Serpent on the Rock (39 page)

“I just heard about that,” Jackson said. “Doesn't sound like any rule I've ever heard of. I'm going to call New Orleans and see if I can get an explanation.”

A few hours later, Jackson called back. He had received little information from his bosses.

“Bob, I can't put my finger on it, but something here doesn't jibe,” Parker said. “I guess I'm having a hard time believing that the national investing policy of Prudential Insurance is being determined by some rule in California.”

“It does sound strange.”

“Well,” Parker said, “how do we go about finding out if it's true or not?”

Jackson thought for a moment. He didn't have any idea.

“I don't know who the hell I could go to here,” Parker said. “One thing I've learned over the years is you don't question what's happening in New York.”

The conversation came to an end. Parker still felt enormously uneasy, but he wasn't about to raise a ruckus about it. He knew what had happened to the Futon Five. If he challenged the propriety of what was being done by the Direct Investment Group in New York, Parker was sure he'd lose his job. He decided to keep his mouth shut about his suspicions and just keep selling.

In early 1986, the first sales materials for the Prudential-Bache Energy Income Partnerships Series III were completed by the firm's marketers in New York.

One of the first documents most brokers saw was a fact sheet written by the Direct Investment Group. On the cover, beneath the name of the partnership, were three words: “A Proven Producer.” The statement was a pure deception.

Few of the brokers concerned about risk in the oil and gas markets could have withstood the barrage of misleading, and sometimes outright fraudulent, information they received in the sales literature. The brokers were told that the partnerships were an ideal substitute for certificates of deposit, one of the safest investments possible.

The Direct Investment Group even coated the prospectus with marketing material designed to soothe any concerns about the quality and safety of the partnerships. The prospectuses arrived in the branches covered in “wrappers” containing slick, full-color graphics and photographs and descriptions of the supposed high quality and safety of the investments. The wrappers were far from subtle: For Series III, they featured a trim older couple walking barefoot down the beach. Above their photograph was the caption “For Investors Planning Their Retirement.”

Throughout Prudential-Bache, on the advice of their brokers, elderly clients of the firm sunk their retirement accounts into this supposedly high-yielding, safe investment.

Over the next four years, using similar sales material, Prudential-Bache brokers would persuade another 98,484 clients to sink more than $1 billion of their savings into the energy income partnerships. Many of them were relying on that money for their retirement. All of them would live to regret the day they trusted the word of Prudential-Bache.

The two life-size elephants, each hand carved out of three thousand pounds of monkeypod wood, loomed over the crowd of Prudential-Bache executives. The group was gathered in the Hindustani Pavilion on the ground floor of the elegant Loew's Anatole Hotel in Dallas. The hotel is a city unto itself, with 1,620 rooms, eleven restaurants, and atriums so large that they can handle rodeos as easily as theater productions. It seemed the perfect place for this meeting in early 1986, Prudential-Bache's huge national forum for publicly placed limited partnerships. With so many partnerships secretly struggling, the meeting's name was almost laughable: “A Commitment to Excellence.”

The list of almost three hundred expected attendees read like a who's who at Prudential-Bache and the Direct Investment Group. George Ball was there, along with Darr. Mingling alongside were representatives from almost every general partner for the large public deals promoted by the Direct Investment Group. Graham Resources alone sent more than a dozen executives to the meeting.

On one side of the pavilion, George Watson and Tracy Taylor from Watson & Taylor swapped jokes with a small group of the brokers. Nearby, Joel Stone, the president of VMS, was enjoying a deep belly-laugh about something he'd just heard. In the middle of the group, Merv Adelson, the chairman of Lorimar, the film production company that sold movie partnerships through Prudential-Bache, was talking with a few other brokers. Clifton Harrison was nowhere to be seen—after all, this was a meeting for public partnerships, and Harrison almost exclusively sold private deals. But word among the brokers was that as long as the Pru-Bache executives were in Dallas, Harrison would be dropping by unofficially over the next few days.

Wandering through the crowd of boisterous brokers and managers was Charles Dawson, the country broker from Sulphur Springs, Texas, who had hit the jackpot in 1985 by selling $1.4 million worth of the energy income partnerships in one day. Even though he had sold only a small number of partnerships since then, Dawson's accomplishment still awed his colleagues. Many of them worked in big cities, at some of the busiest branches in Prudential-Bache, but had never had a day like that. After his accomplishment had been written up in one of the Graham Resources newsletters, Dawson's success had entered the realm of legend.

