He didn’t even want to guess how long the people he left behind would survive.
Clifton Harrison grabbed a chair in a conference room at Prudential-Bache and threw it against the wall.
“Goddamn it, you asshole!” he screamed at David Levine. “What’s the matter with you? This is a great deal!”
Levine stood his ground. He wasn’t going to pass on the latest partnership that Harrison brought into the firm in June 1983. By then, Levine was far along on the due diligence learning curve. He knew that Darr and Harrison were pushing bad deals through the department. This latest one, called Exchange Center Limited Partnership, was the worst. Levine decided that, this time, he was going to stick with his analysis, regardless of the pressure.
The $32 million Exchange Center deal made little sense to anyone on the due diligence team. It was an awful transaction for investors. The deal would build a thirty-nine-story red-granite office tower on South Lasalle Street in the heart of Chicago’s financial district. The fees and expenses were so heavy that Levine did not see how any investor could make a penny on the deal. All told, Harrison, Prudential-Bache, and the Direct Investment Group would pocket more than 20 percent of the money that was raised.
When the Chicago deal first came in the door, Levine decided to pass it to Jeff Talbert, a new, young member of the due diligence group. He wanted to see how Talbert would react. After all, Talbert knew nothing about Harrison’s criminal background or the troubles that his other deals had experienced. It was the best way to get an honest response. Levine dropped the documents on Talbert’s desk without telling him any of the details.
“Let me know what you think of this one,” Levine said.
Talbert started reviewing the documents and, after just a few minutes, decided that Levine must be kidding. The deal was ridiculous: It assumed it could charge rent of $32 a square foot by 1985, when the best estimates for the rental costs in that year averaged around $27. Nobody would pay the extra $5. With such unrealistically positive assumptions, the deal had to flop. Talbert carried the documents back over to Levine’s cubicle. Freddie Kotek and some other members of the department were there talking with him.
“I’ve gone over this, and I was surprised,” Talbert said. “There are lots of problems. I can’t even figure out why we’re looking at this deal.”
“It’s a Cliffy deal,” Levine replied.
Talbert looked perplexed. “Who’s Cliffy?”
Kotek spoke up. “Cliffy, Clifton Harrison. Cliffy’s a guy we do deals with, a friend of Darr’s.”
Talbert could see the disgust on his colleagues’ faces. “Well, what’s wrong with the Cliffy deals?”
“They’re all like that one,” one of his coworkers replied. “They suck.”
“And he’s a convicted felon,” Levine added.
The four talked about what should be done with the Chicago deal. Talbert said that if these Harrison deals were as bad as everyone said, he was worried about them. What would happen when they blew up? Brokers would get mad, and then the department wouldn’t be able to sell anything. It seemed like an incredibly risky way to run the business.
Then it came up that there was one other Harrison deal in the pipeline, Fountain Square Limited Partnership, which would raise a little more than $6 million for a building in downtown Cincinnati. Maybe, someone joked, they should appease Darr by letting the Cincinnati deal through while killing the $32 million Chicago deal. At least that way, less money would be on the line.
Levine looked back at the documents, steaming. D’Elisa was not there anymore to fight for them. But, Levine thought, if the newest person in the department could throw aside the Chicago deal that quickly, he was not going to let it through. This one he was going to take to the mat. He rejected the deal out of hand.
But Darr refused to accept Levine’s opinion. He and Harrison called Levine into a meeting in a conference room and double-teamed him. Levine refused to change his decision.
Later, Darr told Levine that since there was such a split opinion, the matter would be taken to the department’s investment committee for a decision. Levine knew what that meant: Unless he could think of something, the deal would go through. Darr completely controlled those investment committee meetings.
Levine walked back to his desk with a new resolve. If Darr wanted to present the deal to the committee, fine. But Levine was going to make sure they knew, in a written memo, about the deal’s problems. Word spread that Levine was going all out in his effort to kill the deal.
