Serpent on the Rock (71 page)

When the firm faced the growth fund litigation from Bristow, Hackerman, it sent a letter in June 1991 advising clients
not
to participate in the lawsuit. The author notes that this was not a typical class action, which might be settled for pennies on the dollar. Indeed, Prudential-Bache was pushing for a class action, and Bristow, Hackerman was resisting. The potential for huge losses for the firm was apparent.

It was in that atmosphere that the firm sent out its legal recommendations to every investor in Growth Fund 2. The letter criticized the fee structure of the lawsuit and then said: “The soliciting lawyers further ask that you turn over virtually total control of a lawsuit brought in your name to them and to a committee composed of a few of their clients, people whom you probably do not know. The committee has the right to make almost every decision about your lawsuit without your prior notice or input.”

Finally, the growth fund letter states: “We would prefer that you not file suit. We recommend that you consult your professional advisor and consider all factors before deciding whether to accept the proposal of the lawyers soliciting you.”

A number of the recipients of this letter interpreted the “professional advisor” statement to mean they should ask their stockbrokers. After all, if they had a lawyer to consult, they didn't need another one to take the case. In each instance, the author found, the stockbrokers advised the clients against proceeding with the growth fund litigation.

This letter is legal advice. Prudential Securities' statements that it has never done such a thing are not true.

364–66:
Some details regarding Joseph Siff from his affidavit and other documents from the arbitration case,
Prudential Securities
v.
Joseph Si f
, number 91–01262 before the National Association of Securities Dealers.

367:
Details of Webb's conference call with Bristow from Webb's June 10, 1993, deposition in
Robertson and Sitter
v.
Prudential Securities
, cited above.

368:
The dialogue from Schechter's deposition from a transcript in the
Prudential-Bache
v.
Page & Bacek
case, cited above. Some statements were edited out by the author for clarity's sake. No material information was omitted.

369–70:
Eloise Burg's experiences were chronicled in a number of publications. See “Broken Trust,”
Palm Beach County Sun-Sentinel
, November 18, 1990; “Prudential Unit Faces Woes in Unloading Partnerships,” the
Wall Street Journal
, September 20, 1990; “Investors Advised to Read Prospectuses, Learn Risks,” the
Tribune Review
of Ligonier, Pennsylvania, October 29, 1990; “Taking It to the Street,”
New
York Post
, September 27, 1990; “Prudential to Pay Investor $680,000,”
Palm Beach Post
, May 4, 1991; and “Brokerage Opts to Cover Widow's Loss,”
New York Newsday
, April 18, 1991.

370–73:
Webb's experiences in his termination were described by him in part in his June 10, 1993, arbitration, cited above. Also see his December 1991 testimony in
Sondock
v.
Graham Energy
, number 91–020404, filed in the District Court of Harris County, Texas, 281st Judicial District.

377:
The cases pursued by the Idaho Securities Bureau under Wayne Klein are described in the annual reports for the state's Department of Finance, filed each year with the office of the governor.

378:
Some background on the Schneider investigation from the investigative order
State of Idaho
v.
Louise Schneider and Prudential-Bache
, docket number 1991–7–3, before the director of the Department of Finance of the state of Idaho.

379–81:
The details of Ball's last months from a series of internal Prudential-Bache documents. They include internal notes by bankers, dated November 1990, discussing the options for the firm, including its sale; a November 1990 annual review of Prudential-Bache by its bankers; and a series of confidential memos between Burton, Ball, and Winters from the fall of 1990.

380–81:
Details of the restructuring were announced in a December 20, 1990, memo from Ball entitled “Restructuring and Strategy.” Also, see a memo from Winters to all employees of Prudential from that same date.

382:
The Hawkins article, “The Mess at Pru-Bache,” is cited above.

CHAPTER 17

386–87:
A copy of contemporaneous notes from Bill Creedon's meeting with Michael Licosati was obtained by the author.