Still, Dawson felt out of place at the meeting. So many of the Pru-Bache managers and general partners seemed dressed to the hilt. Dawson felt a little conspicuous in his off-the-rack $100 suit from a local department store. The jewelry, the extravagance of the hotel, the rich food there for the taking—to Dawson, all of it seemed a bit excessive for people who were simply supposed to be helping their clients buy and sell investments.

“Excuse me, Mr. Dawson?”

Dawson turned toward the female voice. Hallie Jennings, an assistant vice-president with the Direct Investment Group in New York, was looking at him.

“Yes, ma'am?” he replied.

“I was wondering if you would like to meet Jim Darr?” Jennings asked.

Dawson shrugged. Working out of a one-man office in a small Texas town, he never had much opportunity to meet his Prudential-Bache colleagues. He basically ignored and was untouched by the interoffice politics of the firm. Dawson had no idea who this Darr fellow was, but he liked meeting new people.

“Sure,” he said.

Jennings turned and walked through the crowd toward a tall man with prematurely white hair. On sight, the man left Dawson uncomfortable. Amid all the expensive clothing, his suit stood out. Dawson figured it had to be worth a couple of thousand dollars.

“Mr. Dawson,” Jennings said, “this is Jim Darr.”

Dawson extended his hand, and Darr, unsmiling, took it.

“Hi,” Dawson said as he pumped Darr's hand. “What branch do you work out of?”

Darr's grip went limp and he released Dawson's hand. His face turned beet red in anger. Dawson had never seen someone become so enraged so quickly.

“Don't you know who I am?” Darr spluttered.

“No, sir, I'm sorry. I don't.”

“You work for me. I'm the head of the Direct Investment Group. When you sell partnerships, you're my employee.”

Dawson didn't quite know what to say. “Well, sir, I'm sorry, I just don't mix much with the folks from New York.”

“Well, let me tell you,” Darr growled. “I'm the one who selects the partnerships. I'm the one who decides which ones get sold and which ones don't. When you sell your customers a partnership, it's only because I approved it first. That's who I am.” Darr turned away and stomped into the crowd.

Jennings burst into laughter. “I would have paid a thousand dollars just to see Darr's face like that,” she said. “Not knowing who he was really put him down.”

“Well, why should I know?” Dawson shrugged. “I don't deal with these folks.”

The whole encounter left Dawson with a distinctly uneasy feeling. If this arrogant executive was the one who decided which partnerships were sold, Dawson was not as comfortable with them as he had been before.

The next evening, Dawson arrived for an awards ceremony in the Chantilly West Ballroom on the ground floor of the Anatole, a few yards from the Hindustani Pavilion. Light from the crystal chandeliers on the light peach fabric that covered the walls bathed the room in elegance. Dozens of tables covered in white linen dotted the room. As Dawson approached his table, he felt his stomach drop. He was seated with Darr.

Dawson greeted Darr as he took his seat. Darr looked at him and an odd smile came across his face; it was almost as if he knew he was about to even a score.

“Well, Charlie, welcome,” Darr said pleasantly.

The other members of the table spoke among themselves. Then Darr, speaking loudly enough so that almost everyone at the table could hear, turned to Dawson.

“So, I hear you run a dairy farm,” Darr said, his voice dripping with sarcasm. “That sounds
real
interesting.”

Dawson felt his face flush. He loved his dairy farm. He had been raised on one. He didn't like the fact that this fancy-suited New York executive thought it was an object of ridicule.

After some speeches during dinner, the awards ceremony began. Darr made the presentations. Eventually, he reached an award for Dawson, given for having the best performance on a single day.

“Well, this award is for Charlie Dawson, but I think I better hand it out quickly,” Darr said with a smile. “I'm sure Charlie will want to go home early so he can take care of his cows.”

Brokers around the room tittered. Dawson stood up to accept his award, feeling a slow burn. He took it without a word and returned to his table. He didn't like the fact that Darr was trying to put him down in front of his colleagues. He had only had two experiences with Darr, but already he hated him. Darr's actions and arrogance spoke volumes to Dawson.

