But class actions were the perfect strategy for Prudential Securities. No investor had to accept the settlement. Instead, they received a multipage court notification that described in tiny type the $25 million settlement. It did not say how much investors would receive individually. Under the rules of class actions, only investors who wrote to the court and specifically asked not to participate in the settlement were excluded from it. Investors who did not understand the legalistic document were automatically swept up into the settlement. Even investors who changed addresses and never received the notification were included. Because the essence of the Prudential Securities partnership fraud was that the sales were made to unsophisticated clients, many of the investors did not understand what they were reading and did nothing. As a result, they unknowingly accepted the settlement and waived their rights ever to sue Prudential Securities again. In exchange, they received a payment that was less than they might have obtained for one week on public assistance.
In another few months, a second settlement was reached for the public partnerships. Included in that agreement was the VMS Mortgage Investment Fund, the partnership that had been sold as guaranteed to so many elderly investors. They did not do as badly as the investors in the first settlement.
They received four cents on the dollar—before legal fees.
The word had leaked out days before that Prudential Insurance had found George Ball’s successor. Still, when the announcement came out on April 24, some executives in the firm were surprised. Ball was being replaced by Hardwick Simmons, who eleven months before had been eased out as head of retail at Shearson Lehman Hutton in the wake of huge losses there.
Within the firm, the appointment was greeted with mixed emotions. Some executives felt relieved that at least someone was in charge. But others were horrified that the only person Prudential Insurance could find to run the firm was a man who had lost a midlevel management position at a financially troubled competitor.
But Prudential was not giving Simmons as much rope as it had handed to Ball. He was only named president and chief executive. Winters, the insurance company chairman, named himself chairman of the brokerage, as well.
Simmons began making changes quickly, shunting some senior executives aside. He fired Richard Sichenzio, the man who had succeeded Bob Sherman as the head of retail. Instead, he hired George Murray, a senior vice-president at Shearson and the man who gave Simmons his first job as a management trainee on Wall Street. He also brought on board another friend named Howard “Woody” Knight to handle corporate strategy and business development.
Early on, Simmons became aware of the partnership debacle unfolding in the firm. He didn’t think much of it. Shearson had sold a wide range of limited partnerships, and many of those were having trouble. Senior executives assured him that the partnerships matter was a problem that could be resolved for, at most, $50 million.
Still, given all the legal troubles the firm was experiencing, Simmons asked for a report on whether Loren Schechter himself should be held accountable in any way for what had occurred. By that time, Schechter was a favorite among the senior executives from Prudential Insurance.
A brief inquiry cleared Schechter of any responsibility for the mess. He had raised all of the appropriate red flags to Ball, Simmons was told. In particular, it was noted that Schechter had immediately informed Ball of the Locke Purnell report. But Ball had, for his own reasons, chosen to wait nine months before doing anything about it.
Simmons liked what he heard. Schechter would continue as the firm’s chief legal strategist.
Daryl Bristow carried some files into a room at the Sheraton Hotel in Fort Myers, Florida. Across the room, he saw an elderly man in his late seven-ties, looking fragile and frightened. The man was Darrell Haney, a former client of Prudential Securities and an investor in the growth fund. Haney was a recent client of Bristow, having retained the lawyer for one of the huge growth fund lawsuits his firm had filed against Prudential Securities and Graham. Bristow had never met Haney personally, and they had only a short time to discuss the case before the lawyers for Prudential and Graham would start taking the elderly man’s statement.
Bristow and his partners had already progressed far in their lawsuits over the growth funds. After winning the court order that forced Prudential-Bache to turn over the investor lists for the partnerships, the lawyers had solicited each potential client by mail. Bristow was not filing a class action, so he had to find each of his clients individually. The response was astounding: Thousands of investors, many of them elderly and middle class, sent back a signed contract retaining the lawyers. Bristow had so many clients that, following a disagreement, he was able to split off from his old firm and set up a new one that used the Prudential litigation as its business foundation. The new firm, called Bristow, Hackerman, Wilson & Peterson, opened its doors on May 1.
At about the same time, Bristow had brought another lawyer into the case. With thousands of clients, all of whom had to be kept updated individually, the growth fund litigation was a communications nightmare. Handling it properly would require computer sorting and cataloging of clients’ names and sophisticated letter-writing programs. So Bristow contacted another law firm, James R. Moriarty & Associates. Moriarty was a computer whiz who had already used his skills to keep thousands of clients updated in other mass claims. He could easily do the same thing in the growth fund cases. Within weeks, Moriarty had a computer program running that allowed the lawyers to write individualized letters to every one of the growth fund clients. On top of that, the two law firms had put together a slick full-color newsletter called GFL News . Clients began receiving updates on the growth fund litigation in easy-to-read articles, complete with graphics and pictures.
But Prudential Securities was doing everything it could to make the large client base unwieldy. Already one of the firm’s lawyers had told Moriarty that they planned to depose all 5,800 of the clients in the growth fund lawsuit. Moriarty understood the threat perfectly: Knowing that the plaintiffs’ lawyers were on a contingency fee and were paying expenses out of pocket, Prudential Securities planned to spend the three Texas lawyers into bankruptcy. The brokerage firm seemed ready to make good on its threat, and started with investors in Florida. Haney was the first client who would be deposed.
