Serpent on the Rock (6 page)

In 1977, after a few months as a broker, Darr tried for the big time. He saw that tax shelters were taking off as a business, and Merrill had one of the biggest departments on Wall Street. That, Darr decided, was the place to be.

After lobbying Jack Loughlin, the head of the department, Darr was hired as a product manager. In that job, he marketed specific types of partnerships.

Product managers never sold investments directly to the public. Instead, they traveled throughout the Merrill retail system, talking up the shelters in the hopes of persuading the brokers to sell them. For Darr, the job was remarkably like his father's. Both traveled around the country representing particular products to retail salesmen. But instead of trying to persuade salesmen to offer Naturalizer shoes, Darr was trying to convince them to sell tax shelters.

Darr proved to be a master at sales. He was not the type to spend much time exploring the deep mechanics of how a particular tax shelter worked, but he always knew enough to persuade brokers to sell a deal. He also was one of the few marketers willing to stand up to arrogant investment bankers. If bankers made a shelter too complicated, he would tell them that they would confuse the brokers.

Darr's style was effective; he worked hard, but never bored his colleagues by poring over the dry details of some business deal. Instead, Darr cracked them up with the latest bawdy joke or his dead-on impersonation of Humphrey Bogart as Captain Queeg. It was a glorious time for Darr. For the first time, big success seemed within his reach.

A few months after joining Merrill's tax shelter department, Darr met Barry Trupin, a prominent and flashy shelter promoter. Trupin left some Wall Street professionals uneasy—his style was a bit too garish, his wealth too prominent. Here was a man who could purchase the old Henry du Pont estate in the wealthy enclave of Southampton, New York, and then undertake a multimillion-dollar effort to transform the Georgian Chestertown house into a French Gothic castle—complete with turrets, towers, and an indoor saltwater pool with its own twenty-foot waterfall.

Trupin loved to give people the impression that he was a financier of high pedigree—he named his company Rothchild Reserve International, making more than a few investors think that it was tied somehow to the Rothschild family, the famous European banking dynasty. Trupin made sure he spelled the name just differently enough—leaving out one
s
—that the real Rothschilds would never bring suit. Even his deals pushed the outer edge of the envelope. The values he ascribed to the assets in his tax shelters always seemed enormous, which, in turn, gave investors even greater tax deductions. But it also would likely attract the attention of the Internal Revenue Service, which could disallow any deductions if the agency found the numbers had been puffed up.
¹

Trupin fascinated Darr. He was one of the wealthiest men Darr ever knew. They met as competitors over a big computer-lease tax shelter deal that both wanted to sell. In the end, Darr was the victor, but Trupin felt no ill will. He knew that someday he might want to use the fellow who just beat him for another deal.

That day came in mid-1977. Trupin had learned that Mattel, the toy-making company, wanted to lease a large IBM mainframe computer. Trupin asked Darr if Merrill could help him find the equipment for the deal.

Darr agreed, but on two conditions: first, that Trupin pay $50,000 to Darr personally for finding the equipment, and second, that Merrill be told nothing about the payment. The $50,000 would be a small fraction of what Trupin stood to gain in fees if the deal went through. He readily agreed to both conditions.

For Darr, the chance was slim that anyone at Merrill would ever find out about the money—he had been interviewing for a new job at Josephthal and had an offer in his back pocket. By the time Trupin cut the check, Darr would be out the door. The deal was done in June, and for its work, Merrill Lynch received a 2 percent finder's fee: $11,322—less than a quarter of the cash paid under the table to one of its midlevel employees.

Darr bundled his overcoat tightly around himself as he walked down Broadway. It was January 30, 1978, a bitterly cold Monday in what was already an extremely frigid New York winter. About a block ahead, he could see Trinity Church, which had stood since colonial times like a sentry at the mouth of the downtown financial district. Darr turned onto Wall Street. It was about 3:00 P.M. In an hour, the markets would close and the street would be packed as brokers and traders headed home.

