Any brokers or investors who compared this prospectus with the one distributed almost a year earlier for the first series of energy income partnerships might have been confused. The earlier document provided harsh warnings about the partnerships’ riskiness, with no attempts to play those warnings down. On the front cover, in bold and capital letters, the document read: “THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.”
But the second prospectus, assembled under Pittman’s watch, eliminated the obvious contradiction. The cover made no mention of the partnerships as risky. Instead, it simply referred investors to another part of the prospectus: “FOR A DISCUSSION OF RISK FACTORS CONCERNING THIS INVESTMENT, SEE ‘Risk Factors.’ ”
The simple, easy-to-understand statement about the partnerships’ true risk had simply been removed from the second prospectus. It appeared nowhere else in the document.
Pittman sauntered toward David Levine’s office in the Direct Investment Group. As usual, he was dressed in one of the expensive European suits that he loved, and he was in good spirits. He had returned a few weeks earlier from the trip to Cancún. He was looking tanned and healthy.
Pittman rarely dealt with the executives in real estate due diligence anymore. Ever since he had been promoted from his job as a product manager, he had little reason to speak with them. But today, in the spring of 1984, he had a question to ask Levine. He never hid the fact that he was somewhat contemptuous of Levine and his colleagues. All of them were far younger than Pittman, who was now forty-one. Most of them had business degrees; Pittman only had an undergraduate degree from night school. And Darr had a habit of heaping praise on the young MBAs at meetings with brokers, saying how they were the group making sure that the firm sold only the best partnerships. The attention they received seemed to dig at Pittman.
He arrived at Levine’s office and stuck his head in. The young executive was speaking with Freddie Kotek, one of his colleagues in real estate due diligence. Pittman interrupted and began raising his questions for Levine in a demanding tone. Kotek slouched in his chair. He wasn’t interested in the conversation as it droned on.
Suddenly Pittman turned sharply toward Kotek, staring at him with an expression of anger.
“Don’t give me that wise-ass college smile!” Pittman snapped. Then he turned back to Levine and finished his conversation. A few minutes later, after Pittman walked away, Levine and Kotek both cracked up.
“Boy,” Kotek said, “if I ever had to work for that guy, I’d be out of here.”
Darr announced the restructuring of the real estate due diligence department at a meeting of the Direct Investment Group in September 1984. He arrived in the conference room looking confident. There were going to be some changes in the department, he said. Some people needed to be moved around to take advantage of everyone’s own individual skills.
“The end of the year is coming up,” Darr said, “and we need to get some deals done.”
The executives in the room listened fearfully. They knew that Darr had been frustrated with the pace of due diligence under Joe Quinn. A number of deals were being held up by questions from the due diligence department. Quinn liked to take matters slowly and deliberately, to make sure that he did not make a mistake. But there was no place for that kind of approach in the Direct Investment Group. Some members of the department had heard Darr complain about Quinn noodling the deals to death. David Levine had also made himself very unpopular with the marketing staff by aggressively pointing out the problems that he found in the real estate deals. So now, as they listened to Darr talk about the need to get deals done, the due diligence executives started worrying about their jobs.
“I’m going to make some changes,” Darr continued. “I’m going to move Joe over to be in charge of asset management, to make sure these investments perform.”
There was no mistaking the fact that Quinn was being demoted. Quinn already was responsible for asset management—that department reported to him. With this change, he was losing almost all of his responsibility.
“Now, to take Joe’s place, I’m naming someone who in the last year has proven his skills in due diligence and origination,” Darr said. “Bill Pittman.”
The room was completely silent.
Later that same day, Pittman called David Levine into his office for a talk. Levine stepped in and shut the door behind him before taking a seat.
“David,” Pittman said, “I’m taking you off real estate.”
Instead, Pittman told him, he wanted Levine to handle some of the more esoteric partnerships, which for the department were far less lucrative. Levine was being pushed out of the business he knew so that he could begin reviewing deals involving businesses like horse breeding, about which he knew nothing.
Levine just looked at Pittman, trying to contain his contempt. He thought the man was an idiot. And now he had to work for him. You couldn’t find your asshole with both hands, he thought. You’re just some fucking marketing guy.
“All right,” Levine said, and he got up to leave.
To a degree, Levine had seen it coming for months. Ever since he successfully killed Harrison’s deal in Chicago, Levine had allowed himself to become increasingly vocal in his objections to the low-quality deals that were flying through the department. He threw up roadblocks every time he saw a problem and refused to back down. In doing his job, he knew he was putting his career in jeopardy.
Levine tried handling the esoteric deals. Keith Fell, the due diligence executive who had been reviewing partnerships such as horse-breeding deals, was moved over to cover real estate.
In October, Levine went to the office of Peter Fass, an outside lawyer who worked with the partnership division, to review a horse-breeding deal that was being readied for sale. Levine was told to help draft the prospectus on the partnership.
After a few minutes, Levine excused himself and went to call Fell, who was back at Prudential-Bache. Maybe Fell could explain the horse deal to him. But a quick conversation with Fell reinforced how little he knew. When Fell started talking about mares, Levine had no idea that was the word for a female horse.
