Serpent on the Rock (2 page)

THE MAIN CHARACTERS

In the late 1970s, as change is sweeping across Wall Street

AT BACHE & COMPANY, NEW YORK
Harry Jacobs, chief executive
Virgil Sherrill, president
Robert Sherman, head of retail for branch group west
Leland B. Paton, head of marketing
Guy Wyser-Pratte, head of arbitrage
Bill Jones, head of security

With the Tax Shelter Department
Stephen Blank, head of division through the summer of 1979
James J. Darr, head of division in the fall of 1979
James Ashworth, regional marketer
David Hayes, regional marketer
Curtis Henry, originator
Dennis Marron, marketer and originator
John D'Elisa, originator
Wally Allen, product manager

The investors in Bache stock
Samuel Belzberg, chief executive, First City Financial
Nelson Bunker Hunt, a Texas billionaire
Lamar Hunt, a Texas billionaire

AT JOSEPHTHAL & COMPANY, NEW YORK
Michael DeMarco, president
Norman Gershman, national sales manager
Neil Sinclair, head of real estate marketing for tax shelters

AT E. F. HUTTON, NEW YORK
Robert Fomon, chairman
George Ball, president
Loren Schechter, deputy general counsel

THE CORPORATE LAWYERS
Martin Lipton, Wachtell, Lipton, Rosen & Katz, New York (counsel for Bache and the Belzbergs)
Clark Clifford of Clifford & Warnke, Washington, D.C. (counsel for Bache)
Alan Gosule of Gaston & Snow, Boston (counsel for Josephthal's tax shelter department)

THE GENERAL PARTNERS
Barry Trupin, head of Rothchild Reserve International, New York
Matthew Antell, president, First Eastern Corporation, Boston
Herb Jacobi, general counsel, First Eastern Corporation, Boston

In the early to mid-1980s, as the partnership business is booming

AT PRUDENTIAL-BACHE SECURITIES, NEW YORK
George Ball, chairman and chief executive
Loren Schechter, general counsel
Robert Sherman, head of retail
Richard Sichenzio, senior vice-president and, later, head of retail

In the Direct Investment Group
James J. Darr, director
William Pittman, product manager and, later, head of all due diligence
Paul Proscia, product manager
David Levine, real estate due diligence
Freddie Kotek, real estate due diligence
Joseph Quinn, real estate due diligence
Douglas Holbrook, energy due diligence
Joseph DeFur, product manager
James Parker, regional marketer
John S. R. Hutchison, product manager
David Wrubel, regional marketer
Frank Giordano, lawyer
Kathy Eastwick, product manager

In the Retail Branches
J. Frederic Storaska, director, Corporate Executive Services, Dallas
Charles Grose, branch manager, Dallas
Carrington Clark, regional director for the Pacific North
John Graner, regional director Southeast and, later, Pacific South
James Trice, regional director Pacific South and, later, Southeast
Richard Saccullo, Atlanta branch manager

AT PRUDENTIAL INSURANCE, NEWARK, NEW JERSEY
Robert Beck, chairman through 1986
Robert Winters, chairman from 1986
Garnett Keith, vice-chairman and supervisor of Prudential-Bache
Matthew Chanin, head of energy investments

AT HARRISON FREEDMAN ASSOCIATES, DALLAS, TEXAS
Clifton S. Harrison, principal
Michael Walters, national sales manager

AT GRAHAM RESOURCES, METAIRIE AND COVINGTON, LOUISIANA
John J. Graham, president and chief executive
Anton Rice III, chief financial officer
Mark Files, vice-president
Paul Grattarola, marketer
Pete Theo, marketer
Alfred Dempsey, executive vice-president
John Corbin, regional wholesaler
Robert Jackson, regional wholesaler

AT THE WATSON & TAYLOR COMPANIES, DALLAS, TEXAS
George Watson, principal
Austin Starke Taylor III, principal
William Petty, national sales manager

AT THE SAVINGS & LOANS
Howard Wiechern, chairman of First South Savings, Pine Bluff, Arkansas
John Roberts Jr., president, Summit Savings, San Antonio, Texas
James Holbrooke, a lawyer for Summit Savings, San Antonio, Texas
In the late 1980s and early 1990s, as the scandal unfolds

AT PRUDENTIAL SECURITIES, NEW YORK
Hardwick Simmons, chief executive
Howard A. “Woody” Knight, president of investment banking and corporate strategy

THE WHISTLE-BLOWERS
William Webb, stockbroker, Fort Myers, Florida
Joseph Siff, stockbroker, Houston
William Creedon, stockbroker, Los Angeles
Eugene Boyle, stockbroker, Wayne, New Jersey