When Bristow walked into the hotel room, Haney was already speaking with Steve Hackerman, Bristow’s partner, and Bill Webb, who had been Haney’s broker.
“Mr. Haney, I’m sorry to be meeting you in such unpleasant circumstances,” Bristow said, taking the elderly man’s hand.
“Oh, no, that’s fine,” Haney said gently. “We do what we have to do.”
Haney apologized for the fact that his wife could not make the meeting. “She’s ill, and just can’t make it.”
Bristow sat down next to Haney and explained what would happen in the deposition the next day. He described how a number of lawyers would be asking him questions. All he needed to do, Bristow said, was stay relaxed and answer to the best of his ability.
“Now, what I’d like you to do, Mr. Haney, is tell me a little bit about your background,” Bristow said.
Haney looked down at the coffee table in front of him as he started to speak. He didn’t come to Prudential-Bache with a lot of knowledge about investing, he said. With only a grammar school education, Haney had worked his entire life in the steel mills of Pittsburgh. Being handy, he had rebuilt a small unit apartment and sold it for a profit when he retired from the mills. His wife had a job, too, which helped to make ends meet. Because of their hard work, Haney and his wife had a few hundred thousand dollars. It was enough money to let them move to Florida, where they hoped to spend the rest of their lives in comfort. Once they arrived, the couple decided that they couldn’t manage their money on their own. They went to Bill Webb, whom they had been told was a serious and religious man who looked out for his clients. Webb sold them a number of partnerships. When the growth fund came out, with its advertised low risk
and high returns, Haney invested in it.
“He told us they were buying these discounted loans that would produce a profit and that there was very little risk involved,” Haney said.
Haney paused for a moment, closing his eyes and swallowing. “After all those years of hard work and pinching pennies, I had hoped to be able to live a nice life down here,” he said. “My wife and I were going to travel a little bit and have the fun we were never able to have when we both were working so hard.”
Haney’s eyes began to cloud. “Then we lost so much of the money. And then my wife got sick. Now we could never afford to do the things we wanted to do in life. It just doesn’t seem right. But there’s not a thing we can do about it. We just have to forget all of our dreams.”
Haney broke down in deep sobs. For everyone in the room, it was a defining moment. This was what the case was about, this was the reality of the pain Prudential-Bache caused through its lies. At that moment, the lawyers knew that no matter what, this was a case they were going to win.
Bristow reached out and put a hand on Haney’s shoulder. “Mr. Haney, I don’t think I can appreciate how bad you feel, but I know how bad it is,” he said. “And I’ll tell you one thing. We’re going to get your money back for you. You can count on it.”
The deposition of Darrell Haney began early the next day in a room at the Sheraton. When Bristow and Hackerman walked in with Haney, they could not believe what they saw. More than half a dozen lawyers for Prudential Securities and Graham were scurrying about. Video cameras were set up to record what Haney said. The defense lawyers had also brought hundreds of thousands of dollars of electronic equipment—so much that they needed to keep it in an adjoining room—which would allow them to have instant deposition transcripts. They were obviously preparing for an all-day deposition of the elderly man.
Bristow smiled. It was the most comical thing he had ever seen in a deposition. Prudential Securities was obviously trying to send a message. Even with small investors who had little direct evidence to offer, they would do everything possible to run up the man-hours. It seemed they wanted to make the cost of bringing the lawsuit so high that it would serve as a warning to other plaintiffs’ lawyers.
There was no question in Bristow’s mind that Prudential Securities and Graham fought dirty. From the beginning of the lawsuit, they threw up every barrier and made every accusation possible against the lawyers. Even though the brokerage firm’s attempt to sue Boyd Page had had a disastrous outcome, crushing the lawyers was apparently still a central part of its strategy. Already Prudential Securities had tried unsuccessfully to have Bristow’s firm removed from the case by filing motions accusing it of every ethical breach. The motions were tossed out. Then, when his firm won access to the client list, Prudential Securities and Graham sent a joint letter attacking the law firm and suggesting that investors should not sue. The letter, from John Graham and James Kelso, the new head of the Direct Investment Group, criticized Bristow’s firm by implying that it was not working in the interests of investors.
The letter appeared to be another cynical attempt to use Prudential’s good name to trick investors into making decisions that benefited the firm financially. After all, at the same time it was criticizing lawyers willing to fight, Prudential Securities was simultaneously herding tens of thousands of investors into the inadequate VMS settlements.
The Haney deposition dragged on the entire day. The defense lawyers asked questions about every investment decision Haney had ever made. When it seemed there was nothing left to ask, the lawyers came up with another line of questioning. Legal assistants hustled back and forth from the adjoining room, providing the lawyers with the instant transcripts to help them form their next questions.
Finally it was Bristow’s turn. He decided to humiliate his opponents for their tactics.