As Fell finished his explanation, Levine felt frustrated with how little he knew. “What the hell am I doing here?” he asked.
Levine knew the answer to his question even as he asked it. When he had been hired to handle due diligence for the department, he knew very little, and so had been considered harmless. Back then, he couldn’t slow down Darr’s aspirations for huge sales by objecting to bad deals. But once he understood his job, he was simply in the way. By having Levine and Fell switch jobs, Pittman had successfully put them all back to square one. Neither of them knew enough now to consistently sift the bad deals from the good.
Freddie Kotek and David Levine had never seen someone looking so anguished. Dick Anastasio, an appraiser for the Direct Investment Group, had come to speak with his two colleagues a few minutes earlier on this day in October 1984. His face looked ashen.
“What the hell am I supposed to do?” Anastasio asked. “This deal is terrible. I’m really being pressured by Pittman to change my numbers. I just don’t think I can do it.”
Anastasio had been a respected member of the due diligence team since he started working for the department a few years before. His job was to examine the real estate properties that sponsors wanted their limited partnerships to purchase. The job was incredibly important: When the proposed partnerships came into the Direct Investment Group, the general partners already knew what price they would have to pay for the property they wanted. If the property appraisal came back lower than the purchase price, the deal had a significant problem. Clients who put money in the deal would be overpaying and would be virtually guaranteed that much of their investment would be lost. Anastasio was known as an appraiser who was thorough, reliable, and totally independent.
His latest appraisal had been for a partnership sponsored by the Related Companies, a New York real estate group. Anastasio’s values for the property h
ad come back far below what Related had proposed to pay. A few weeks earlier, when real estate due diligence was handled by Joe Quinn, that would have killed the deal.
But now Bill Pittman was in charge. He sent Anastasio’s appraisal back and asked him to try again. Perhaps, he suggested, he could increase his numbers. Appraisals are flexible; there are often honest disagreements about values. Anastasio took another look and raised the value slightly, but the values still were nowhere near the purchase price. Pittman was not pleased. He sent the appraisal back again.
That was a few days before Anastasio came to speak with Levine and Kotek. “Pittman keeps sending the numbers back to me, again and again. He keeps asking me to push it up higher. I can’t raise it much more.”
Both Levine and Kotek looked uncomfortably at Anastasio. They both felt bad for him. They knew he was under enormous pressure. He had a family, a mortgage, and could not afford to lose his job. But he also could not bring himself to give Pittman the appraisal he wanted. There would have been no rational justification for it, other than self-preservation.
“Dick,” Levine finally said. “Do whatever you feel you have to do.”
The agony that Levine and Kotek saw in Anastasio’s face angered them both. They hated Bill Pittman. Hated his willingness to cut corners. Hated his willingness to get deals sold at almost any cost.
A few days later, Kotek and Anastasio were speaking with Pittman when the topic of Anastasio’s latest appraisal on the Related deal came up. Still millions less than the sale price, it was the best he could do within the parameters of an honest appraisal.
“Well, look,” Pittman said. “Now we’re within ten percent of the price. That’s fine. We can write ten percent off as the margin of error.” He smiled. “We’re going to do the deal.”
Anastasio blanched. Kotek looked at Pittman with disgust.
Levine kept in close contact with Fell over the next few weeks. He explained all of the problems he had with the real estate deals that were in the pipeline and let him know all of the dirty secrets about the Harrison partnerships. And he continued being vocal in his objections to the low-quality deals coming out of real estate.
But he never had the opportunity to do much more work on the horse-breeding deals. About thirty days after Levine was told of the job switch, Pittman’s secretary showed up at his office door. Pittman again wanted to speak with him. Levine headed over to Pittman’s office right away.
“David,” Pittman said as Levine sat down. “It’s very obvious to us that you’re not happy here. We think you should resign today.”
In his heart, Levine knew it had been coming. Still, Pittman’s statement hit him hard. He sat in front of Pittman’s desk, momentarily unable to speak.
“Either you can resign,” Pittman said, “or you’re fired, as of now.”
Levine halfheartedly mumbled a few objections. He was too discouraged to put up much of an argument. That day, he typed up his letter of resignation and handed it to Pittman. Fifteen minutes later, he headed out the front door of Prudential-Bache’s office by the East River, feeling depressed and defeated. His two-year career in the Direct Investment Group was over.
“Bruce, we’ve got to find another deal,” Pittman said. “Have you got another deal?”
Bruce Manley, the national sales manager from Franklin Realty, listened with amusement in late 1984 as Pittman begged him to come up with another partnership to sell. Franklin, a real estate company, had never been a big partnership sponsor at Prudential-Bache. For years, the company had sold only small private deals through the firm. But Manley had enough exposure to know that the firm’s due diligence operation was deteriorating. When D’Elisa ran things, there had been tough questions. Although Quinn asked a lot of questions, he did not have D’Elisa’s real estate savvy.
