Serpent on the Rock (4 page)

“I have your records. I have your expense accounts. I want you to tell me about them.”

McGillicudey pulled out a pile of Ashworth's expense statements submitted over four years and tossed it on the desk. Then he asked about each statement, day by day, item by item. Why did he spend each penny? On some days, he billed the firm fifty cents for crossing the Bay Bridge. Where were those receipts? The interrogation dragged on for eight hours, with Ashworth struggling to remember why he spent $50 here, $1.25 there. Finally he couldn't take any more.

“Look, I give up,” he said. “I can't remember all these. The receipts you have are the ones you have.”

“Well, Mr. Ashworth,” McGillicudey said as he rose, “then we're done.”

Within minutes, Ashworth was told that he was being fired for cheating on his expense account. He was ordered to leave the firm and immediately pick up his personal property at the San Francisco office.

Ashworth stumbled out of the room, destroyed. He was escorted to the lobby and out of the building. He was not permitted to meet with any of his friends in the tax shelter department. The next morning, he flew back to San Francisco and drove his car to the Bache branch on California Street. As he approached the office, he saw a dented cardboard box on the curb outside the building. When he saw what the box contained he felt sick to his stomach.

Someone from Bache had dumped all his personal belongings onto the street.

Blank couldn't believe Ashworth had been fired. He thought Bache had drawn an absurd line in the sand on expense accounts. He doubted anyone—even those who challenged the expenses—could survive the kind of test Ashworth had been put through. Still, Blank naively assumed that the events with Ashworth had no relation to the rest of the department. He felt thankful that the problem ended quickly. At least the tax shelter division could get back to work.

In the spring of 1979, Blank received a telephone call from the security department, asking him to come over to the office right away.

Blank strolled over, unconcerned. Maybe they had learned something new about Ashworth, he thought. But seconds after walking into the security office, Blank was told this meeting was about him: Now the head of the tax shelter department was being investigated. A security officer said he had heard allegations that Blank had received improper gratuities from a general partner doing business with the firm. He wanted to interrogate Blank.

The accusation didn't intimidate Blank; it enraged him. He had worked diligently to build up a reputation as a straight, ethical guy who did deals he thought were right. Taking money from a general partner was probably the worst accusation that could be made against someone in Blank's position. As the gatekeeper between the retail investors and the general partners looking to get rich off the management fees, Wall Street executives making the judgments about which shelters to accept had to be pure. Taking cash from a general partner meant that the gatekeeper was betraying the investors he was supposed to protect.

From what the security officer said, Blank could tell that there was no evidence, just a spurious charge. He'd be damned if he would let his reputation be destroyed in some political game.

“You are making a serious error here,” Blank said in a quiet tone of pure anger. “I have done absolutely nothing wrong. And I am not going to let this go past the close of business today.”

Instead, Blank said he would immediately take the security officer to his office and let him dig through every file there. Then the two of them would go to his bank and open Blank's safety deposit box and examine all the contents. Finally the two men would go to Blank's home and examine every financial record. The security officer could review whatever he wanted, right away, to make sure that Blank didn't move anything.

Blank paused a moment for effect. Then he issued a warning: If Bache took this step on the basis of just an allegation and found nothing, Blank said, then he would declare war. “Tomorrow I will go out and hire the biggest, meanest law firm I can to take you apart,” he said. “And since Bache is letting you do this, I'll go after them, too.”

The security officer stared at Blank, expressionless. “Let me get back to you,” he said.

Blank stormed out. He never heard from the security officer again.

Tom Huzella and his wife strolled past the swimming pool at the Kahala Hilton in Honolulu, Hawaii, heading toward the hotel's outdoor bar. They were a good-looking, athletic couple, and they exuded self-confidence and success. Huzella, a broker from Bache's Pittsburgh branch, won the 1979 trip to Hawaii in one of the firm's sales contests. About a hundred brokers who had opened the largest number of new accounts were flown to the islands, with Bache picking up the tab.

