Serpent on the Rock (50 page)

To the brokers of Prudential-Bache, the message was clear: Don't take on the firm.

It was a critical message for senior officers to convey. Controversy could smudge the firm's image. A bad image might cut the price Pru-Bache could fetch if it was sold. And at that moment, the firm, in whole and in part, was secretly on the block.

By 1989, the Blackstone Group was one of the most respected of the boutique investment banks sprouting up all over Wall Street. The firm was founded a few years before by Peter G. Peterson, the former chairman of Lehman Brothers, along with one of his Lehman colleagues, Stephen Schwarzman. Whenever a company was being shopped, there was a good chance some information about the proposed deal would pass across the desks at Blackstone.

That year, Schwarzman received a telephone call from one of his fellow investment bankers at Lazard Frères & Company. The Lazard banker had a proposal: Would Blackstone be interested in buying the arbitrage department of Prudential-Bache?

Schwarzman rejected the offer out of hand. He didn't even ask to see any documents on the proposal. He hung up and thought nothing of the call. So Prudential Insurance was trying to sell pieces of its brokerage firm. That came as no surprise. It was Wall Street's worst-kept secret. After seeing Pru-Bache racked by a decade of losses, Prudential Insurance would be remiss if it didn't try something new.

In truth, the attempt to sell pieces of the firm was only the beginning. Prudential Insurance finally was launching a full-scale attempt to turn its huge losses around. It had even set up negotiations with a competitor, Paine Webber, about merging the two brokerage firms. Prudential Insurance wanted out—if not of the whole business, then at least a large part of it.

George Ball set a thirty-seven-page document down on his desk. At that point, in January 1990, it was the most secret set of papers in all of Prudential-Bache. Ball had demanded that the document be written. Only a small handful of his most trusted executives knew about it. Ball was pleased with the results. In a document just an inch thick, every important financial detail about Prudential-Bache was laid out.

Ball thought it was an excellent private investment memorandum. On its cover, the document was simply called an “information package.” Regardless of its name, the document meant one thing: George Ball was trying to find new investors for Prudential-Bache. He wanted some financial institutions to take over part of the role being played by Prudential Insurance. After reviewing the potential candidates with his trusted advisers, they decided to send the document to a few German and Swiss banks that would be likely candidates for investing in a brokerage house. If any of the banks were interested, the firm would send them more information. Otherwise, the recipients had to return the document to Prudential-Bache or destroy it. The last thing Ball wanted was to have extra copies floating around.

The information package had high praise for the performance of the firm—it described Prudential-Bache as “the largest sponsor of public limited partnerships in the U.S.”—but failed to mention the investor losses. It ignored the monstrous, unrealized liabilities that were washing up relentlessly. In essence, it told nothing of the firm's unfolding disaster.

Ball's attempt to find a new outside investor for Prudential-Bache had all the earmarks of a last-ditch effort to stave off the inevitable. Prudential Insurance had injected well over $1 billion into the firm during his reign. All the Pru had to show for it was the endless stream of losses. Although the Direct Investment Group had pulled in money, overall the firm just seemed to hemorrhage cash. Ball's credibility in Newark was suffering greatly. Some executives believed Ball hoped another investor would lessen the financial pressure on Prudential Insurance. Apparently he was hoping to create a new master and save his job. And the evidence was growing that his time was running out.

Ball had heard rumors that the executives in Newark were trying to sell Prudential-Bache. He even heard that Lazard Frères had been retained for the job. He worried that Prudential Insurance might be getting ready to dump the firm and walk away.

But he felt better after speaking with Garnett Keith and Bob Winters, Prudential's chairman. He told them about the Lazard rumor he had heard and asked if it was true. Both Keith and Winters told Ball not to worry. He still had the full confidence of Prudential. There was nothing to these rumors about Lazard, they told him.

Meanwhile, Lazard continued contacting prospective buyers.

