Immediately, the call made sense. Darr had developed a close relationship with George Watson, a named principal in the real estate company, and the two men spoke frequently. Watson, a thin, bald man with a quiet demeanor and a toothy grin, seemed to consider keeping Darr on his good side to be a central part of the job. Often he told Petty to take care of selling the deals, and Watson would take care of Darr. But on this day, Watson was not in the office. Darr had only asked for Petty as a second choice.
“George isn’t in,” Petty said. “Is there anything I can do for you?”
“Yeah, tell me where I should send my $20,000 check.”
Petty paused for an instant. “Jim, I’m sorry, I don’t know what you’re talking about.”
“You know,” Darr replied. “For that land deal, over there on Stemmons Freeway.”
Petty sat back in his chair. He had never heard of the deal. “Jim, I’m sorry, I still don’t know what you mean. Let me talk to George and I’ll have him get back to you.”
He hung up the phone, perplexed. What was Darr doing investing in some land deal with Watson & Taylor? The company made huge profits buying and selling land in its private deals with its own money. Petty could not imagine that Darr was being allowed to invest in those lucrative private deals, too. He made a mental note to speak with Watson as soon as possible.
Later that day, after Watson returned, Petty walked down the hallway to his boss’s wood-paneled office. “George, Jim Darr called about sending a check on a land deal,” he said. “I didn’t know anything about it. What should I tell him?”
Watson looked up from his desk and smiled. “I’ll take care of that, Bill,” he said in his smooth Texas twang. “Don’t pay any further attention to it.”
A couple of days later, Watson came to Petty’s office and knocked on the door. He said he wanted to talk to Petty about an investment.
“I’ve got this land deal that’s a laydown,” Watson said. Petty perked up his ears. He knew that Watson used that word only when he had found something that was really good.
“Well, what is it?”
“It’s over on Stemmons Freeway,” Watson said. “It’s a done deal.”
Petty looked at Watson, confused. “What do you mean?”
“The land has already been sold,” Watson said.
Already been sold. Petty could not believe his good fortune. In Texas in the early 1980s, the land business was wild, with developers and speculators making millions of dollars from buying and selling properties like stocks. It was possible to sell some land, with the final transfer of ownership simply awaiting zoning changes or other delays. From what Watson said, Petty figured that was the situation here—although the closing had not yet taken place, Watson had a buyer and a profit already sewed up. Now he was selling participations in the guaranteed profit. Watson’s offer to let him buy a piece of this property was like a gift, Petty thought. For every dollar he could invest, he would receive a proportionate share of whatever profits Watson had locked in. The more money he could invest, the more money he would make.
“Gee, how much can I put in?”
“Well, $5,000,” Watson said.
That didn’t sound like much. “You sure there’s not any more available?” Petty asked. He was feeling a trifle greedy. If he could have put everything he owned in this investment, he probably would have.
“No, just $5,000.”
“All right,” Petty said. Before he could reach for his checkbook, a thought crossed his mind. This was the second time in just a few days he had heard about a Watson land deal over on Stemmons. “Is this the deal Darr called about?” he asked.
“Yes, it is,” Watson said.6
So Darr is putting in $20,000, and I’m restricted to $5,000, Petty thought. Watson was right—he did take care of Darr. When Petty later saw the list of investors in the deal, which was called Lombardi Number Three, he realized that the only other people from Watson & Taylor allowed to invest were two executives who would see the transaction’s paperwork. Petty was sure the only reason he had been offered a stake was that he had heard about Darr’s involvement.
The Lombardi deal proved a big winner. Within a matter of months, the payback on the deal came out, with Darr netting about $45,000. Petty did not know it, but this was Darr’s second investment with a Watson & Taylor deal. George Watson had offered Darr the first opportunity in February, on almost the exact same day that the prospectus was filed with the Securities and Exchange Commission for the first Watson & Taylor public partnership sold through the Direct Investment Group. That deal, which was not disclosed in any of the public partnership’s filings, netted Darr a profit of $46,258 in less than one month.