THE PLAINTIFFS' LAWYERS
Charles Cox, partner, Cox & Goudy, Minneapolis, Minnesota
J. Boyd Page, partner, Page & Bacek, Atlanta, Georgia
B. Daryl Bristow, partner, Bristow, Hackerman, Wilson & Peterson, Houston, Texas
Stephen M. Hackerman, partner, Bristow, Hackerman, Wilson & Peterson, Houston, Texas
James R. Moriarty, principal, James R. Moriarty & Associates

AT LOCKE PURNELL RAIN HARRELL, DALLAS, TEXAS
Bud Berry, partner

AT DAVIS, POLK & WARDWELL,
NEW YORK AND WASHINGTON, D.C.
(COUNSEL FOR PRUDENTIAL SECURITIES)
Gary Lynch, partner
Scott Muller, partner

AT WILMER, CUTLER & PICKERING,
WASHINGTON, D.C.
(COUNSEL FOR PRUDENTIAL SECURITIES)
Arthur Mathews, partner

AT THE COURTHOUSE
Marcel Livaudais, Federal District Judge, New Orleans

AT THE STATE TASK FORCE
Wayne Klein, chief, Idaho Securities Bureau
Nancy Smith, director, New Mexico Securities Division
Lewis Brothers, director, Virginia Division of Securities
Matthew Neubert, assistant director, Arizona Securities Division
Don Saxon, director, Florida Division of Securities

AT THE SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C.
William McLucas, director of enforcement
Thomas Newkirk, assistant director of enforcement
Joseph Goldstein, associate director of enforcement
Pat Conti, counsel and, later, branch chief, enforcement division

PROLOGUE

JUNE 1991—SCOTTSDALE, ARIZONA

Rhoda Silverman eased her 1984 Chevy Suburban out of the driveway, starting her weekly two-mile trip to her elderly mother's condominium. Saturday had been their day for years, a time when they could chat over breakfast at Smitty's or Luby's Cafeteria. Sometimes, on special days, they even splurged for lunch at Red Lobster.

She flipped on the car's air-conditioning. Summer in Scottsdale had arrived early this year, and this Saturday was particularly sweltering. To beat the heat, they probably would spend the day window shopping at Fashion Square Mall, the newly renovated indoor shopping center. Their visits to department stores had become a Saturday favorite in recent years after Rhoda's mother, Fannie Victor, began to lose her sight to a degenerative eye disease. The eighty-year-old woman loved to sample perfumes, touch the different clothing textures, or just sit in her wheelchair by the fountain, listening to the crowds.

Rhoda looked ahead to the McDowell Mountains as she turned onto Mountain View Road, the carefully landscaped street leading directly to her mother's condo. It was a beautiful drive. But she knew this was one of the last Saturdays she would take it.

Why couldn't I have protected you?

The question almost never left Rhoda's mind. She knew that she and her husband, Bernard, had kept the secret too long, hoping somehow that they would find a solution. But endless tries, sleepless nights, and frequent tears got them nowhere. She was still brooding about it when she reached the parking lot of her mother's retirement community. Maybe, she thought, maybe today would be the day. Maybe, finally, she could tell her mother the truth.

But how do I tell a blind, crippled old woman that she's losing her home?

Rhoda still didn't understand how it happened. Everything had started with such promise. Her mother moved to Arizona in 1985 to be closer to her children. She arrived with about $100,000 from the sale of the small Brooklyn row house she had lived in for decades. It was the first time in her life that Fannie had some money. After all the years of frugality and hard work, of going without vacations or movies or fancy clothes, Fannie finally could live the rest of her life in comfort. All she needed were safe investments.

That was when Bernard met Steve Ziomeck, a young vice-president with Prudential-Bache Securities, at a Scottsdale businessmen's club. Ziomeck's knowledge of finance impressed Bernard, much to Rhoda's delight. After all, she could think of no place safer for her mother's money than with “the Rock,” the name that decades of popular advertising helped bestow on the Prudential Insurance Company of America, the company that bought the brokerage in 1981.

When Fannie and her family went to the local Prudential-Bache branch for the first time, Ziomeck put them immediately at ease. A good-looking young broker with a baby face and a calming sales style, he stressed the words that mattered to them: Safety. Security. Income. None of them quite understood the investments Ziomeck recommended. Still, since neither Rhoda nor Bernard had much college or knowledge of finance, they figured that they should trust their broker's selections. Besides, the investments seemed well diversified, in a range of businesses like energy, real estate, airplane leasing, and horse breeding. Ziomeck told them that Fannie could expect $792.67 a month from the investments. Combined with Social Security and money from her children, that was enough to let her live in her own apartment.