Manley’s opinion of the due diligence operation had hit an all-time low a few months earlier. Franklin had presented a deal to the firm for consideration, sending a copy of a proposed prospectus. Weeks later, Manley heard that he would be receiving a telephone call from Direct Investment Group’s due diligence team. He assembled all the necessary paperwork and waited by the telephone.
About ten minutes later, the call arrived. A woman from due diligence got on the line. She asked one question: Where were the commissions for the firm listed in the prospectus? After Manley told her the page number, she thanked him, then hung up.
From that point on, Manley had lost his respect for the due diligence at Prudential-Bache. Now, on this day, he had Pittman on the phone, practically pleading for Franklin to come up with an offering. Franklin had just offered a deal through the Pru-Bache system, and it had sold out in about five days. Pittman wanted desperately to pull off a repeat performance as fast as possible.
Manley thought for a moment. The only deal that the company had ready was one that had been shown to Prudential-Bache a few weeks earlier. The due diligence team had rejected the deal, saying that the real estate market in the area looked weak and that it appeared Franklin was overpaying for the property.
“The only one I can think of that’s available was the one you guys rejected a short time back,” Manley said.
“Well, that’s fine,” Pittman said excitedly. “We need to have another deal. So why don’t we take a look at that one again. Maybe we can futz with it and make it a little more acceptable and revive it.”
Manley agreed and spoke with some of Pittman’s team about changes that could be made. After reviewing the numbers for a few weeks, Pittman came back and said that the deal had been made acceptable. It was scheduled for marketing through the Prudential-Bache system.
That day, Manley sat in the chair at his desk, making a final review of the prospectus. It was almost identical to the original deal that had been sent to Pru-Bache, the one that had been rejected for being too risky for investors. The price of the apartment building was the same. The projections for performance were the same. The market conditions in California were the same. In fact, only one change was made in the entire prospectus that made the deal acceptable to Pittman:
Prudential-Bache’s fees were increased.
The deal sold out in about ninety days. Investors eventually lost most of their money.
George Ball laughed at the large, ugly statue of a mother suckling her child. It was being presented to him as a joke at the November 1984 retirement party of David Sherwood, the outgoing president of Prudential Insurance. Traditionally, the statue was given to the worst-performing company in the Prudential family, symbolizing the struggling company’s need to feed on mother Pru. For losing a bundle of money, Prudential-Bache was the statue’s new home.
After two years of running the firm, Ball was beginning to feel some heat for its lousy performance. The firm had been hemorrhaging cash— for the first nine months of 1984 alone, it lost about $105 million. Prudential Insurance had been compelled to invest another $100 million into Pru-Bache on October 22 to help keep the firm going. The high hopes that followed Ball’s arrival had all been dashed.
Ball desperately wanted to turn things around. Somehow, he needed most of the firm to start generating huge profits. Only a few departments seemed able to make any money at all, with the Direct Investment Group being one of the standouts. If every department could run as efficiently as that one, Ball felt sure that Prudential-Bache could start making some consistent profits.
So Ball decided to use the presentation of the statue as an opportunity to urge his troops to start bringing in the profits. On November 26, he wrote up a Ballgram, describing how the firm had been given the statue and what it symbolized. It was something that no member of the Prudential family wanted.
“I also want to unload the statue as soon as possible—to pass it, flowing on a sea of profits, to another Prudential company,” he wrote. “Accomplishing that, quickly and loudly, is one of our primary goals.”
At the end of the memo, Ball included a new rallying cry for the firm: “Shed the statue. Losses suck.”
To make sure no one would miss the point, Ball sent out thousands of buttons that featured a picture of the statue. Surrounding the picture, in bright red lettering, were the words “Losses Suck.”
Within six months of Bill Pittman taking over real estate due diligence, the group’s makeup was almost totally changed. Levine had been asked to leave. Freddie Kotek, Lauren McNenney, and Jeff Talbert had all found other jobs. It was the same thing that had happened a year earlier when Darr gave Pittman the responsibility for energy due diligence: Everyone who had done their jobs and raised questions that slowed down the limited partnership money machine had been driven out of the firm.
By late 1984, the transformation of the Direct Investment Group was complete. It was run by Darr, a former broker. Due diligence was handled by Pittman, a former broker. It reported to Sherman, a former broker. And the firm was controlled by Ball, a former broker. Everyone in an important supervisory position for the department came from a background based purely on sales. For them, the proof of success was the dollar volume of the partnerships that could be stuffed into accounts of Prudential-Bache clients.
Only one person with supervisory authority over the Direct Investment Group was not a broker. But by then, that executive, Loren Schechter, had a number of other issues on his plate. Even as the general counsel, he could not pay much attention to what was happening in the firm’s partnership division.
In that year, Schechter was too busy negotiating with the Securities and Exchange Commission on behalf of Prudential-Bache. He was desperately trying to stop the regulatory agency from filing one of the largest complaints in its history against a national brokerage firm.
CHAPTER 10
Serpent on the Rock Page 29