In his first months, Darr also pushed Paton to turn over all the bonuses that were being withheld. Bonuses for both John D’Elisa and Curtis Henry had accrued over the past year, based almost exclusively on the number of deals done by the department. Even if the bonuses were too high, Darr argued, Bache had to keep its word. He persuaded Paton, and early in 1980, he told D’Elisa the news.
“Since you’re going to work here, they should honor their commitments,” Darr said. “But there’s no guarantee we’re going to continue paying you the way you have been paid. It’s important to reorganize the department in a way that makes us more efficient in the way we do business.”
D’Elisa said that would be fine, and Darr handed him his check.
“You know, I worked real hard to get you this bonus,” he said, staring straight at D’Elisa. “I think I deserve a piece of it.”
Is he testing me? For an instant, D’Elisa was speechless. “OK, Jim,” he finally replied. “I’ll take you out to dinner.”
Darr smiled and walked away. D’Elisa still felt a little shaken. Maybe Darr had been kidding. But it sure didn’t sound like it.2
That same week, Darr called Henry to talk with him about his bonus. He told Henry that he had persuaded Paton to pay the accrued bonus. It was more than $80,000, the most Henry had ever received.
“You know,” Darr said, “this is an awful lot of money. More than you deserve.” Henry said nothing. For this much money, he could take a few insults.
“But I got it for you,” Darr continued. “So the least you can do is give me $5,000 of it.”
There was not a hint in his voice that Darr was joking. Besides, Henry was already sure that Darr was not the kind of person who joked about money. Henry felt disgusted by the request. The only way he could think to respond was pretend nothing had happened.
“Well, thank you very much for getting me my money,” Henry said. “I really appreciate it.”
They wound up their conversation. Darr never mentioned the $5,000 again.
Darr quickly revised the way his troops were paid, trying to make it in everyone’s financial interest to sell more deals. Product managers and regional marketers would be paid on what Darr called “gross marketed equity,” a fancy term that simply stood for the dollar volume of deals sold. The more the marketers sold, the more money they made. The originators, D’Elisa and Henry, didn’t sell deals, so they would receive special compensation. Darr helped set up a special partnership, called Trace Management, which took a one percent interest in every transaction they assembled. Henry and D’Elisa each took a one-third interest in Trace. Darr took the last third for himself, even though he was not originating deals.
By early 1980, Darr had his first opportunity to speak to all of his troops in person at the department’s quarterly meeting in New York. All of the marketers and originators came to town and gathered in Darr’s office at Bache’s headquarters. Darr started a speech, letting them know that things were going to change.
“We are going to do more business than we have ever done,” Darr said. “We are going to have bigger deals, and newer sponsors. We are going to have a well-run department, and we are going to become a leader on the street.”
For the most part, his hour-long presentation sounded like the typical pep talk. But then Darr shifted gears. His department was not going to be like others on Wall Street, he said. His shop was going to be clean.
“I know all the other heads of the departments on the street,” Darr said. “I know which ones of them have secret bank accounts in the Bahamas and in Switzerland. I know the ones that are getting side deals. And we are not going to do anything like that.”
Several members of the department listened in amazement. None of them had heard about people in the business having secret bank accounts or taking payoffs.
Darr changed the subject again and soon brought his talk to a close by emphasizing one last point. “And don’t any of you forget,” he said, pointing a finger at his staff, “your job is to make me look good.”
Nothing about working together. Nothing about teamwork. Make me look good. The meeting broke up, and everyone headed out of the crowded room. No one was talking. Finally, the silence broke.
“Great motivation speech,” someone muttered caustically. Everybody cracked up.
As the weeks wore on, the discomfort with the new boss grew. There was no question that Darr was smart—he understood the dynamics of the tax shelter business and had a clear plan of how to change the department. But his behavior veered at times into the realm of the bizarre. Darr’s talk about his military background was particularly troubling. He loved to brag about his exploits during the war, but he rarely told the same story twice about where he served and what he did.