Even with what little Petty knew, Darr’s financial ties with Watson bothered him. Darr was accepting rich investment opportunities from Watson at the same time he was judging the general partner’s deals for public investors. It all seemed too ugly, too smarmy. But Petty could understand why Watson would want to keep the Prudential-Bache executive happy. At that point, almost no one was more important to George Watson’s financial future than Jim Darr.
A fourth-generation Texan, Watson had come from a long line of wealthy Texas real estate men. At the age of sixteen, he was infected by his family’s real estate bug following his success at selling some of his grandmother’s land for $1.5 million. After receiving his business degree from the University of Texas in 1965, he dabbled some more in real estate but went through some tough times. Then, in 1974, he teamed up with Austin Starke Taylor III, a serious man known to everyone as Tracy. A former insurance agent, Taylor brought something to the business: connections in politics and business. His father, a wealthy cotton exporter and real estate investor, was a premier player on the Dallas axis of politics and business, and would be elected mayor during the 1980s. Through his father, Taylor had access to people who could make zoning changes or decide highway routes. Those were the sorts of decisions that could inflate the value of a land investment overnight.
Watson & Taylor expanded rapidly in its early years. Through a series of different entities, grouped under the name “the Watson & Taylor Companies,” the two men assembled and managed real estate properties both for the company’s account and for outside investors. They were particularly attracted to deals involving mini-warehouses, a niche of the business that had less glamour—and far less risk—than developing office towers. In the late 1970s, their track record attracted the attention of Steve Blank’s tax shelter department. Soon Watson & Taylor was selling real estate limited partnerships through Bache. The deals were not huge moneymakers for Bache, but they were solid performers.
By 1983, Watson & Taylor had been successful enough with earlier deals to sell its first big public partnership through Prudential-Bache. It took a little more than thirty days for the firm’s brokers to sell the entire $14.4 million deal to 1,961 clients.
Better still for the Direct Investment Group, Watson agreed to allow a subsidiary of the brokerage, called Prudential-Bache Properties, to share the role of general partner. On top of the huge 8 percent commissions it received for selling the deal, the firm received a percentage of the cash flow from the partnership. And a chunk of that money went to select executives in the Direct Investment Group, including Darr.
Even as Watson & Taylor were raising millions thanks to Darr’s ability to tap the huge network of retail brokers, the economics of Texas real estate were vastly changing. In 1982, Congress and the Reagan administration deregulated the multibillion-dollar savings and loan industry, allowing the institutions to invest directly in assets such as real estate. Suddenly huge thrift deposits were searching out real estate investments, helping to drive the prices of properties sky-high. Developers around the country immediately struck up deals with S&Ls or bought them outright for the purpose of using the deposits to finance real estate projects.
George Watson and Tracy Taylor forged a business relationship with a savings and loan just months after Prudential-Bach
e sold their first public partnership. Their effort began in 1982 when Taylor met Howard Wiechern, the chairman of First South, a small S&L in Pine Bluff, Arkansas. On a sweltering Saturday afternoon, Taylor flew to Pine Bluff to discuss a proposed land development project with Wiechern. The two men spoke about the background of Watson & Taylor, as well as about its recent business and future prospects.
“The Texas market is hot,” Taylor said. “There will be lots of opportunities to make money.”
Wiechern seemed suitably impressed. He listened as Taylor proposed that, if First South financed Watson & Taylor’s developments, the company would share 25 percent of the profit. Wiechern shook his head.
“No, the way we do deals here in Arkansas is we’re fifty-fifty partners,” he said. “We put up the money and you put up the work and find the projects and make them happen.”