387:
The VMS private partnership class-action settlement was described in a July 1991 analysis by First Winthrop Corporation.

Beigel & Sandler, which handled many of the Prudential-Bache class actions, has been widely criticized in the profession for settling cases without performing sufficient investigation. The settlement style of Beigel & Sandler was described in “Millions for Us, Pennies for You,” the
New York Times
, December 19, 1993.

The criticisms of Beigel & Sandler's work by judges include an April 1992 opinion by Judge Thomas P. Griesa in the case Kushner v. DBG Properties, a limited partnership sold by another firm. The judge dismissed twenty-seven complaints, calling them “equally frivolous,” and saying that “it appears to the court as if the complaints were spun out of a word-processed original, with little attention to the details of each partnership and its private placement memorandum.”

In 1994, the firm was sued in a class action on behalf of investors in other cases. That litigation accused the firm of legal malpractice, fraud, and misrepresentation. The class action against the firm is captioned
Adelstein et al.
v.
Beigel & Sandler
, case number BC104597, filed on May 11, 1994, in the Superior Court of the State of California for the County of Los Angeles. The case involves a Beigel & Sandler settlement of a lawsuit involving a limited partnership called Mayer Warner Center, which was sold by Shearson.

The VMS public partnership class-action settlement was described in an October 1991 analysis by Page & Bacek.

388:
The appointment of Hardwick Simmons was described in “Prudential Names Simmons to Head Brokerage Unit,” the
Wall Street Journal
, April 25, 1991. Also, see “Prudential Securities Reorganizes at the Top,” in the
New York Times
on the same date.

The firing of Richard Sichenzio is described in “Prudential Unit Fires Sichenzio as Brokers' Chief,” the
Wall Street Journal
, June 10, 1991.

The hiring of George Murray is described in “Prudential Names Head of Retail Securities Unit,”
New York Times
, July 31, 1991.

The hiring of Woody Knight is described in “Prudential Securities Taps Woody Knight for New Position,” the
Wall Street Journal
, May 20, 1991.

391–92:
The deposition of Darrell Haney was described in “Plaintiff's Motion for Sanctions” of February 11, 1992, in the case
Hitchcock
v.
Prudential-Bache
, cited above.

394:
The Kansas complaint is described in “Notice of Intent to Invoke Sanctions under the Kansas Securities Act,” cited above.

395:
Copies of some of the Bristow letters to clients regarding regulatory complaints were obtained by the author.

395:
Wechsler's history in the growth fund litigation is described in “Objection to Settlement,” in
Starr
and Lipton
v.
Graham Energy
, cited above.

396–98:
The dialogue regarding the proposed class-action settlement on the growth funds from a transcript of the proceedings before Judge McNamara on December 11, 1991, in the case
In Re: Prudential-Bache Energy Growth Funds Securities Litigation
, docket number cv-91-md-867-d.

399:
Copies of dozens of letters both to regulators and from regulators in response to the Bristow, Hackerman mass mailing were obtained by the author.

400:
Terms of the growth fund litigation settlement are described in
GFL News
, June 1992.

402:
Simmons's announcement about the rebirth of the Direct Investment Group from
Wall Street Letter
, July 20, 1992.

402:
A copy of Schiller's letter to his client was obtained by the author.

Also, see “True Bill of Indictment” against Jeffrey A. Schiller, number GJR F92-02923, filed in July 1992 with the 194th Judicial District Court in Dallas. The case was subsequently dismissed.

404:
Copies of the corporate records for Ambryshell were obtained by the author.

405:
Peter von Maur's instructions that Storaska be allowed to keep $26,000 in fees to ensure he remained a friendly witness in part from a December 3, 1992, memorandum from Michael McClain to branch administration in New York.

407–8:
The terms of the energy income settlement are described in “Memorandum, Opinion and Order” by Judge Marcel Livaudais, dated February 19, 1993, and filed in the case
In Re: Prudential-Bache
Energy Income Partnerships Securities Litigation
.

