Serpent on the Rock

by Kurt Eichenwald

  Pittman looked up from his desk, his eyes blazing in absolute fury. “No!” he screamed. “I want it done tonight! I want it done right now!”

  “Bill, it’s Friday night,” Eastwick said. “Everybody’s going home.”

  “Don’t you undermine me! Goddamn you! You work for me!”

  With that, Pittman stood up and pounded his fist on his desk.

  “I’m just telling you that you’re being too tough on the girl,” Eastwick yelled back.

  “Don’t you talk to me like that!” Pittman yelled, slamming his fist onto the desk again. “Who the hell do you think you are?”

  Pittman seemed to lose control as his screaming grew louder. He repeatedly banged his fist into the desk. Then, with a wild look in his eye, he leaned over and slid his hands under his desk. Even though the desk appeared to weigh more than a hundred pounds, Pittman started to lift it.

  Oh, my God, Eastwick thought. He’s trying to throw his desk at me.

  Darr heard the ruckus in the next office and buzzed the intercom, demanding that Pittman pick up. Finally, as Eastwick broke into hysterical tears, Darr burst into Pittman’s office.

  “Pittman, are you nuts?” he yelled. “Leave her alone!”

  Darr grabbed Eastwick, pulling her into his office and shutting the door. Then he headed back to Pittman’s office. As Eastwick cried, Darr screamed at Pittman, telling him he had to learn to control himself. Darr would later claim to colleagues that he had grabbed Pittman by the shirt and thrown him against the wall.

  Other members of the department who witnessed the exchange couldn’t believe what they had seen. It wasn’t just unprofessional, it was scary . After all, Pittman wasn’t some inconsequential administrator anymore. He was a decision maker, one of the most powerful people in the tax shelter department, someone who would help set its agenda over the coming years. And he acted like a madman.

  Another winner from the undoing of the Futon Five was Paul Proscia. A man of average height with dark, receding hair, Proscia had been bouncing around Bache since graduating from St. John’s University in 1968. He spent most of his years at the firm as Pittman had, primarily handling administrative duties. The job was distant from the business of assembling and selling securities—largely, Proscia spent his days making sure that stock certificates weren’t lost or stolen. But in the late 1970s, he got his big break when Harry Jacobs selected him as assistant to the chairman. The job lasted two years, and by all accounts, the genial Jacobs thought highly of Proscia. But when Proscia left the chairman’s office to take a job as the assistant manager in a commodities department in downtown Manhattan, things didn’t go quite as well. He was out of the job in a few months, and ready for a new assignment.

  Shortly after the announcement that he had been cleared of allegations from the Futon Five, Darr brought Proscia into the tax shelter department as a product manager. Although the department needed the help, few of his new colleagues could understand this particular hire—Proscia didn’t seem to have much knowledge about the business. And it didn’t help that when Proscia felt pressured in some sales presentations, he started stuttering. Other members of the department whispered that Darr must have been trying to put himself in good stead with Harry Jacobs by hiring the chairman’s former assistant. Even though Darr had been cleared by Bache, they reasoned, it never hurt to try to counter the stench of the allegation. Besides, given time, they knew Proscia would figure out how to do his job.

  Then, just a few months later, Darr made an announcement: He was promoting Proscia to senior product manager. The other New York marketers were livid—they couldn’t believe that they would have to report to someone who was still learning some of the basics. Worse, sometimes his behavior was totally unprofessional. At one quarterly meeting at the Drake Hotel in Manhattan, Proscia got rip-roaring drunk. About midnight, the meeting broke up and a group of inebriated Bache executives and partnership sponsors left through the hotel lobby. Proscia, who was having one for the road, stumbled and spilled his tequila on a girl about seventeen years old. His colleagues watched in horror as the department’s newest executive got down on his hands and knees and licked the alcohol off the teenager’s leg.