The investment committee met soon after. On that day, Joseph Quinn, a former official with Chase Manhattan Bank, took over D’Elisa’s job as the new head of due diligence. Shortly before the meeting, Levine spoke with Quinn and told him about what was happening with the Chicago deal.
The meeting started later that morning in the department’s boardroom. Senior executives, including Darr, gathered around the conference table as Levine distributed copies of his two-page memorandum on the Exchange Place deal. For the next half hour, Levine went through his memo, point by point: The deal was one-sided, in favor of the general partners over the investors; the rents were above market; the real estate market was soft. He supplied a stream of data to support his position.
Finally Levine finished his presentation. With such a massive criticism on paper, he figured the meeting was over. He couldn’t see how it would be possible for even Darr to push this deal through. Levine started gathering his things.
“Now, wait a minute,” Darr said. “We have an interesting problem. We’ve had two people who did the due diligence here, and they don’t agree.”
Levine looked up, stunned. “What?” He couldn’t understand what Darr was talking about. He ran due diligence for real estate private placements. And everyone in his department agreed with his analysis.
Darr motioned toward someone sitting at the table. “Ralph, why don’t you tell us what you found,” he said.
One of the department’s appraisers stood up and began passing out copies of a second memo. Levine couldn’t believe it. Appraisers figured out fair values of purchase prices for buildings. They never reviewed deals for their investment quality on their own. They didn’t have the background to do it.
This is a total setup, Levine thought.
For the next few minutes, the appraiser described the benefits of the Exchange Place deal. He trembled as he spoke, obviously very nervous and uncomfortable. In Levine’s mind, the report made no sense. But Darr had managed to regain control. The appraiser finished his report and sat back down.
“Well, thank you very much, Ralph,” Darr said. “Obviously, David, you need to go back and take another look at this.” The investment committee gave the go-ahead for the department to proceed with the deal.
Levine and Quinn headed out of the meeting room to Quinn’s office, where Levine slumped into a chair, pale and wiped out. The stress from trying to do his job properly was overwhelming.
“I’m living in the Soviet Union, trying to fight the KGB,” Levine muttered.
Quinn looked nervous. “This is a nightmare,” he said. “I don’t want to do this deal.”
Finally Quinn came up with a suggestion: They would proceed with the deal, but they would question it to death. Darr couldn’t stop them from demanding more information from the developer and general partner. So they would just keep demanding more and more financial records until the developer Harrison had found walked away out of frustration. Levine agreed.
As the due diligence team learned of what had happened in the conference room, most of them began to say the same thing: Darr was creating a monster. He didn’t have any interest in their judgment about deal quality—he just wanted to keep the products coming. There was only so much Quinn, Levine, and everyone else could do to hold him off. Someday, the deals he pushed through would start falling apart. When that happened, there would be hell to pay. A lot of careers were going to be ruined, potentially even their own.
Dennis Mar
ron closed a bound report filled with financial data from NRM Energy Company. He looked out of his office window at a view of the Brooklyn Bridge and sighed. Marron knew he had to block Prudential-Bache from doing its next big oil partnership with NRM. Nothing was particularly terrible about NRM—Pru-Bache had already sold a number of the oil company’s partnerships. But Darr seemed very close to the NRM executives, talked about them frequently, even traveled to their Dallas headquarters a few times to visit. That was enough to make Marron suspicious. He saw the havoc that Darr’s friendships were causing for the due diligence team in real estate. Marron wasn’t going to allow another Clifton Harrison problem to develop with the oil and gas partnerships.
Marron was frustrated—handling due diligence for Darr had an Alice-in-Wonderland quality about it. The numbers, the experts, the market all said one thing. But each morning, the due diligence team stepped through the looking glass into the Direct Investment Group, and everything turned on its head. The old standards didn’t matter. If Darr wanted to do a particular deal, it was almost impossible to stop him.