Although only twenty-nine, Huzella had been a big hitter at Bache for years. He earned his broker's license in 1975, two weeks before his twenty-fifth birthday, and quickly established himself as somebody to watch. During training at the firm, he sat in rapt attention as Steve Blank explained the firm's tax shelter business. Huzella always considered himself good with numbers and saw the tax shelters as more challenging than stocks and bonds. Even better were the commissions: Tax shelters paid as much as 8 percent of a client's investment in commissions, compared to as little as 1 percent for a stock transaction. And since a single unit of a tax shelter almost always sold for several thousand dollars, that meant big money.

With his interest in the shelters, Huzella focused his business on tax lawyers who would easily understand the investments. The success of the first shelters bred more clients for Huzella, as the lawyers referred their colleagues to him. Business came quickly, and almost every week, one or two new clients would give him $100,000 to $1 million to invest. With that kind of volume, Huzella easily qualified for almost every sales-incentive trip sponsored by the firm.

Still, Blank's tax shelter department frustrated him. The demand among Huzella's clients for tax shelters was enormous, but the department just was not churning out enough deals to keep all of his investors satisfied. The department seemed more interested in shooting down deals than in getting them out to the brokers. At times, the problem was embarrassing, such as when Huzella promised some clients that they would get a piece of a particular shelter, only to find the deal sold out. With more and more brokers getting involved in the business, there wasn't enough of the product to go around. By the time of the Hawaiian trip, Huzella was sick of it.

As he approached the bar, Huzella saw Bob Sherman dressed only in a bathing suit and nursing a gin and tonic. Huzella liked Sherman. Because of his big sales, the broker always felt comfortable skipping the normal chain of command and speaking directly with senior executives. Over the years, Sherman had become one of his good friends.

After a few minutes of idle chatting, Sherman asked Huzella about any problems he had with the firm. The broker decided that this would be a good time to dump on Steve Blank. The tax shelter department did not produce enough product, he said, leaving him with lots of angry customers. No matter how many times he complained, nothing changed. Blank just seemed unwilling to whip up lots of deals for the brokers to sell.

Sherman looked down at his drink. “I've had enough of this,” he muttered. Then he broke into a smile and looked up at Huzella. “Tommy, watch this.”

Still holding his drink, Sherman walked over to a pay phone near the bar and made a call. Huzella couldn't hear what Sherman said but could tell that he was setting something big in motion. He didn't think Sherman could do anything to Blank directly, since the tax shelter department reported to someone else. But Sherman was one of the best at Bache power politics: If there was something he wanted to get done, he knew which buttons to press. Within a few minutes, Sherman hung up the phone and returned to the bar, beaming.

“Well, the problem is solved,” he said. “You won't have to worry about Steve Blank anymore. He's gone.” Sherman patted Huzella on the shoulder and turned to walk away.

Huzella stared at Sherman in awe.
My God, he did that just to impress me
.

A second thought raced through Huzella's mind, and he turned to his wife. “That man just fired somebody while holding a gin and tonic in his hand,” he said. “Now
that's
power.”

No one in the tax shelter department ever knew for sure what hit Blank, but they suspected Bob Sherman somehow had been behind it. The word spread fast on June 14, 1979, just after Blank's supervisor, George Meyer, told him he was fired. The reasons sounded hazy—something about not pleasing the brokers and not turning out enough product. The timing was horrible, since Blank had just moved his family to a new house over the Memorial Day weekend. His friends were relieved when he landed on his feet a few days later at Kidder Peabody & Company, a competing investment firm.

Things started changing quickly at the Bache tax shelter department. Executives throughout the firm suddenly began sticking their noses into the department's business and successfully dictating which deals were done. With Blank gone, the buffer that kept the politics at bay and the bad deals from going to market had vanished. Garbage that would not have been given a look was being dressed up and sold with Bache's seal of approval.

