobs had agreed to meet Belzberg alone, without the usual coterie of lawyers and advisers, in a last-ditch effort at compromise.

The two men shook hands. As they sat down, Belzberg said that he regretted they hadn't met by themselves more often to talk things over.

Belzberg paused. “Mr. Jacobs, I'm embarrassed to ask this, but my lawyer said I should,” he said. “Are you wired?”

“I beg your pardon?” Jacobs snapped.

Belzberg held up his hand. “Fine, that's good enough for me,” he said. “I assure you I'm not wired. So let's talk.”

For the next hour and a half, they discussed Bache, its problems, and Belzberg's ideas for it. Beyond his knowledge and contacts, Belzberg said, Bache would get the benefit of the trading and investment-banking business from his Canadian companies. If they laid aside their anger, everyone would profit. The bitterness between the two sides developed only, Belzberg said, because Bache reneged on promises to him and fought dirty.

“Slowly but surely, you people dug yourself into a hole with confrontation,” he said. “The way to end this is to give me two seats on the board. I already own more than fifteen percent of the firm. I'm entitled to the seats.”

Belzberg looked Jacobs straight in the eye. “If you refuse me, I will have to look at other avenues at my disposal,” he said menacingly. The message was clear: Either Belzberg got his seats, or he would bring in other investors to help buy the whole firm.

Jacobs had listened politely to Belzberg the whole time. Now he stood and extended his hand. “All right, Sam, I'll let you know soon,” he said. Belzberg shook his hand and watched Jacobs walk away, confident he had made his point and would get the seats he thought he deserved.

He was wrong. Instead, that airport meeting set in motion the first battle ever for control of a public brokerage firm. When the fight was over, Belzberg learned a secret from a Bache executive that made him realize his confidence at the airport meeting had been a self-deception. There had never been a chance for a deal. After all, compromise requires trust. And that day, Belzberg heard, Harry Jacobs
had
been wired.

If he had known more about the tortuous history of Bache politics, Belzberg might not have been surprised.

THE TRADITION of political intrigue that drove Bache's history unofficially took shape at 12:10 A.M. on March 24, 1944, a few months shy of the firm's sixty-fifth anniversary. At that moment, Jules Semon Bache, the eighty-two-year-old Bache patriarch who had transformed a tiny family commodities brokerage into a prominent Wall Street securities firm, died peacefully in his sleep at his winter home in Palm Beach, Florida. He had been bedridden for weeks, the rigors of old age finally slowing his body and mind. His family took shifts standing by him to await the end. In his final minutes, Jules's daughter, Hazel Beckman, and a granddaughter, Muriel Pershing, were at his bedside, quietly holding his hand.

Despite the long expectation of his death, Jules Bache's gentle passing roiled J. S. Bache & Company, the firm he had controlled since 1892. Though the old man had gradually withdrawn from the firm's daily operations over the years, at times threatening to shut the place down, no one had planned for his succession. The competitors for his job eyed each other jealously. The battle for power was engaged.

Succeeding Jules Bache would have been hard for anyone. Throughout his career, he had nurtured a reputation that was almost larger than life. He had the foresight to build his firm with the business of small-time investors—like European Jews in the garment industry—who were ignored by Wall Street's tonier investment houses. Once he saw success, his client roster blossomed to include financial giants like the Rockefellers. He became a prominent New York socialite, known and respected among members of the monied class for his passion for fine art.

None of the candidates seemed capable of stepping into that role. The only blood family member at the firm was Jules's nephew, Harold Bache. But privately, Jules viewed his nephew as an unimaginative lightweight unworthy of the Bache name. Harold didn't have Jules's regal appearance—in fact, he was simply unattractive. At five-four, with a compact, muscular body, jowly face, and large ears, Harold looked nothing like the visionary Jules wanted to have replace him.

The days after his death made that clear. Jules left Harold out of the will, dividing his $10.6 million estate equally among his three daughters and their families. Worse, Jules bypassed his nephew as executor, bestowing the honor on some sons-in-law and grandsons-in-law, including Clifford Michel, a partner at the firm. These four executors received explicit instructions: Liquidate Jules's investment in the firm. He wanted J. S. Bache transformed into a penniless corporate shell.

With that final indignity, Harold the plodder came to life. Most people at the firm knew he had little money of his own. But he was not going to allow his uncle's spite to destroy the family business. Harold sought out customers and friends who were willing to invest a few hundred thousand dollars in the firm in exchange for a partnership role. Unyielding in his search for cash, Harold successfully beat Jules's posthumous effort to kill the firm. In a little more than a year, he had raised more than $4 million in capital from seven new general partners and six new limited partners.

Finally Harold rid the firm of the influence of the man who so mistreated him. In one last flourish, he banished his uncle's name, reorganizing J. S. Bache into Bache & Company. For years to come, the only remnant of Jules Bache would be on incoming mail incorrectly addressed to the old name. Each time one of those letters crossed Harold's desk, he took out his pen and scratched out the offending “J. S.”