This time, the deal was too important. For months, Marron and Douglas Holbrook, a specialist on energy financing who recently had been hired out of the firm’s corporate finance division, had been trying to put together a unique energy deal with Prudential Insurance. It would be an energy income deal, in which investors’ money is used to purchase oil reserves that had already been discovered and proven. Then, if the partnership is well managed, it makes money for investors by pumping the oil out of the ground and selling it at a profit.
The idea was attracting attention at the highest levels. Ball himself was involved in discussing some of the terms of the deal. He had explored selling a similar partnership at Hutton, and it interested him. As this would be the first major product involving Prudential Insurance, Ball wanted to make sure everything was handled just right.
If Prudential Insurance agreed to invest, the deal would be enormously appealing to retail investors. What client wouldn’t want to invest money alongside one of the world’s largest companies? Making it even better, Holbrook was insisting that some of the money paid to general partners up front—known as the promote—be held back until clients received their original investment back from partnership distributions. That would help put more investor cash to work and improve the chances for success.
The partnership would also have big benefits for Prudential-Bache. One of the Direct Investment Group’s subsidiary corporations, called Prudential-Bache Energy Production, would serve as a co–general partner in the energy income deals. Then it could charge management fees and snap up a piece of the cash flow. It could be enormously lucrative for the firm, and also for select members of the Direct Investment Group, such as Darr, who would share in the money flowing into the subsidiary company.
Darr liked the idea as soon as he heard it, and he immediately told Marron that he wanted NRM brought into it as the managing general partner. “They’re the best guys for this,” he said.
Marron objected. As far as he knew, NRM had little involvement with institutional investors like Prudential Insurance. Other companies had stronger financial positions. He did not mention his most serious concern: Darr’s relationship with NRM.
“Go see NRM,” Darr commanded.
A short time later, Marron and Holbrook were on the plane to Dallas to meet with NRM executives. After about an hour of speaking with them, neither Marron nor Holbrook was much impressed. They struck Holbrook as having more knowledge about partnership sales than they did about the oil and gas business.
As the last stop on their due diligence trip, Marron and Holbrook visited the bank that was financing much of NRM’s operations. The banker in charge of the account praised NRM as a fast-growing company with strong finances.
“Would you lend NRM more money if they needed it?” Marron asked.
“Oh, absolutely,” the banker replied.
Wait a minute, Holbrook thought. We’re leaving something out of this equation. “If Prudential-Bache stopped raising capital for NRM, would you still lend them money?” he asked.
The banker looked shocked by the question. “Well,” he said, “no, we wouldn’t.”
The conclusion was obvious: NRM was getting bigger because Prudential-Bache was raising money for it. If the firm stopped, the growth could stop as well. Marron and Holbrook were trying to judge the wave height in the ocean by examining the wake from their own boat.
“Man,” Holbrook said after they left the bank. “We’ve got to figure out a way to get these guys out of this deal.”
On the three-hour flight home, Marron and Holbrook plotted how to ditch NRM. If they found another oil company that Prudential Insurance liked, Darr could never stop it. But unless they stumbled on a solid company soon, they knew that, no matter what their objections, NRM was going to do the deal. They needed to move fast.
Holbrook was sure he was having lunch with executives from Crawford Energy. That was what he remembered hearing from Ed Devereaux, the partnership marketer in the New York region. He barely knew Crawford but figured there would be no harm in meeting them. Even if he didn’t strike up any business, at least he would get a free meal.
So in early 1983, Holbrook and Devereaux went to the City Midday Club at 140 Broadway, just a short walk from Wall Street. As they got off the elevator, Holbrook recognized Rich Gilman, a former insurance company executive he had met over some deals years before. Holbrook had immense respect for Gilman and strode quickly toward him to say hello.