With the money tucked away, Rhoda found a spot for her mother at the Villages at McCormick Ranch in Scottsdale. Fannie fell in love with the condo, with its Mexican tile, recessed ceiling, and large bedroom. It was poolside and on the ground level, so she easily could come and go in her wheelchair. Even though her vision was already faltering badly, she still had time to learn her way around before she lost her sight. This was the place, Fannie decided, where she wanted to live out her last days. With Rhoda's help, she took out a mortgage and bought it.

The problems started almost immediately. Checks from Prudential-Bache did not come monthly, as they had thought, but instead every three months. Even then, the money was far less than what Ziomeck told them they could expect. Eventually the checks stopped coming entirely. Rhoda and Bernard, who handled Fannie's bills, began covering her mortgage payments with their own money. But they couldn't keep that up long— their own business was struggling as the economy slowed, and they just didn't have the cash.

Finally, in November 1990, Rhoda telephoned Ziomeck's assistant, Kelly, exasperated about the investments' poor performance. Why didn't the breeding company make some money by just selling the damn horses? Rhoda asked sharply.

“Didn't anybody tell you?” Kelly responded. “They went out of business.”

Rhoda demanded to speak with Ziomeck, and peppered him with questions. She learned that her mother's financial situation was dire. Her mother didn't own stocks, as Rhoda had thought, but something called limited partnerships, a name she did not remember hearing before. The partnerships were performing terribly but couldn't be sold. Unlike stocks and bonds, no real market to buy and sell them existed. All Rhoda's mother could do was hang on, Ziomeck said, and hope that the partnerships' fortunes improved.

But there was no time to wait. Already they were months behind on Fannie's mortgage payments. Rhoda explained the troubles to the mortgage company and offered to turn over the deed to the condo if her mother could stay on as a renter. But the company said foreclosure was the only option. Her mother would have to move out.

Rhoda pulled her car into the space behind her mother's condo. Maybe now was not the right time to tell, she thought. Maybe let her enjoy today.

She went to the door of the condo, swinging it open as she knocked. Fannie was ready, waiting at her kitchen table in a flowered sundress. Rhoda hugged and kissed her mother, and sat down beside her. She launched into some idle chitchat.

Fannie immediately sensed something was wrong. “You're very tense,” she said. “You're agitated. What's the matter?”

Rhoda stammered for a moment. Then she blurted it out. “There's a problem,” she said, her voice trembling. “I don't know how to go about saying this. I guess the best way is the truth straight out.”

For the next few minutes, she rambled about what had happened: the declining income. The partnerships. The mortgage. The failed attempts to find a solution.

Her mother listened quietly. It wasn't sinking in.

Rhoda took a breath. “We've lost the apartment, Mom,” she said. “We'll keep trying to get out of this. Maybe business will pick up. I'll try everything I can. But we have to start looking for another place for you to live.”

For an instant, the two sat in silence at the table. And then Rhoda heard a throaty, guttural sound like nothing she had ever heard. It was her mother's moan of horror.

“Why would they want to throw an old lady out into the street?” Fannie sobbed, tears streaming down her face. “I don't want to be homeless. I don't want to leave.”

Rhoda sank down off her chair and, on her knees, wrapped her arms around her crying mother.

“This is my home,” Fannie cried. “I love it here. Oh, please, I don't want to go.”

Rhoda could not find the words to calm her mother. Her own guilt and sense of failure overwhelmed her. She began crying, apologizing again and again.

It seemed like they sat there forever. Rhoda held her mother close, rocking her, fruitlessly trying to calm her. Finally, her tears exhausted, Fannie looked up at her daughter.

“Rhoda,” she said. “Where did all the money go?”

AUGUST 1993—SAN DIEGO, CALIFORNIA

Mike Piscitelli stared down at the stainless-steel .357 magnum revolver in his hand. The silvery metal of the gun was clean and bright, perfectly reflecting the light of his bedroom. Such was his reward for cleaning the gun every time he fired it and polishing it even if he didn't.

He looked up and saw himself in the bedroom mirror a few feet away. He almost didn't recognize his reflection. Even with his tall, wiry frame, Piscitelli had never seen himself so gaunt. In the last few months, he had lost about two inches from his waist. The dark circles under his eyes from his daily insomnia gave his face a worn, hollowed-out look.

So much had changed. So much had been lost.

Piscitelli watched his reflection as he raised the handgun. Slowly he slid the tip of the six-inch barrel between his teeth. He paused, staring at his image in the mirror as he held the powerful gun in his mouth.