If that's the way you feel, you son of a bitch
, Dawson thought,
I'll never sell
your partnerships again.

If Darr had suspected what Dawson thought, he likely would not have cared. By 1986, brokers throughout the country had to sell his products. Their managers pushed them to do so, and the regional directors pushed the managers. The regional directors felt pressure from New York, all seeming to emanate from Ball's office. With the losses stacking up at the firm, Ball needed to keep up the performances of strong departments, such as the Direct Investment Group.

Darr had big plans to transform his influence into more power. In just a matter of years, or maybe just months, he felt sure he could take Bob Sherman's job. And that would be the first step on the way to his plan to succeed Ball. Darr didn't need the good graces of some country broker who didn't even know who he was. He had come to expect far better treatment than that.

CHAPTER 12

THE SLEEK, BLACK LIMOUSINE drove past the Prudential-Bache headquarters in lower Manhattan, continued for about a block, then pulled up to the front of 170 John Street. Decades before, the granite building had been a ship's chandlery, selling supplies to the schooners, barks, and transatlantic packets that tossed their lines and heaved their loads onto the docks at the East River. But after the sea traffic dwindled, the seaport had fallen into disrepair. It was not until the 1980s that the area was rebuilt into a popular tourist attraction and Wall Street hangout called South Street Seaport. Now the John Street building housed the Yankee Clipper Restaurant. Where once the astonishing sight of a limousine on the seaport's narrow streets and alleys might have brought dock work to a halt, by the late spring of 1986, it was a common sight.

After pulling to a stop, the driver settled in for a wait. The car had been dispatched not long before from Smith Limousine Company to make a pickup for one of its corporate accounts. Whenever the customers were not paying for the limousine out of their own pockets, they never seemed to mind letting the bill run up.

Finally the door from the Yankee Clipper opened, and the driver saw a familiar face walking toward the limousine. He stepped out of the car, walked around to the back door on the passenger side, and opened it. Jim Darr nodded as he climbed in. The driver hopped inside and drove off, headed toward Darr's home in Greenwich.

Darr loved limousines. He boasted about his frequent limo rides to his colleagues, seeming to view them as a measure of his success. His trips were not even charged to his company, Prudential-Bache. Instead, Darr often relied on the general partners whose deals he sold to let him use their corporate accounts. Then they would just pass on the cost for Darr's indulgence to their investors.

This time, Clifton Harrison's corporate account was being charged for Darr's trip. Darr had used Harrison's limousine service before to shuttle him from his home to the office. Other times, he used it to travel the short distance from Prudential-Bache to the River Café, just under the nearby Brooklyn Bridge. Even if Darr could not bring himself to use a taxi, that short hop using a car service would cost less than $15. But since he was not paying for the limousine, he kept it waiting outside that restaurant. The total tab for three and a quarter hours was $136.50.

The trip from the Yankee Clipper would be even more expensive. With all the waiting and traveling, seven hours passed between the time the limousine arrived at the restaurant until it dropped Darr off at his house. It cost $297.50, with the entire bill paid by the investors who did business with Clifton Harrison.

It was one of the last times Darr would be able to enjoy his friend's largesse. Harrison's freewheeling spending of partnership money—for Darr, for brokers, and for himself—was on the verge of coming to an end. But not until after one last extravagant blowout.

The stately
Queen Elizabeth 2
, the world's most famous luxury ship, was docked in its berth at Manhattan's West Side passenger terminal. Thousands of people stood along the pier on the Saturday morning of April 20, 1986, watching as the pride of the Cunard line was readied for the boarding of its excited and wealthy customers.

Amid the crowds, about a dozen Prudential-Bache brokers waited patiently. The brokers—all men—happily talked with their wives about the exhilarating five-day trip they were all about to take. In a short time, their transatlantic cruise to Southampton, England, would begin. Along the way, they were planning to shop on board at Harrods, gamble at the Players Club Casino, and enjoy the “Golden Door Spa at Sea” program. Then, after visiting London, they would be flown back to America on the Concorde. The extravagant trip would cost them nothing. The entire bill was being footed by Clifton Harrison.

As they waited in line, several of the brokers noticed there was something wrong with their host. His usual jovial demeanor was gone—in its place, he seemed tense and worried. They knew that Darr was supposed to be on this trip, but for some reason he had canceled at the last minute. Instead, Harrison brought along Howard Feinsand, his lawyer. That alone struck the brokers as odd.