The first time he discussed his military background with his new colleagues, he said that he flew F-4 Phantom jet fighters for the air force in Vietnam. At another meeting, Darr suddenly changed course, describing in detail his experiences as a helicopter pilot in the war. He told how he and other pilots used to fly low over Vietnamese rivers, trying to make the wheels of their helicopters spin by touching the water. On some days, he said he was in Special Forces, on others, he said he was a Green Beret. Then he changed his story again, saying that he had not served in Vietnam at all—instead, he told them, during the war years he was stationed by the Central Intelligence Agency in Iran to help support the shah. He had been selected, he said, because he spoke Farsi fluently. Nobody was likely to be able to challenge the claim. The ayatollah wasn’t buying tax shelters.
By then, nobody believed a word Darr said about his past. They couldn’t understand why the man lied so frequently, and so obviously. But it put them on guard, worried about what other falsehoods Darr might be telling. Finally, at a quarterly meeting, David Hayes had enough of the lies. Darr was discussing his experience in some branch of the armed forces when Hayes broke in.
“I thought you served in the air force,” Hayes said, leaning against a wall.
Darr glared at Hayes and walked toward him, placing the palms of his hands on Hayes’s chest, as if in one more step he would go for the throat. Then Darr just stood there, glowering. Hayes stared right back. He doesn’t know what to do next, Hayes thought. Finally, Darr smiled and took his hands away. The confrontation ended.
Darr’s bullying style extended into every facet of the department, transforming even the weekly conference call for marketers. Established by Blank, the call had been designed to give everyone a chance to discuss problems they might have with particular deals or to learn about offerings in the pipeline or to offer suggestions about possible sponsors. But Darr had no tolerance for marketers raising perceived problems with a deal or suggesting changes. In the calls, Darr pounded one theme: sell. New York would put the deals together. Their job was to sell the shelters—without question.
“If you don’t sell out this project, then you are going to be out of the firm,” Darr barked at his marketing staff in one conference call. “I’ll find people who can do your job if you can’t handle it.”
Other times, if some marketers felt uneasy about the quality of a particular tax shelter, Darr threatened not to pay the bonuses they had already earned unless the new deal sold out.
With Darr leading the charge, new and previously unknown promoters suddenly appeared at Bache. Among the first was a group of men whose biggest qualification seemed to be their personal ties to Darr. The group included John Holmes, the headhunter who helped Darr get his job at Bache and who now was one of his good friends. Their oil tax shelter, called Integrated Energy, Inc., or I.E.I., struck many in the department as odd. For one thing, neither Holmes nor another chief principal, Gene Mason, worked in the oil patch. While some oil professionals were brought into the deal, Mason, a Philadelphia lawyer, would be president and chairman. Holmes’s background was limited to Wall Street. Also, the company would not invest in oil wells—instead, it would be a roll-up, purchasing stakes in other energy partnerships and
throwing them together into what would become a publicly traded entity.
Curtis Henry, who handled the due diligence for energy deals, grew more uncomfortable after he reviewed the plans for I.E.I. This is a perfect Wall Street deal, he thought. They’re creating net worth out of thin air.
I.E.I. at that point had no office space. No accounting procedures. No full-time employees. No systems to evaluate the value of the oil reserves coming into the company. No capital. None of the normal elements of a regular business. “This isn’t a company,” Henry told colleagues. “It’s an idea.”
I.E.I. quickly became the butt of jokes, with executives referring to it derisively as “E.I.E.I.O.” But Darr was passionate about the deal, talking it up to his superiors as a fabulous transaction that would make Bache lots of money. Other members of the department didn’t understand his excitement; they began to gossip that maybe Darr was so agog about the deal because of his friendship with Holmes.