After some negotiations, the men struck a deal. By May 1983, the floodgates had opened. That month, without approval from its lending committee, First South loaned Watson & Taylor $20 million. Over the next few weeks, First South loaned millions more to Watson & Taylor so that the company could pay the interest on other loans. Later, Wiechern and First South’s president, Rod Reed, would backdate documents to make the loan appear properly approved and legitimate. The First South loans came so fast and steadily that by August 1983, three months after its first transaction with Watson & Taylor, Wiechern’s thrift went in violation of federal regulations that restrict the amount of money that could be loaned to a single borrower. First South would remain in violation of those rules for years.
The ready financing from First South and Prudential-Bache not only further enriched George Watson and Tracy Taylor. It also freed up capital that allowed them to make even larger profits investing in raw land for their own account. Some of the deals were phenomenally profitable in less than twenty-four hours. On one day, Watson & Taylor purchased about ninety-three acres of land in the morning and, thanks to some rezoning arranged through political connections, resold it that same afternoon for a pretax return of 4,771 percent. Another property of almost eight acres gave them a 12,463 percent pretax return. And a large parcel of about 130 acres snapped up and sold in one day brought a 68 percent return. Those were the wild, woolly days of Texas real estate, and profits were virtually guaranteed, so long as the market held up.
It was in this atmosphere that Watson approached Darr about investing with his company in the raw land deals. The first involved a 15.6-acre property called Trinity Mills, which Watson & Taylor purchased on February 1, 1983. Although the property was fully financed, Watson allowed Darr to invest $107,274 in exchange for 10 percent of the profits. That money was used to pay down part of a bank loan, even though no principal payments were due until November. Darr’s investment did little to decrease the interest costs—twenty-eight days later, or about two weeks after Darr’s check would have cleared, Watson & Taylor signed a contract to sell the property. Darr made $46,539. With that success under their belt, on October 3, Watson met with Darr in his office at the Direct Investment Group in New York and told him about the Lombardi deal on Stemmons Freeway, offering him a stake of more than 3 percent. Watson showed him nothing but some newspaper articles that mentioned the property, but Darr quickly agreed to invest.
Darr mentioned the Watson & Taylor deals both to Bob Sherman, his boss, and to Loren Schechter, the general counsel. Years later, Schechter would have no memory of ever hearing about the investments. But at the time, based on whatever Darr told him, he did not see any problem with a senior officer at the firm investing in lucrative private deals with a general partner.
Weeks after the Lombardi deal closed, Watson gave friends another tip: First South, the Arkansas savings and loan that financed so much of Watson & Taylor’s business, was about to go public. Watson was sure the stock would be a fabulous buy.
“This stock is going to go up right away,” Watson said one day to Bill Petty. “I’ll see if I can get you some.”
In the end, Watson did not get Petty any of the stock, but it was not for lack of shares. Both he and Taylor loaded up on First South stock when the thrift went public in November 1983. They had decided to become the biggest investors in the institution that they owed tens of millions of dollars. Both men purchased just below 5 percent of the company’s stock in their own names. If they purchased any more for their own accounts, they would have to disclose their stake in a Schedule 13-D, filed with the SEC. This document is extremely important because it lets investors know when a takeover might be under way or when a single investor might bear a degree of control over a company’s direction. But even though both George Watson and Tracy Taylor kept buying First South stock, they sidestepped the disclosure requirements. Instead of buying the stock in their own names, shares were purchased for their children or by close business associates. Eventually, the government would determine that, through these various accounts, Watson & Taylor secretly controlled more than 26 percent of the total shares in First South. The rest was purchased by the public.
Darr now had a friend with access to close to a billion federally insured dollars. That would quickly come in very handy.
Alan Warrick, a First South executive who handled its investments, looked up from his desk when he heard the knock at his door. It was the secretary for his boss, Howard Wiechern. She had just come from her desk outside the executive office and was standing in the doorway.
“Alan,” she said, “Howard would like to see you for a moment.”
It was early 1984. Warrick set down the papers he was reviewing. Wiechern was friendly enough, but Warrick knew that when he asked to see someone, he wanted them right away. Warrick adjusted his tie and followed Wiechern’s secretary back to the chairman’s office, knocked on the door, and was invited in.