As the days on the cruise passed by, the brokers' concern about Harrison grew. He spent almost no time with them—instead, he seemed to be in continual consultation with Feinsand. Whatever was going on, it seemed serious.

Unknown to the brokers, Harrison was facing dangerous legal troubles. A Minneapolis investor named John McNulty had filed a lawsuit against him and Prudential-Bache months earlier. McNulty, a lawyer, had purchased an interest in the Archives partnership in 1982. When the investment fell apart, he contacted Harrison, who indicated that the fault for the trouble lay with the banks. But after conducting an investigation, McNulty believed that Harrison had mismanaged the partnership. Now his lawyer, Charles Cox, was trying to get Harrison under oath. Harrison didn't like the idea.

Harrison's legal problem with an investor would not have surprised the brokers he was hosting. For even as they feasted on sumptuous meals, at times ordering expensive entrées not included on the ship's lavish menus, they spoke bitterly of their host. Despite all the praise that Darr and the Direct Investment Group showered on Harrison, his deals were turning into debacles. Their performance projections had almost uniformly been worthless; the brokers' best customers flooded them with an endless stream of complaining telephone calls. Already the brokers were shying away from Harrison's deals.

“I'll tell you one thing,” Agostino Zolezzi, a top-selling Prudential-Bache broker, told a colleague as he relaxed on a lounge chair on the
QE2
. “I am never going to do another one of Clifton's deals. They've been unmitigated disasters.”

Finally, after a few days on board, Harrison contacted the brokers. He wanted to hold a twenty- or thirty-minute sales conference to discuss his plans for future deals. They gathered that day in one of the
QE2
's private lounges. Most of the brokers on board showed up. Without his usual exuberance, Harrison described his plans for new deal structures in the wake of the government's growing interest in tax reform.

“We can't ignore what's happening in Washington,” Harrison said. “I'm going to be turning away from tax shelters. My future deals are all going to be driven by the economics of the property. I'm going to be spending much more time looking at cash flow instead of tax implications.”

The brokers wanted to hear none of it. “Forget the next deal, Clifton,” one of them barked. “What went wrong with the projections on Madison Plaza?”

Another broker interrupted. “Your Brazilian Court deal doesn't look like it's doing too well either. What's happening?”

The pointed questions came one after another. It was clear that the angry brokers were just a few steps shy of becoming an ugly mob. Harrison stood in front of them, looking tired. In a flat voice, he sloughed off the questions with vague assurances.

“There have been some problems, we're all aware of that,” he said. “But my future deals are all going to be driven by economics, and that's a whole new ball game. I think we need to focus on that.”

Harrison stumbled through a few details about the deals he expected to be offering soon, but no one in the room cared. If any of the Pru-Bache brokers had doubts whether they planned to sell any of Harrison's future deals, they were resolved in that lounge on the
QE2
. Harrison could not offer them a simple explanation about what was going wrong. They began to feel like fools. How had the people in New York been so confident about Harrison's partnerships? Had anyone been doing any due diligence at all?

It was too late to be asking those questions. The brokers didn't know it, but there would be no next deal. Harrison's financial troubles were already mounting, his real estate empire on the verge of collapse. He had no secret deals to strike with Prudential-Bache executives; his friends in the S&L industry had all been booted out of the business. For the first time since he began selling partnerships through Pru-Bache, Harrison was standing on his own. He would not even be able to afford the
QE2
trip and would have to negotiate an installment plan to pay for it.

All he needed was one more push, and everything could fall apart.

Two weeks later, he was pushed.

It began on May 15 in the small village of Massing-Rott, West Germany, at the office of a respected general practitioner named Dr. Herbert Schieffer. After rummaging through some of his files, Schieffer found the document he had received six years before, when his stockbroker was attempting to persuade him to invest the deutsche mark equivalent of $20,000 in a particular partnership. The deal would pool the investor capital to help purchase two shopping centers based in Bessemer, Alabama, and Key West, Florida. Like most of his fellow investors, Schieffer had known little about either location and at first felt uncertain about the investment.