Curtis Henry, who originated energy deals at the Dallas branch, couldn't stand it. It seemed like he was beginning to spend more time trying to stop bad deals than promoting good ones. And now, even when he killed a deal, it would not stay dead. Brokers who hoped to earn a finder's fee for bringing in new business just kept the pressure on, and often succeeded. Without Blank there, the Bache end run worked wonders. The worst, Henry thought, was a ridiculous oil deal brought into the firm by Bob McGiboney, one of the top brokers in the Dallas branch office.

Henry had little patience for McGiboney, whose blond, blow-dried hair gave him the looks of the lifeguard he once was. Shortly after Blank was fired, McGiboney came to Henry with an idea—one of his clients, a young man who had graduated a few years before from Baylor University, wanted to sell his own oil-drilling partnership. Henry pored over the proposal and broke out laughing: The guy was only in his twenties, had little net worth, no reputation in the industry, no training in the oil business, and almost no staff. He would have thought McGiboney was kidding if he didn't see the eager look on the broker's face.

“This is absolutely preposterous,” Henry said, rejecting the deal with a wave. “There's no way we're going to be involved in this thing.”

But a few days later, the deal came back to life. McGiboney had gone over Henry's head. Lee Paton, the firm's head of marketing in New York, heard about the controversy and contacted Henry. “Look, McGiboney is one of our biggest producers, and the Dallas office is one of our best branches,” he said. “Unless you can come up with something really wrong with this deal, we are going to have to do the thing.”

Henry had no one he could appeal to. The deal was going through.

After reviewing it more closely, Henry was more certain of his original opinion: This shelter was junk. It was composed mostly of little oil wells, which were selling at their highest rates in years because of the oil crisis that year. And the kid from Baylor who was promoting the deal did not make him any more comfortable. In a meeting with Henry and Linda Wertheimer, the Dallas lawyer working on the deal, the kid kept saying all he wanted to do was put together “a good Christian oil deal.” Henry and Wertheimer looked at each other and smirked. Apparently their new general partner didn't realize that his lawyer was Jewish.

To make the deal meet the legal requirements of a partnership, Henry ordered a number of changes in the corporate structure. The most important required the client to set up a subsidiary to his main corporation that would serve as the general partner. But only corporations with a strong net worth could legally run partnerships. So, before the deal was sold, Henry ordered the kid to transfer much of his net worth into the subsidiary.

Three months after the deal was sold, Henry received a telephone call from Wertheimer. She wanted to know if he had seen the latest financial statements on the deal. He hadn't.

“Well,” Wertheimer said, “I've discovered that the day after you closed that deal, your buddy took all that net worth back out of the subsidiary.”

Henry was livid. If investors figured out what had happened, Bache would be on the losing side of a major lawsuit. He fired a letter off to the kid, telling him that he had forty-eight hours to put all the money back. Otherwise, Bache would cancel the deal and give investors all their money back through a process known as a rescission offer.

A few days later, Henry was at the Bache office in Raleigh, North Carolina, shooting the breeze with Roy Akers, the branch manager. Akers's secretary knocked on the door and told Henry that Lee Paton, the head of marketing in New York, was on the telephone and wanted to talk to him.

Paton nearly climbed through the phone in anger. The letter was the final straw, he said. “You know, Curtis, you've pissed off half the people you deal with.”

“Lee, my job is to piss people off,” Henry said. “When one of our brokers brings a deal in, the only thing we have in common is our name on our business card. I'm on the buyer's side, he's on the seller's side. He's looking for a fee to bring the deal in, I'm looking to see if the deal is any good or not.”

“Well, you've really pissed off McGiboney,” Paton said. Not only that, but the branch manager in Dallas and the regional director were mad at him, too. The letter had backfired.

Henry never controlled his anger well. This time he did not want to. “Listen, goddamn it!” he snapped. “I'm not worried about what any of those guys think. I'm trying to cover Bache's ass. If this dumb idiot doesn't put the money back, I'm going to proceed with a rescission offer.”