  The person who was the angriest about Proscia’s promotion was Wally Allen. As one of the only experienced product managers in the department, Allen not only didn’t respect Proscia but at times had to pick up the slack caused by his new boss’s lack of experience. Repeatedly, Darr called Allen in to help out on deals that Proscia couldn’t handle. The worst came in early 1981 with Montford Place, a real estate deal sponsored by a young general partner named Rick Strauss. The deal itself, involving apartments in Texas, was average at best, and Strauss did not have much experience yet. But Darr treated the deal like it was the keys to the kingdom: Strauss’s father was Bob Strauss, the former chairman of the Democratic Party, and his uncle was Theodore Strauss, a prominent Dallas businessman. If Darr could get to them, he predicted that the firm would land a lot of new business.

  “This relationship is going to be a stepping-stone to big things,” Darr said of the deal at one staff meeting. “Ultimately, we’ll develop something with his father and with all the vast connections his family has.”

  It sounded like a great idea until Darr turned the deal over to Proscia to sell to brokers. After several months, the Strauss deal languished, unsold, on the shelf. Darr did everything he could to push it along, including threatening the jobs of all the regional marketers if they didn’t flog it. But nothing worked. Investors were not interested. Finally, Darr called Allen in and asked if he would help out.

  “Fine, I’ll be glad to do it,” Allen said. “But I want to have complete control of the deal.”

  “OK, Wally,” Darr replied. “But try and humor Paul a little bit.”

  The response just made Allen angry. “Look, Jim, if I’m going to do it, then I’m going to do it. I’m not going to play games.”

  Darr agreed, and Allen went into high gear. He organized a meeting with Rick Strauss for some brokers he knew in Dallas. Then he took the brokers to tour the property. It was a tough sell—the deal had been around so long, it had the musty, stale air of an investment in trouble. But after a few weeks of hard work, the sales started coming in.

  One afternoon Allen was at his desk, reviewing some of the materials from the Strauss deal, when his telephone rang. It was Proscia, calling from outside the office. He wanted Allen to update him on what was happening with the Montford deal.

  “Paul, just stay out,” Allen said. “Either I’m going to do the deal, or you’re going to do the deal. But it’s not going to be both of us.”

  Proscia seemed taken aback by Allen’s condescending tone. “Hey, Wally,” he yelled. “I’m the top guy here. So we do what I say.”

  “Fine,” Allen snapped. “Then you go sell this fucking deal.” He hung up.

  At that moment, Allen realized that he couldn’t stay at Bache. Working for Darr had been bad enough. Now he had to report to somebody he couldn’t respect. The next chance I get, he thought, I’m out of here.

  He sat back and shook his head. Business for the department was just taking off. Demand for tax shelters was growing around the country. Darr was hiring new marketers and due diligence executives almost every day. But now, at this important juncture, the New York marketing effort of Bache’s tax shelter division was falling into the hands of Paul Proscia and Bill Pittman. Two guys, Allen thought, who a year or so earlier were little more than flunkies.

  Ellen Schachter slipped on her dress shoes and walked to the mirror in her bedroom. She gave herself one last lookover: Her clothes were attractive but not flashy, her brown hair was in a conservative business cut. It was just the right image for her interview with Jim Darr. The meeting in March 1981 was the last hurdle for her to get a job in Bache’s tax shelter department. She did not want to blow it. The job was the best she had ever tried to get.

  Schachter was amazed that she had gotten this far in the pro
cess. As much as the possibility of getting the job intrigued her, it also worried her deeply. Although she was an MBA and had worked as an accountant for years, she didn’t know much about tax shelters. She had never even worked on Wall Street before. Her application for this job had been a fluke. Schachter had been a bored accountant when her father suggested she approach a stockbroker he knew at Bache about opportunities there. The broker had agreed to shop her résumé around the firm, and the tax shelter department was the first to approach her about a job examining the quality of deals to make sure they were safe investments. She was amazed that the firm thought she was qualified. She said as much in one of her first interviews with Dennis Marron, a surviving member of the Futon Five.

  “Don’t worry,” Marron replied. “We’ll train you as you go.”