A few years earlier he could never have imagined reaching this point. Piscitelli had been a success. With only a year of college and a career in the wholesale liquor business, he had become a stockbroker in the early 1980s and worked his way up to being a top salesman with Prudential-Bache, the country's third-largest brokerage firm. He earned almost $200,000 a year. He married a woman he loved. He counted many of his 125 clients as friends.

And then the lies wrecked everything. The lies the firm told him. The lies he repeated to his customers.

The lies helped bring him to Prudential-Bache in 1986. Lewis Jacobsen, the firm's branch manager in Rancho Bernardo, recruited him from Merrill Lynch that year, telling Piscitelli about Pru-Bache's limited partnerships, which pooled small investors' money to buy expensive assets like apartment buildings, oil wells, and airplanes. Pru-Bache had the best partnerships on Wall Street, Jacobsen had said. They gave clients handsome returns and big tax benefits. And, unlike other firms, Prudential-Bache not only paid brokers large commissions for selling the investments but also gave them a share of the cash the partnerships produced later. By selling partnerships, Bache brokers could create their own personal retirement plan, without ever contributing a penny of their own.

It took six months, but Jacobsen sold Piscitelli on Prudential-Bache. It was worth the effort—Piscitelli soon became one of the firm's top salesmen. Using computer programs provided by the brokerage, he recommended how his clients should diversify their investments. The computer almost always said that a chunk of the clients' money should go into Pru-Bache partnerships.

Piscitelli never reviewed the dense, legalistic documents each partnership filed with the Securities and Exchange Commission—he had neither the time nor the desire. That was not his job. Instead, like most stockbrokers, he examined the sales material provided to him by the firm. That was supposed to summarize, in simple English, what the filings said. Then he passed that information on to his clients: The partnerships were safe investments, some as secure as certificates of deposit in the bank. Still, they paid a huge yield, often as much as 13 percent to 19 percent, with some of that money tax-free. Investors could scarcely resist that pitch. By 1988, Piscitelli had sold more than $9 million worth of the partnerships to his clients and friends. The sales material was so convincing that he even bought some for his own portfolio.

But by the late 1980s something terrible started to happen. The Prudential-Bache partnerships began to fall apart, starting with one of the biggest, VMS Mortgage Investment Fund. A real estate partnership, VMS Mortgage had guaranteed high income for three years and then return of the original investment. But instead it simply collapsed. The once-guaranteed income vanished, and most of the principal was lost. Suddenly some of Piscitelli's friends were forced to take out second mortgages on their homes to continue their retirement. Piscitelli called Pru-Bache executives in New York demanding to know what was happening. His was one of hundreds of telephone calls from brokers around the country. Eventually New York stopped answering questions.

Piscitelli's chest pains started soon afterward, followed by intense headaches. He took eight aspirin a day, but the headaches just grew worse. As other partnerships came undone, he spent his days dealing with angry clients while desperately trying to hold his own life together.

Friends filed lawsuits against the firm and Piscitelli. His constant anxiety destroyed his marriage. His annual income dropped to $20,000. A few anonymous telephone callers threatened to kill him. Fearful for his safety, Piscitelli purchased a .25-caliber pistol and a .357 magnum. He loaded them with hollow-point bullets and carried one of the guns at all times, ready to defend himself against his former friends.

By 1993, Piscitelli could no longer function in his job. He couldn't concentrate. He was always irritable. He frequently wept. That May, he went on disability leave. A doctor for Prudential would later diagnose Piscitelli as suffering a major depression caused by anxiety related to the partnership troubles. The broker could not overcome his sense of having betrayed his friends and of having been betrayed by his employer.

Piscitelli looked into the mirror. Tears were streaming down his face and onto the gun in his mouth. He was crying uncontrollably again. He took the barrel out from between his lips and wiped away the tears. Then he turned to put the weapon back into his closet.

He had put the gun in his mouth before. He was sure he would do it again.

Maybe, someday, the time would be right.

But not today. Not today.

SLOWLY, ALMOST imperceptibly, the truth settled in as the 1990s began. One at a time, until they numbered in the hundreds, then the thousands, then the hundreds of thousands, people in every state and around the world awoke to realize that they had been victims of the most destructive fraud ever perpetrated on investors by Wall Street.

Although the magnitude of the crime was unparalleled, it was not engineered by the shady penny-stock promoters or crooked savings and loan operators who exist on the underbelly of the financial world. Rather, the scheme emerged full-blown from the New York headquarters of one of the brokerage industry's brightest lights, an investment firm with a name that conveyed the essence of reliability and trust: Prudential-Bache Securities.