Holbrook was surprised to find out that Gilman was one of the two people he was meeting. Gilman introduced the other man as Anton Rice III, known to everyone as Tony. Holbrook took almost an immediate dislike to Rice. A tall man with graying temples, blow-dried hair, and French cuffs, Rice struck Holbrook as striving too hard to hit some Wall Street image. He had a little too much of a salesman’s smell to him, all polish and gentility.
As the four men followed the maître d’ to a table, Holbrook thought fast. Gilman had introduced Rice as the chief financial officer of Graham Resources, not Crawford Energy. Gilman apparently worked with Graham, too. Holbrook had heard of that company before. Headquartered in Metairie, Louisiana, Graham had been founded in 1975 by Ford Graham, a sharp and crusty oilman who started in the business in 1938, and his son, John, a Princeton graduate and lawyer.
Holbrook remembered that he had seen a tombstone advertisement in the Wall Street Journal in 1980 announcing that the St. Paul Fire and Marine Insurance Company had committed to investing close to $90 million with Graham in an energy property acquisition deal. If Graham was good enough to attract St. Paul, he thought, and employed quality people like Gilman, maybe it would be the right choice for the energy income deal.
As the men dined on fresh salmon and beef tenderloin, Rice laid out the purpose for the meeting: Graham had been raising money for drilling partnerships with Merrill Lynch but now wanted to do business with Pru-Bache. Rice mentioned that he once worked for Merrill and knew Darr from there. He left out the fact that Darr had tried to get a job at Graham while still working at Josephthal. It didn’t strike Rice as important.
Holbrook listened politely, then shook his head.
“We’re not interested in a drilling deal,” he said. “We’re looking at doing an income fund. Maybe if you’re interested in something like that we might be able to talk.”
The conversation was all very sketchy, without any hard proposals. After more than an hour, the meal came to an end, and everyone stood up from the table. “Well, it was great seeing you, Rich,” Holbrook said. “Let’s not lose track of each other. Maybe we have something we can work on here.”
Holbrook and Devereaux said good-bye to their hosts and hustled back to the firm. Holbrook strode into Marron’s office immediately.
“I may have found an option to NRM,” he said.
Marron listened as Holbrook excitedly described his meeting. He spoke highly of Gilman, adding that if Graha
m had sent only Rice, he never would have thought about doing business with them. Graham had done transactions and was a company of real substance. Marron liked what he had heard. He told Holbrook to call Prudential Insurance and see what they thought. Maybe they had found a way to beat Darr at his own game.
Darr stopped Marron in the hallway as he was about to walk past.
“Dennis, I want you to get control of Holbrook. He’s yours. Control him.” Then he walked away.
Marron knew that Darr was angry at his team. Holbrook had no qualms about speaking his mind on a deal and never seemed afraid to tell Darr when he disagreed with him. Marron knew that alone would be enough to infuriate Darr. But now, he and Holbrook had displaced NRM with Graham in the energy income deals. Darr could never reverse the decision even if he wanted to—it had the full backing of Prudential Insurance. The company had agreed to invest in the Graham deals.
Still, Darr made Marron’s job as difficult as possible. Even though the Direct Investment Group had already started putting together more than $100 million worth of Graham partnerships, Darr refused to meet with executives from Graham Resources, saying he was too busy. So Marron and Holbrook handled the negotiations almost by themselves, frequently flying down to the company’s headquarters in the unfashionable outskirts of New Orleans. It was there, during one negotiating session with John Graham, that the story of Darr’s past came up yet again.
“I’ve heard some information about Jim Darr,” Graham said. “As I understand it, he’s not totally aboveboard, and I’m concerned about that. Is that something I have to worry about?”
Marron couldn’t believe it. Everyone seemed to know Darr’s reputation.
“Well, I have to admit that I’ve heard some things about him, too,” Marron said. “But the transaction we’re doing here is a good one. We’ve got Prudential Insurance in it. Jim Darr, whatever his problems are, shouldn’t affect it at all.”
Graham pursed his lips for a moment. “All right, fine,” he said.
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