Then Schieffer received an astonishing document from Clifton Harrison, the proposed general partner for the deal. In that 1981 letter, Harrison guaranteed that in 1986 he would repurchase the partnership units from him for 150 percent of the original investment, or $30,000. If Schieffer did not want to sell, he could simply hold on to his investment. The letterhead had the Bache name in it. Schieffer believed what it said.

Now it was 1986, and Schieffer was certain he wanted to sell. The partnership had done poorly, and he was awfully glad that he had retained Harrison's guarantee in his files. After locating the document, he stamped his name on the bottom of the letter, acknowledging that he wanted his money back. All he had to do, he thought, was send the letter back to Harrison, and he would have his money in a matter of weeks.

For the next three weeks, all across West Germany—in Stuttgart, Sauerlach, Offenburg—as well as in Austria and Greece, dozens of Harrison's investors repeated Schieffer's action, hunting down their guarantee, signing it, and mailing it to Dallas.

The letters poured into Harrison's office. The man who needed an installment plan to pay for the prior month's trip on the
QE2
was suddenly facing a debt of more than $1.9 million. And he had no way to pay for it.

Tillie Tillman, one of the biggest sellers of Harrison's partnerships, was in a virtual panic. On that day in the summer of 1986, a colleague who worked with him at the Prudential-Bache branch in Long Beach, California, had told him of an unbelievable rumor about Harrison. As someone who had sold close to $1.5 million worth of Harrison's partnerships in 1985 alone, Tillman was sure that someone—someone at Prudential-Bache, he hoped—would have given him the information if there was any truth to it. But no matter. He wanted to get to the bottom of this immediately. He called Harrison Freedman Associates in Dallas and asked to speak with Mike Walters, the chief marketer.

“Mike, I've got to talk to you,” Tillman said, his words pouring out. “Is Clifton a convicted felon?”

Walters muttered something, sounding distinctly uncomfortable. “I don't want to talk about this on the telephone, Tillie,” he said. “Can you come to my office?”

“Next flight, I'll be there.”

Tillman grabbed some clothes from home and rushed to the airport. His head was swimming. For as long as he had been at Prudential-Bache, he had been pushing his clients into Harrison deals. He repeatedly vouched for the man, relying on the assurances of his bosses at the firm. And now he found out that Harrison might be a common criminal—reformed, perhaps, but a criminal nonetheless.

He took the next flight to Dallas. He could barely sit still during the flight. His agitation about what he had heard just kept growing. How could Prudential-Bache have expected to hide something like this? he wondered. With all the general partners in the world, why in the hell would they do business with one who went to jail?

He arrived at Dallas–Fort Worth Airport in the late afternoon and took a taxi to Harrison Freedman Associates. When he arrived, he was immediately whisked in to see Mike Walters. Before Tillman could say anything, the heavyset Walters beat him to the punch.

“Yes, Tillie, it's true.”

The words hit like a dagger in Tillman's heart. He felt almost woozy as he sank into a chair in Walters's office. Rage welled up inside him.

“How in the hell could we have not heard about this until now?” he exploded.

Walters hustled over to his door and shut it. He looked upset that he had not done so sooner. Then he walked back and slumped into the chair at his desk, sighing.

“Well, it's just been a big cover-up all this time,” he said. “Otherwise, it would have been a mess.”

“Damn right it would!” Tillman barked. “Who the hell wants to get in bed with a convicted felon?”

Walters looked on impassively as Tillman got control of himself. Finally Tillman looked up, with his eyes almost pleading for an explanation. “Mike, what the hell happened?”

“It goes all the way back, Tillie,” Walters said. “All the way to the beginning.”

Walters told Tillman that years before, he had witnessed Jim Darr arguing with the lawyers about whether deals from Harrison should be sold by the firm. He said the lawyers had thought the idea was crazy. But Darr had argued forcefully that Harrison should be approved, Walters said, saying that the presidential pardon had expunged his record.

Tillman listened, feeling numb. He almost wanted to cry. He had decided recently not to sell any more of Harrison's deals because of their poor performance. But he knew now it was too late. His clients couldn't sell the illiquid partnerships. Suddenly he knew they were trapped. Millions of dollars of their money rested on the reliability of a man he would never have recommended had he known the truth.

“Oh, my God, Mike,” Tillman said. “The people I put into these deals are some of my best friends in the world. What the hell do I tell them? What do I say?”