Wiechern was meeting with three businessmen and seemed delighted to be entertaining his guests. Warrick recognized two of the men as George Watson and Tracy Taylor, whom he knew were First South’s biggest shareholders and biggest borrowers. He figured something important was up, because Watson and Taylor usually came to Pine Bluff only to work on big deals with First South. Warrick did not recognize the third guest in the room, a white-haired man whose expensive clothes signaled his affluence.
“Alan, come in, come in,” Wiechern said. “You know George and Tracy. I’d like to introduce Jim Darr. He’s an executive at Prudential-Bache Securities and a close friend and business associate of George and Tracy.”
Warrick nodded to Watson and Taylor and shook hands with Darr. He had never heard of him. But since he was from Prudential-Bache, Warrick figured that Darr was there to discuss some investment opportunities for First South. That was right up Warrick’s alley.
“Alan, sit down for a minute,” Wiechern said. “Look. First South’s going to be making a home loan to Jim Darr. I want you to get somebody in lending to help work out this deal for him.”
Warrick agreed but felt puzzled. He didn’t handle mortgages; he was much higher up in the organization than any loan officer. Clearly, this was a loan that meant a lot to Wiechern. And if Wiechern wanted the loan approved, it would be.
As they discussed the terms of the proposed loan, Warrick began to understand why Wiechern was involved. This was no ordinary mortgage: Darr wanted $1.8 million to buy a mansion in one of the wealthiest sections of Greenwich, Connecticut. The loan would cover the entire purchase price—on closing, Darr would not put any cash into his new home at all. But despite the huge risks for First South, they would charge him a relatively low interest rate—the prime rate plus one point.
It was an incredible deal. As far as Warrick knew, this would be the single largest home loan ever granted by First South. Now he understood why Darr had flown all the way to Arkansas to finance a home in Connecticut. It certainly paid to have friends in the thrift business.
The meeting broke up, and Warrick stood. Darr shook his hand.
“I look forward to working with you guys here at First South,”
Darr said. “Looks like you have a great organization.”
Warrick walked out of Wiechern’s office. This was going to be a loan of great value to First South. Just by stretching a bit to let Darr buy his mansion, First South now had an ally in one of the most powerful departments of one of the biggest brokerages on Wall Street. Warrick was sure that First South and Darr would do business again.
“Goddamn it, Virg!” George Ball snapped. “Have you got anything specific or not?”
Ball felt exasperated. Yet another person, this time Virgil Sherrill, had come to him with more bad rumors about Jim Darr. By 1984, Ball had been besieged by whispers that there was something crooked about Darr, something wrong with his Direct Investment Group, something that could harm the firm. But the more Ball heard, the more frustrated he became. Even though the rumors were rampant, no one was able to tell him exactly what Darr had done. Ball knew Darr was one of the best-paid people at Prudential-Bache. For all he could tell, what he was hearing was the jealous backblow from the usual Wall Street compensation envy.
The conversation with the patrician Sherrill was typical. Sherrill had strolled into Ball’s office minutes earlier, saying that they needed to speak privately. Then, with the door closed, Sherrill said that he had been hearing things, horrible things, about the head of the Direct Investment Group. He felt obliged to let Ball know.
“From what I hear, Jim Darr is a bad man,” Sherrill said. “We need to be careful.”
But when Ball pressed Sherrill for details, he had none to give. Ball asked who the source of the information was. Sherrill demurred, saying “I gave my word that I would keep that confidential.”
Ball threw up his hands in despair. What was he supposed to do with this? Ball respected Sherrill immensely, but he didn’t think he could make any judgments on such thin information. It wasn’t something he could just dismiss out of hand—Peter Bernard, a dapper head of corporate finance, had told him that he thought Darr was dishonest. He even heard the rumors from Alan Hogan, the short, brash executive whom Ball selected as his chief administrator. But none of them would give him anything concrete.
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