He walked past the thick, gray walls of the New York Stock Exchange and the columns of Federal Hall, where George Washington had once taken the presidential oath of office. He continued for two blocks until he arrived at 45 Wall Street, the offices of the United States Trust Company.

Darr waited for a teller. Finally, at 3:16 P.M., he passed two deposit slips through the teller's window, along with a check he had just received for $50,000. It was the personal payment he had demanded from Trupin for helping him on the Mattel deal. Trupin had successfully sold out the partnership in December, as wealthy investors scooped up shelter deals to help cut their tax liability for the year. True to his word, Trupin wrote Darr the check within weeks.

The teller took the documents from Darr and placed them in an electronic time stamper. Following Darr's written instructions, $45,000 was deposited into checking account number 2551. The remaining $5,000 was deposited in his savings account. In just one transaction, Darr more than doubled the $30,000 he had in the bank.

Darr had been in his job as head of Josephthal's tax shelter department for just over six months. His new firm was no Merrill Lynch—instead of hundreds of offices around the country, it had only about twenty along the East Coast. Until it hired Darr, Josephthal did not even have a tax shelter department. Even his pay was meager by Wall Street standards: about $65,000 a year, plus bonus. But at Josephthal, he was the person in control. He could decide which deals were sold and how much the firm would be paid. Promoters who wanted to sell their shelters through Josephthal had to make sure that Darr was happy.

About a week before receiving his payment from Trupin, Darr took steps that would protect him in case anyone ever heard of the check. At a lunch with Michael DeMarco, the president of Josephthal, Darr tiptoed around the topic of money he expected to be receiving. He had outside business interests, Darr told DeMarco, and would soon be getting income from them. But DeMarco need not worry, he said, because none of those activities conflicted with the interests or businesses of the firm. But in fact, the opposite was true—he was receiving cash from the very types of people whose deals he was supposed to rule on objectively.

The flow of money to Darr soon sped up. Matthew Antell from First Eastern was the next client to pass some cash to Darr. Josephthal sold a limited partnership for First Eastern called King's Court Associates, and three days before the deal was filed with securities regulators, Darr sent Antell a bill for $30,000. The bill did not indicate it was from Josephthal and simply said that First Eastern owed the money for “specialized program structuring and consultation.”

A few days later, on March 6, Antell sat down at his desk in Cohasset, Massachusetts, to write a series of $30,000 checks from First Eastern Corporation. After funneling one check through another company he controlled, he wrote a second check, to Rothchild Reserve, the company controlled by Barry Trupin. Antell had never met Trupin.

The check was mailed to Trupin, who deposited it in his account at Citibank. On March 22, after Antell's check cleared, Trupin wrote the fourth $30,000 check in the series, this time to the true recipient, Jim Darr.

Darr was ready to use the money. After starting in New York in a modest apartment in a middle-class neighborhood, Darr had his eye on a $181,500 house in the wealthy suburb of Stamford, Connecticut. Four weeks after receiving his latest check, Darr handed over a down payment of $35,000 in cash for the house. Without the money from clients, he never could have afforded it.

Darr's newfound power and healthy financial shape showed in his strut. He became looser and more arrogant, at times embarrassing some of his professional staff by mistreating potential clients. Stuart Ober, who handled oil and gas deals, bitterly complained to colleagues after he brought one potential shelter promoter into the office to see Darr. Ober liked the promoter and wanted to make a good impression. But Darr treated the client with open contempt. Sitting behind his desk, Darr put his feet up on the table in front of the prospective client's face, lit up a cigar, and leaned back in his chair.

“Tell me about your deal,” he said. “
I'll
decide whether it's good or bad.”

The client was clearly offended. Within minutes, Darr cut him off and ushered him out. Ober had never seen a performance like that in his life. The client took his business elsewhere.

Darr's antics also made some of his bosses uncomfortable. He was simply too out of step with the collegial atmosphere of a small, old-line firm. He created a huge, separate office for himself, while the heads of most other departments worked in the same room as their staff. Though his department had only four people, Darr hired his own personal secretary. His colleagues could not believe his pomposity—never before had any of them known of a Josephthal executive who would have his secretary call clients, only to put them on hold until her boss picked up the phone.