  At the time, Bache desperately needed more bodies in the department. The year 1981 was developing into the most important one in the department’s history. A tax revolt was spreading across the country. As the year began, Ronald Reagan was inaugurated as the nation’s fortieth president, raising hopes for a more probusiness mind-set in Washington. Inflation was still rampant, pushing taxpayers into higher tax brackets even though their spending power remained unchanged. The shelters lost most of their smarmy tinge—no longer were they looked down on as a means of helping the rich escape their obligations; instead, they were sold as a financial necessity, a hedge against inflation in an era of high taxation. They were quickly becoming one of Wall Street’s most popular products.

  At Bache, Darr worked fast to meet the surging demand. On the marketing side, he had already established several tiers of executives. In New York, there were product managers responsible for answering broker questions about a deal and helping to usher it through the system. At the next level were the regional marketers, spread across the country. They told brokers about new deals and conducted seminars. In coordination with the product managers, they also arranged meetings with the developers and oil executives who wanted the lucrative general partner’s role in the shelters. The regional marketers, in turn, had help from the marketers who worked for the general partners. These marketers, called wholesalers, sold only one sponsor’s products and met with the firm’s regional marketers and product managers to plan ways to bombard brokers with educational material and sales literature. Although wholesalers did not work for Bache, they were given extremely wide latitude to travel throughout the branch offices, helping the department persuade the brokers to sell the latest deal.

  Outside of marketing, the other important division of the tax shelter department was due diligence. On Wall Street, due diligence is one of those five-dollar financial terms with a very simple meaning. When brokerage executives say they performed due diligence on a deal, it means that they examined it closely to make sure there were no glaring problems that might put investors at risk. In Bache’s tax shelter division, the due diligence team was broken down into two groups, one for real estate deals and the other for energy deals. Deals involving equipment leasing or esoteric assets like horse-breeding farms were handled by both groups.

  By the spring of 1981, executives with long backgrounds in the shelter business had been shunted aside or were losing influence for having opposed Darr. The announced acquisition of Bache by Prudential had bolstered confidence in the firm’s once-sickly capital base. Darr knew he would have the resources available for a massive expansion in both marketing and due diligence. Prudential’s backing made the firm a more attractive employer, and Darr could attract a number of high-profile, wellqualified marketers. But his sights were set lower in selecting due diligence executives. Rather than seeking out executives with a background in the business, Darr loaded up the department with inexperienced young people, most of whom were fresh out of business school. Then he turned over much of the responsibility for ferreting out potential problems with a tax shelter to them. Ellen Schachter was the first of this new breed for the due diligence team.

  Her interviews with the department began in February, when she met with Marron and D’Elisa, who still ran due diligence for real estate. Schachter heard from Marron that she had done well. But he said she would have to pass one more interview with the head of the department, Jim Darr.

  “What’s he like?” Schachter asked.

  Marron shrugged. “Judge for yourself.”

  A few days later, Schachter took the trip from her apartment to 100 Gold Street to meet with Darr. She arrived a few minutes early and waited outside Darr’s office. He kept her waiting past the appointed time, until finally he came to the door and asked her in. Schachter felt almost immediately uncomfortable. Darr never looked her in the eye. He made her horribly uneasy. To Schachter, Darr looked spooky.

  The meeting was short and unpleasant. Darr had almost no questions for Schachter. Instead, the interview was mostly a pep talk, delivered in a tone of pure arrogance. “This is going to be a great department,” Darr said. “You’ll be making lots of money with us.”

  The meeting came to an end, and Schachter stood up to shake Darr’s hand. She had said almost nothing the entire time. A day or so later, Marron called her. She had passed the last test with flying colors. Ellen Schachter was the newest due diligence officer for the Bache tax shelter department.

  A few weeks later, in April 1981, Schachter was visiting the home of a friend who worked as a stockbroker at Josephthal. She told him she had found a new job, which would be starting on May 1, with Bache. The friend asked her what department she would be in. When she told him tax shelters, his face fell.