Finally, Darr told Dennis Marron, who worked for the department in New York, one of the reasons he was so fired up about the deal: If I.E.I. went through, Darr himself stood to make a lot of money. He told Marron that the idea for I.E.I. had, in fact, been his and that he had been working on the deal when Bache hired him. So, as part of his pay package, he said, Bache promised that if he sold the deal, the firm would pay him a special bonus equal to the amount he would have made for his interest in the new oil company. I.E.I. went public at $10 a unit. Its price immediately collapsed, with the units losing more than half their value. While the deal blew up for investors, Bache walked away with huge fees.
No one could argue that Darr failed to bring money into the firm. Sales had picked up since he arrived. The department kept expanding, with Darr scouring for new hires. His staff might not trust him, but Darr could run the business.
Despite his lies, his bullying, and his arrogance, he seemed to be at Bache to stay. Then the word spread about Darr’s past at Josephthal, and the plots against him began to be hatched.
Curtis Henry walked across a Manhattan parking lot to David Hayes’s car. The two men had come to town for meetings at Bache’s New York headquarters in September 1980. A few minutes earlier, Hayes had asked Henry to come on a trip to a Bache branch in New Jersey. The branch had scheduled Hayes for a presentation to brokers about a new tax shelter. It was a deal Henry knew something about, and he agreed to tag along and help out.
The two men chatted amiably as Hayes drove the car through the Midtown Tunnel, crossing the New York State line to New Jersey. It had been weeks since Henry had heard the allegations from Leach about Darr taking money. He still hadn’t decided what to do about it. But in his mind he kept replaying the events that occurred since Darr came to Bache: Darr’s pronouncements about how everyone in the business was taking money but him. Darr hitting him up for part of his bonus. The strange deals. Now it all was starting to make sense. As Hayes drove into New Jersey, Henry decided that the moment had finally arrived to tell someone in the department what he knew.
“David, I’m going to tell you a story that you are not going to believe,” Henry said. “But nevertheless, it’s the truth.” For the next few minutes, he described what Leach had said. Hayes kept his eyes on the road, listening quietly until Henry finished.
“Jesus,” Hayes said. “Well, this is not good news.”
For the rest of the trip, the two men discussed nothing else. When they finally arrived at the Bache branch, they stayed out in the parking lot another twenty minutes, hashing through what they should do.
The bottom line, Hayes said, was that they simply didn’t have enough information to make a decision. “If this is a true story, if we can find out if there is somebody else who can confirm this story to us, maybe we should begin to think about doing something,” Hayes said. “For now, this is just a rumor.”
“Yeah,” Henry said. “But it’s a scary one.”
John D’Elisa’s concern about Darr’s history gradually began to border on obsession. After his encounter with Sinclair at the footrace, D’Elisa made inquiries with people he knew in the business. Among those he called was Alan Gosule, a lawyer in Boston with Gaston & Snow who had done work with Josephthal’s tax shelter department.
After discussing some pending deals, D’Elisa asked what Gosule knew about Darr.
“Darr’s got a reputation,” Gosule replied. “He’s a really bad guy.”
D’Elisa pressed the lawyer for more information, but he refused to explain further. D’Elisa thanked Gosule for his help and hung up more anxious than before. He knew Gosule well; he wasn’t the kind to traffic in rumors. If Gosule was worried about someone’s integrity, D’Elisa knew he should worry, too.
D’Elisa decided to tell someone else in the department what he had heard. He telephoned David Hayes, who just days earlier had returned from his trip to New Jersey. He’d been sitting on some information, D’Elisa said, and wanted to talk with Hayes about it. He’d heard stories about Darr taking payoffs at Josephthal. Did Hayes think he should do anything?
“Oh, shit,” Hayes said. Without even trying, the confirmation he wanted was coming in.
Hayes telephoned Henry in Dallas immediately. More people knew this Darr story than just Leach, he said. Now D’Elisa had heard it coming straight out of Josephthal. For the next few hours, Hayes, D’Elisa, and Henry telephoned back and forth. They didn’t learn anything new but ruminated endlessly about what to do. If this became a scandal, they knew Bache wouldn’t handle it well—the firm was already smarting from the silver crisis and the rounds of criticism from an angry Congress and the press. The Belzbergs were making new rumblings about going after Bache. The three feared that the Darr problem might make Bache executives panic and shut the whole department down to keep this new scandal secret. All of their jobs could be on the line.