Still, he showed talent in the job. In negotiations over a deal, no one was tougher. Darr always insisted on the highest fees and the best terms for Josephthal. He even haggled over the commissions that would be paid to the firm's brokers, demanding that each promoter pay as much as was permissible under the securities rules. His colleagues smirked each time they heard Darr push the demand—they knew his bonus was based in part on the amount of commissions his department generated.

And Darr still had his sense of humor, although it started to develop an edge. Once, when spying a homeless person on the street, Darr asked his companion if he recognized the man. His associate said no.

“Well,” Darr said, “this guy used to run a tax shelter department a few years back.”

The message of Darr's humor was clear: This was a business where anyone's fate could change in an instant.

Norman Gershman, Josephthal's national sales manager, regretted ever hiring Jim Darr. The man's egotistical behavior was bad enough. But by the late spring of 1979, Gershman, Darr's immediate supervisor, was beginning to question his integrity.

Already some of the firm's best clients were refusing to work with Darr. A friend of Gershman's who headed a real estate syndication company called him personally to complain.

“I don't want to do business with the guy,” the client said. “He's not being honest.”

For Gershman, a quiet, gentlemanly sort from Wall Street's old school, that was enough to make him edgy about his aggressive, arrogant new hire. But then later, Gershman told Darr about a wealthy potential client who was looking to buy a tax shelter. Darr leaned close and lowered his voice.

“I've got a deal we can sell to this guy, but it's not coming through Josephthal,” Darr told Gershman. “You know, you and I could make money from this on the side.”

Is he seriously suggesting that we pocket the fees that should go to Josephthal?
Gershman just stared at him in silence, until Darr turned and walked away. If that was a test, Gershman thought, he was glad to fail.

Before Gershman decided what to do about his suspicions, DeMarco, the head of the firm, called him into his office and shut the door. He wanted to know if Gershman knew anything about payments Darr had been taking from clients.

Even with everything he had heard to that point, the accusation floored Gershman. “I can't believe a professional would do something like that,” he said.

But as the two men talked, he began to wonder. DeMarco had copies of the checks. Neil Sinclair, a member of the tax shelter department who handled real estate deals, had somehow obtained the records from Darr's locked desk and turned them over. Both DeMarco and Gershman knew that Darr had purchased a new house in Connecticut and was driving an expensive car. Somebody on Darr's salary could never have afforded it. Until now, everyone just assumed Darr had family money. It was beginning to look like they assumed wrong.

THE INVESTIGATION dragged on for weeks.

On the books of Josephthal, Darr was still the head of the tax shelter department. But he stopped coming to work every day—many weeks, the other executives in the department had no idea where he was. When they did see him, his face betrayed every fear and every concern. Over a two-month period, he started losing weight, and lots of it. His staff guessed that he had lost more than twenty pounds since the investigation began. Darr looked dreadful.

Finally DeMarco called Gershman aside again. “Listen, we're doing something with the Darr matter,” he said. “Stay away from it.” Gershman took it as a friendly tip. He never spoke to Darr again.

Even Jacobi, the lawyer from First Eastern, could tell the man was coming apart. Using an assumed name, Darr called Jacobi once at the office and asked for his home number. Then, almost every night, Darr called Jacobi, sometimes in tears, asking the lawyer to figure a way out of the problem. “Please help me, Herb,” Darr begged repeatedly.

Jacobi would never know why he did it. He didn't like Darr. He fully believed the only reason Darr called him was to get legal advice without having to pay for it. But the desperate nightly pleadings finally got to him. He told Darr how to resolve his problem: On his next day at work, Darr should go to the cashier's office and write Josephthal a check for some of the client money, saying that he was turning over a fee he earned from First Eastern. He should make sure to mark the check as being for that fee. Turning over some of the money, Jacobi said, would give Josephthal an explanation for the payment in any future litigation and would guarantee that the firm could never turn against Darr. How could they call the money a payoff if they accepted some of it?