  “Oh, my gosh,” the broker said. “Be careful of your boss.”

  “Who, Darr?” Schachter asked. “What’s the matter with him?”

  “He’s a bad guy. Keep your distance.”

  Schachter pressed for details. Her friend told her that Darr had been caught taking money from clients at Josephthal. And, he said, Josephthal had allowed him to leave without pressing charges, just to rid itself of the problem.

  Schachter didn’t know what to think. She had just been presented with the best job opportunity of her life. Now, before her first day, trouble had been dumped in her lap. Even worse, on her employment application she had mentioned that she maintained a brokerage account at Josephthal. She worried that if Darr saw that, he might think she knew something. Her job might be over before it started. A few weeks later, on one of her first days on the job, she went to Marron and pulled him aside into a private office. At that point, Schachter had never heard of the Futon Five and had no idea she was speaking to one of its original members.

  “I’ve heard some bad stuff about Darr,” Schachter said.

  Marron looked stunned. “How did you . . .” He paused. “What are you talking about?”

  Schachter quickly outlined what she had been told by her friend from Josephthal and mentioned her concerns about her employment application. Marron seemed to visibly relax, as if he’d heard it all before.

  “Well, it might be tough for you,” Marron said, “because if Darr looks at the employment application and sees the name ‘Josephthal,’ he’s not going to like it. But you just do your job and mind your business, and there’s really no reason why you have to deal with Darr.”

  Marron spent a few more moments trying to reassure Schachter and then stood up to leave. Schachter still felt concerned.

  “But, Dennis,” she asked. “Don’t you think we need to tell somebody else at the firm about what I heard?”

  Marron stopped in the doorway of the office and looked back at Schachter.

  “The firm already knows,” he said. Then he turned to walk away.

  By June 1981, D’Elisa’s briefcase was stuffed with résumés from young MBAs, all of them eager to join the department’s due diligence team. He and Wally Allen interviewed a number of candidates but were most impressed with David Levine, a recent business school graduate from the University of Pennsylvania. Although there was competition for Levine from other firms, he had been won over by D’El
isa and Allen. Levine liked the chemistry of the place.

  Like Schachter, Levine also had to clear the final interview with Darr. But Levine came away from that meeting with a different feeling from Schachter. Even though Darr seemed somewhat arrogant, he displayed a level of charm that Levine enjoyed. To a degree, he felt flattered by Darr’s attention. The department had little in the way of any business school talent, and Darr seemed to want it badly. Levine decided that at Bache he would be permitted a fair degree of autonomy. So, when D’Elisa came back with a competitive offer, he snapped it up.

  In his first few days, D’Elisa told Levine to start a six- to nine-month study to explore the possibility of the department developing a more active business in public tax shelters. Its business to date had been founded mostly on private deals. Such deals had some advantages—for example, a private partnership did not have to register with the Securities and Exchange Commission or publicly file financial information, both of which cost money. But the disadvantages were far larger: The firm still had to send each buyer an investment memorandum describing the deal and disclosing all of the relevant facts. Under the rules at that point, an unregistered security could be sold only to a maximum of a hundred buyers, sharply restricting the amount of money that could be raised. All buyers had to meet certain income and asset standards to ensure that they had the financial wherewithal to handle the risk of the tax shelters.

  Still, in the department, it was well known that the high commissions paid by tax shelters encouraged some brokers to fudge their clients’ true financial condition in order to get them approved to invest. As the joke went, Bache’s files held the names of more people making at least $250,000 than actually existed in the world.

  Public deals would solve that problem. Partnerships could be registered with the SEC, then sold to thousands of investors across the country, almost as if they were stocks. All the partnerships would have to do was file prospectuses that disclosed all the risks. Then, for the most part, the law would shift responsibility for assuming that risk onto the investors themselves. If such a market could develop, it would increase the amount of money that partnerships could raise by an exponential factor. And with public deals, the stringent rules restricting which types of investors could purchase the deals would no longer apply.