Harold proved adept at steering the firm. Over the next twenty years, its influence surpassed what it had under his uncle's guidance. He committed himself to a philosophy of constant, unrelenting growth. His dream, recited often to his friends and partners, was to build a brokerage even bigger than Wall Street's giant, Merrill Lynch. He never succeeded, but not for lack of effort—in a little more than two decades, the number of Bache employees grew from 1,800 to almost 6,000.

Every day, Harold awoke at 6:00 A.M. at his duplex apartment on Park Avenue and was whisked downtown forty-five minutes later by the same taxicab. He arrived at his desk by 7:15, long before the 9:30 opening bell of the stock market, a habit that won him the nickname in the newspapers of “the man who opens Wall Street.” From his office just off the firm's entryway, Harold kept a steady eye on the stream of Bache executives arriving each morning, greeting them as they walked down the firm's red-carpeted corridor. He frequently wandered about the offices, stopping to ask each man about his job and his life. Sometimes he would relive his days in the marines, rolling up his sleeves to talk battlefield tactics and tell war stories with other veterans.

Such strategizing proved useful in managing Bache, where life grew increasingly treacherous. While Harold's decision to bring in new partners saved the firm, it also created an environment where the intense political maneuvering never ended. With the new capital, his ownership stake in Bache was only about 10 percent. Any of Harold's new partners could throw the firm into disarray by withdrawing their money. Since, for many, that investment composed much of their personal wealth, they wanted as much say in the firm's management as Harold himself.

To keep everyone happy, Harold blurred lines of authority, leaving no one with the power for final decision making. Anyone who gained authority was viewed as a threat by the others and toppled from power. No one could afford to lose any political strength, so no one could gain any. Harold became a master manipulator of Bache's fragile egos. With so much infighting, a strong management team couldn't develop; Bache was transformed into a haven for Wall Street's mediocrities.

Titles became virtually meaningless, as they were transformed into symbols of ego gratification rather than descriptions of responsibility. By the 1960s, more than seventy vice-presidents roamed the halls of Bache, and all of them jealously guarded whatever small power they might have. The thick bureaucracy slowed the firm's responses and destroyed managers unwilling to play Bache's politics of appeasement.

By 1968, Bache was in the same shape it had been in when Jules died: one person in control, and no designated successor. With prodding from his longtime partners, Harold, then seventy-three, finally agreed to name a new Bache president. He picked Harry Jacobs, the head of the firm's syndicate department, and planned to announce his decision in April.

The announcement never came. On March 15, 1968, Harold's driver arrived as always at the Bache Park Avenue home at 6:45 for the morning trip downtown. Unlike most days, Harold was not waiting for him. The driver knocked on the front door, and Harold's wife, Alice, opened it. She did not know what delayed her husband—the two had been sleeping in separate bedrooms for years. She and the driver went to Harold's bedroom. When he didn't answer a knock on the door, they swung it open: Harold was lying in his bed, dead from a heart attack.

For the second time, the death of a Bache threw the firm into chaos. Senior executives launched an endless series of meetings. The squabbling continued for almost a month. Finally, on April 11, the firm made an announcement that reflected its true inner turmoil—no one would be Bache's chief executive. Instead, three rivals for power would share those duties: Jacobs as president; John Leslie, an accountant and lawyer at the firm, as chief administrative officer; and Robert Hall, the firm's treasurer, as chief financial officer.

The arrangement was part of a complex political ploy engineered by Leslie, perhaps the most unlikely candidate to succeed Harold Bache. Leslie had no experience in the firm's moneymaking businesses, having spent all his time on legal and accounting issues since joining the firm in 1955. He had minimal personal interest in the stock market—for years, executives at the firm gossiped that Leslie never owned a single share of common stock. But Leslie craved the power and prestige of running a securities firm.

Born in Vienna, Leslie was aloof and something of a stuffed shirt. Unlike the gregarious Harold Bache, Leslie rarely chatted up his colleagues, who considered him funereal, with cold, clammy hands. Formalities meant a lot to Leslie: He called no one by their first name and demanded that he be referred to as “Mr. Leslie.” He advertised his appointment as an honorary consul general for Austria by always wearing the title's ribbons and medals to the firm's formal functions.

In the months after the selection of the new management team, Leslie quickly gathered political strength, bluntly letting executives know that he would remember who didn't support him when he gained control. The tactics worked—in April 1969, Bache named Leslie as chairman. No one opposed him for the job.

With Leslie's stiff personality setting the firm's tone, formalities took hold throughout the firm, even in the men's bathroom, where he posted a sign advising “Please flush.” Fortifying his control, Leslie reinforced the old politics of Bache that were the source of his power. A new, complex web of committees diffused the authority of any possible successors for the job and allowed Leslie to play each executive's interests off another's. Success at Bache became a matter of who could be pushed out of the way, as internal politics transformed into guerrilla warfare. Executives launched investigations of one another's expense accounts, looking for problems. If that didn't work, the same tactic would be used on a competing executive's underling. Life at Bache was getting nasty.