Analysis of the energy income settlement in part from a January 19, 1993, examination of the deal by the American Association of Limited Partners. Also, see “Prudential Makes Settlement-Rollup Offer,”
The Perspective
, November/December 1992.

408–10:
Barrett's experiences in part from his complaint filed before the National Association of Securities Dealers. Also, see Barrett's April 14, 1994, sworn testimony in “Belmont and Belmont v. Prudential Securities,” case number 93–02086 before the NASD.

CHAPTER 18

412:
A sixth regulator, Burnet Maybank III, the securities commissioner of South Carolina, also joined the task force during the meeting at the Brazilian Court Hotel. Shortly afterward, he stepped down from his job with the state and resigned from the task force.

414:
A copy of the January 14, 1993, letter to Pat Conti from Gary Lynch was obtained by the author.

414–15:
A copy of Klein's January 22, 1993, letter to Livaudais was obtained by the author.

418–19:
The details of Grossmann's closing argument from contemporaneous notes taken of the presentation.

419–20:
Livaudais's “Memorandum, Opinion and Order” of February 19, 1993, was filed in the case
In Re: Prudential-Bache Energy Income Partnerships Securities Litigation
, cited above.

423:
Details of the GBK bid from tombstone advertisement that appeared in the
New York Times
and the
Wall Street Journal
on March 22, 1993.

Details of the Parker & Parsley bid from a news release issued by the energy company on May 10, 1993.

423–25:
Some details of Scanlan's discussions during the Chanin deposition from the transcript, dated March 29, 1993. The case number is cited above.

425:
A copy of the subpoena to Prudential Securities involving Fred Storaska was obtained by the author. The timing of the issuance of the subpoena comes from the fax “telltale” imprinted on the document.

426:
A copy of Finley's April 13, 1993, letter to Klein regarding the Locke Purnell report was obtained by the author.

427:
An unnumbered copy of the statement of claim in “J. Donald Smith v. Prudential Securities and J. Frederic Storaska” before the NASD was obtained by the author.

Ahearn's statements regarding Pru-Bache's decision to sue the NASD over the ordered release of the Locke Purnell report from the
Wall Street Journal
, April 21, 1993.

428:
Copies of the questionnaire distributed by the task force were obtained by the author.

432:
Schechter made his statement about being “happy” to turn over the Locke Purnell report in the
Wall Street Journal
, July 13, 1993.

434–35:
Klein's shot across the bow that he delivered through Hawkins was printed in
Business Week
, August 2, 1993.

EPILOGUE

446–47:
The author attended the press conference where the settlements were announced.

447:
A copy of the Prudential Securities advertisement ran in the
New York Times
on October 22, 1993.

The method of preparation for the advertisement and Simmons's state of mind about it are described in a series of interrogatories he answered in the case
Ashmore, Brown and Brown
v.
Prudential Securities
, case number 663808, filed in the Superior Court of California for the County of San Diego. In those interrogatories, Simmons is asked specifically what he meant in the letter advertisements when he described what went wrong with the partnership sales. All he refers to in those answers are failures on the part of brokers. He never refers to the fraudulent marketing material disseminated from New York.

Simmons made his statement about there being no systemic problem at the firm in “Fixing a Piece of the Rock,”
Newsweek
, August 8, 1994.

448:
The author obtained a copy of the videotape of the November 23, 1993, meeting in Dryden Hall. It is not publicly available.

448–50:
The dialogue from the energy income fairness hearing of January 1994 from notes taken by the author and an official recording of the hearing.

451–52:
The author obtained a copy of the never-used March 3, 1994, press release announcing California's decision to launch an enforcement action against Prudential Securities, with the intention of suspending the firm's license to do business in the state.

453:
The troubles with the “straight talk” campaign are described in “Prudential Image Mending Stumbles,”
New York Times
, February 17, 1994.