Just four weeks after the information package had been sent to the German and Swiss banks, the whole effort seemed to have been a bust. Not a single positive response came back. After copies of the packet were returned from all over the world, Ball tried a new tack.

On February 7, 1990, he met with Jean-Louis Lalogeais, a respected specialist on the securities industry who worked with Booz, Allen & Hamilton, a consulting firm. The time had come for action, Ball told Lalogeais. Prudential-Bache had to focus on its core businesses. The noncore businesses had to be profitable, or else they would be cut off.

With that, Ball began discussing the entire portfolio of the firm's businesses, labeling each as either “core” or “not core.” He listed retail sales, risk arbitrage, merchant banking, and equity underwriting as core businesses. But he also ticked off the names of some businesses that he clearly thought would soon be going by the wayside if they didn't make money: public finance, investment-grade debt, foreign exchange. At one point, Ball made a statement that turned around the attitude of the last decade and signaled the failure of one of his central strategies.

“Direct investments,” Ball said. “Not core.”

Sichenzio called the emergency meeting of the Direct Investment Group on a February afternoon. No one knew what it was about. The executives in New York were told to meet in a special auditorium that had microphones and a speaker system hooked up to telephone lines. All the marketers in the field were to attend by conference call. They would hear everything through the communications system.

Most of the executives arrived a few minutes early and took seats around a twenty-foot conference table. At the appointed time, Sichenzio walked into the room. He looked angry, but no one thought much of it. Sichenzio usually looked angry.

There were some changes coming in the Direct Investment Group, Sichenzio said. Paul Proscia was out as head of the department. Frank Giordano, the lawyer, was taking over. But the real shocker came next.

“Effective today, the Silver Screen deal is pulled,” Sichenzio said. “It's no longer consistent with the firm's marketing plans. It's a difficult sell, and we've got better things to do with our time.”

No one knew what to say. Almost the entire department was working on that deal. The firm had a contract to sell it. Under the direction of the Direct Investment Group, Silver Screen had spent $3 million marketing the partnership to the firm's brokers. Then, boom, it was dead. What was going on?

David Wrubel, who had joined the department two years earlier, looked at Sichenzio with contempt. Wrubel was relatively close to Tom Bernstein and Roland Betts, the top principals of Silver Screen. Bernstein had been complaining bitterly to Wrubel about Prudential-Bache. He was used to being treated like a gentleman when he did deals with other firms, Bernstein had told him, but Pru-Bache just treated him like some pocket there to be picked.

I'll bet they don't even know at Silver Screen
, Wrubel thought.
I bet you
haven't even told them, 'cause you're such chickenshits
.

The meeting ended, and Wrubel raced out of the room. As soon as he found a phone, he called Bernstein at Silver Screen. He told Bernstein's secretary to pull him out of a meeting.

“Listen, I can't talk long,” Wrubel said. “We just had a meeting. They pulled the deal. Have they told you?”

“What are you talking about?”

Wrubel explained about the emergency meeting and what Sichenzio had said. “It's a lame excuse,” Wrubel said. “Something else is going on. But I can't talk to you now about it.”

Bernstein said he would call Wrubel at his home later.

Within a few minutes, sometime after 4:00 P.M., Sichenzio called the senior executives of Silver Screen.

“This offering will not get done at Prudential-Bache,” he said.

The Silver Screen executives demanded that Sichenzio tell them how the termination could be justified given their contract.

“You agreed to sell this,” one of the executives said. “You signed a binding contract. We spent $3 million to market this based on that assurance. How can you just come along and shut it down?”

Finally Sichenzio offered a new explanation for what was happening.

“We're getting a lot of adverse publicity about what happened with VMS,” he said. “And we've heard that
Business Week
is putting together some article criticizing all of our real estate partnerships. We have to pull the deal.”

The Silver Screen executives angrily argued that none of this had anything to do with their deal, but Sichenzio could not be budged. It didn't matter if Prudential-Bache had given its word to sell the deal, both morally and legally. Bad publicity was more important. The Direct Investment Group had to take a low profile.