But keeping things quiet was not going to be an option. Within days, Douglas Kemmerer, a Bache tax shelter marketer in San Francisco, caught wind of the internal rumors and started calling around to ask others what they knew. Kemmerer worried Hayes—he thought the guy loved corporate intrigue far too much and wouldn’t keep his mouth shut. He called Henry and D’Elisa and said they had to meet.
With Henry in Dallas, Hayes in Washington, and D’Elisa in Smithtown, Long Island, the only chance to meet face-to-face would be at the department’s next quarterly meeting in Manhattan, scheduled in two weeks. But they agreed that they would say nothing about their suspicions at Bache headquarters; the risk of detection was too great. Instead, they had to meet somewhere they could speak privately.
Henry called Dennis Marron, who worked for the department in New York, to see if he could find a meeting place. When Marron asked why, Henry told him what was going on. The story confirmed Marron’s worst fears. He had listened to Darr for months, spinning lie upon lie about his military career, and had grown more uncomfortable with his boss as each new version emerged.
“The guy is pathological,” Marron muttered. Henry pushed Marron again about a meeting place. After thinking for a moment, Marron had an idea.
“What about Wally Allen’s apartment?” he asked.
Allen, Darr’s old friend from his Merrill days, rented an apartment just two blocks from the firm after Darr hired him. It was the perfect place, Marron said. It was close enough that everyone could go there during the lunch break and be back in an hour without anyone the wiser. But the idea left Henry wary. After all, Allen knew Darr longer than he knew any of them. How could they know that he could be trusted?
“I don’t think Wally will be a problem,” Marron replied. “He may have been hired by Darr, but he’s not a big Darr fan.”
Marron was right. Allen agreed to let everyone meet in his apartment and said he would not tell anybody about what was happening.
By October, the plans were set. The staff of the Bache tax shelter department arrived in Manhattan for the quarterly meeting. Nothing seemed unusual. They listened as Darr spoke about the sales performance of th
e prior quarter, they took notes during presentations about new deals scheduled to be sold. At the lunch break on the first day, everyone streamed out of the building, headed toward nearby restaurants. Amid the hubbub, Hayes, D’Elisa, Henry, Marron, and Allen politely rejected any lunch invitations. They had other plans.
The five men left separately from Bache’s headquarters at 100 Gold Street and slowly walked the two blocks south to Allen’s apartment at the old Excelsior Power Company. The Excelsior, built in 1888, was the first coal-generated electric power–generating station in Manhattan. In 1979, the brick building was transformed by a historic rehabilitation, giving somebody, somewhere a tax shelter. One at a time, the men followed as Allen led the way to his apartment. Through the nondescript lobby of the Excelsior, down a long hallway to the small, new elevator, up to the fifth floor, left, down the carpeted hall, into the apartment at the end.
Allen, whose tastes ran to contemporary, simple designs, had decorated his apartment almost exclusively with futons. Everyone started trying to fashion chairs out of them. Grabbing a few beers out of Allen’s refrigerator, the men chatted nervously in the living room as they waited for everyone to arrive. They commented on the apartment’s gorgeous view of the Brooklyn Bridge and kidded Allen about his taste in furniture. At some point, the suggestion was made that the group take a name in honor of their meeting place. From then on, the gathering would be known within Bache as the first official meeting of “the Futon Five.”
No one ran the meeting. It just flowed, like a group therapy session without a therapist. D’Elisa opened the conversation, describing what he had heard from Sinclair and Gosule. Then he turned the floor over to Henry, who told of his experience with Leach in Oklahoma. Despite the repetitive nature of the information, all of them knew it was still too thin. They needed something more.
D’Elisa turned to Allen. “Look, you’ve known Jim longer than anybody,” he said. “What do you know about the guy? Have you ever heard of anything like this?”
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