By early 1990, Boyd Page's legal practice in Atlanta was centered largely on suing Prudential-Bache for the Risers problem. Page had found dozens of clients who had lost huge sums of money investing in the mortgage products. Some of them had true horror stories, like Gail and Michael Parks, who lost about $79,000, almost their entire portfolio. About half of that money had been insurance proceeds from the death of Gail's brother, and it had been held in trust for her young niece's education. Now almost all of it was gone.

At first, it seemed as if Prudential-Bache might have been willing to settle some of the cases. Early on, Page had invited lawyers from the firm down to his office so that they could review the documents he had uncovered from months of investigation. He thought the information was damaging enough that the firm would quickly throw in the towel.

After the Pru-Bache lawyers finished their document review, Page gave them two months to respond. They never did. So he began filing his claims.

In February 1990, Page was sitting at his desk when his secretary buzzed in. He had a telephone call.

“It's Chuck Hawkins from
Business Week
,” his secretary said.

Page picked up the telephone, and Hawkins identified himself. He was the Atlanta bureau chief of the weekly business magazine. Hawkins told Page that he was working on an article about the huge losses being suffered by investors in real estate deals pushed by Prudential-Bache, from VMS to Risers to others.

“Well, what can I do to help you?” Page asked.

Hawkins asked a number of questions. Page shared all the information he knew about the Risers situation, even telling Hawkins that the firm's own lawyers had predicted the exposure on the mortgage investments alone was $175 million.

“The word we get is that Ball has decided not to address the Risers problem,” Page said. “If he takes a hit, it's his job. From what I hear, I think they want to settle this at ten cents on the dollar.”

But, Page said, given everything he had learned, the Risers problem paled compared to the troubles in the firm's partnerships. “Long term, the greatest threat to Bache is direct investments.”

Hawkins wrapped up his interview with one last question. “Are there any clients that you have who would be willing to talk to me about what they experienced?”

Page thought he knew the perfect people: Gail and Michael Parks. Prudential-Bache had been dragging its feet on their case. Maybe a little publicity would move things along.

“I don't know, but maybe,” Page said. “Let me check and I'll get back to you.”

The
Business Week
article in late February brought national fame to Boyd Page and his Risers cases. His clients, the Parks, were featured in a photograph looking forlorn above the headline “How Pushing Real Estate Backfired on Pru-Bache.” Page was quoted about the $175 million exposure that Prudential-Bache faced on the Risers, a number that Schechter was quoted as calling “completely untrue.”

Page liked the way the article turned out. He was now one of the national experts, as far as reporters were concerned, on Risers and Prudential-Bache. Lawyers around the country were contacting him for his advice and assistance in bringing similar cases against the firm.

Weeks after the article appeared, Page received a visit from Joel Bernstein, Sanford Kantor, and Irene Siegel, three New York lawyers who were pursuing Risers cases themselves. Page agreed to share some information with them about his cases. The four lawyers went out to lunch at Trio's, a restaurant next door to Page's office. There they discussed the legal issues of the cases for more than an hour.

As they returned to Page & Bacek, laughing as they stepped into the lobby, Donald Bacek, Page's law partner, emerged from his office looking serious. He hurried toward the group with a small sheaf of papers in his hand.

“You're not going to believe this,” Bacek said, handing the papers to Page.

Page looked at the cover sheet, then flipped to the first page. It was a claim that had just been filed in federal court in Atlanta. Page read the caption on the case, then read it again.

“
Prudential-Bache Securities Inc.
v.
Page & Bacek
.”

The lawsuit, which had been approved for filing by Loren Schechter, accused Page of conspiring to subvert Prudential-Bache business by encouraging its customers to sue the firm. It claimed that Page, like some legal Svengali, was single-handedly undermining the confidence of Pru-Bache employees in the firm and encouraging them to steal confidential, proprietary documents that he then used in litigation.