“Well, Mr. Haney,” Bristow said, his arm sweeping around the room at the lawyers and equipment, “what do you think about all this?”
“It’s amazing,” Haney said softly.
“You know, they’ve got all this electronic equipment over there, and they’ve already printed your every word,” Bristow said. “They can call it back in a flash and stick it right in front of your face. So is there anything you’ve said that you want to take back?”
“No sir.”
“Well, now, Mr. Haney, they’ve spent something like $300,000 to get all this equipment,” Bristow said. “We can all look at what you’ve said. It’s available. So are you sure you don’t want to change anything?”
“No sir.”
“Would you like them to place some of your words in front of you?”
“No sir.”
“You ready to vouch for everything you said?”
“Yes sir.”
Bristow dragged on the questioning about the equipment, occasionally fencing with objections from his opponents. By the time he was done, he had made Prudential Securities and Graham Resources look like a bunch of bullies picking on a frightened old man.
After seven and a half hours, the Haney deposition came to an end. Prudential Securities never used the equipment in a deposition again.
A few weeks later, in the late summer of 1991, a letter from Louisiana arrived at Daryl Bristow’s law office. The letter was just one of a number sitting in a pile of mail on his desk. Bristow opened it without a second thought. As he skimmed the letter, his face turned red with rage. He jumped up from his desk and ran down the hallway to Hackerman’s office.
“Steve,” Bristow fumed, thrusting the letter at his partner as he walked in, “look at what these sorry sons of bitches are trying to do now.”
Hackerman took the letter and read it, his eyes widening.
The letter was from the securities commissioner in Louisiana, the home state of Graham Resources. It was a notification that the regulators had reason to believe that the Bristow, Hackerman law firm had been offering an investment opportunity without filing an appropriate prospectus. Essentially, it was accusing the law firm of running a securities scam.
But the amazing part was what the regulators said was the “security” that the law firm had been offering: the contract for retainer that Bristow, Hackerman had sent to prospective clients in the growth fund cases. In essence, Louisiana was now questioning whether a contingency fee contract, an everyday product of law firms across the country, was an investment that required registration with securities regulators. A copy of the letter had been forwarded to Texas state regulators and the SEC.
“That’s the silliest damned thing I’ve ever seen,” Hackerman said as he finished the letter.
Bristow’s mind was reeling. He had heard too many stories about back-scratching in Louisiana state government.
“Surely the Louisiana Securities Commission can’t be fixed,” he said.
“That’s not the problem,” Hackerman said. “Look, these guys fight dirty. We should have expected it. They sued Boyd Page, now they’re coming after us. They’re just a little more sophisticated this time.”
Bristow started cursing Prudential Securities and Graham. Never before had he been in a lawsuit where the opposing side spent so much time attacking the lawyers and so little time dealing with the facts of the case. All of the defendants’ motions accusing Bristow of unethical conduct had been bad enough, but this one stepped over the line. Bristow wanted to strike back, and hard. He just didn’t know how.
Over the next few days, Bristow hired a lawyer from Baton Rouge to represent the firm before the securities commission. A few days later, he and his lawyer traveled to New Orleans to meet with the regulators. The meeting was relatively friendly. The regulators said that they had been obliged to send the letter because some lawyers representing Graham Resources had filed a complaint. The commission seemed to think the complaint was ridiculous, but still suggested that Bristow, Hackerman file a response. Bristow returned to Houston, still seething at the dirty tactics.
That same week, the plaintiffs’ lawyer in the gro
wth fund case met in a conference room at Bristow, Hackerman to discuss the case. Bristow was still thundering about the complaint that had been filed in Louisiana.
“These folks have gall to spare,” Bristow exclaimed. “Here they’re the ones who have committed this huge fraud, but they turn around and try to send a regulator after us!”
Jim Moriarty, the lawyer and computer expert who had been brought into the case a few months before, suddenly jumped up. “Well, goddamnit, they want the regulators involved in this, then let’s do it,” he said. “Let’s get the regulators involved.”
“What are you talking about?” Bristow asked.
“We represent five thousand people who were ripped off by these bastards,” Moriarty replied. “They’re the ones who have the right to file a complaint. So let’s find out where they should send their complaints and pass on the information to them.”
“Wait a minute, Jim,” Bristow said. “We don’t have the time to go writing up complaints for five thousand people.”
“Daryl, that’s the beauty of this,” Moriarty said. “We don’t write it. All we do is give some information. If they want to write something, it’s up to them.”
Bristow shook his head. The idea sounded risky. “I’m not going to let one of my clients just haul off and file something without my knowing what they filed.”
“Why not?” Moriarty asked, throwing up his hands. “It’s their case. It’s not ours. They’re the ones who know what happened better than anybody. They ought to be able to tell their story their way, without a bunch of lawyers interfering.”
Other investors had already shown that it could work, Moriarty said. Just a few months before, in June, regulators in Kansas had filed a complaint against Prudential Securities, charging that it had defrauded customers in seven different partnerships. It was a small case, but it started because customers in Kansas complained.
Bristow still looked doubtful. Moriarty sat down next to him.
“Daryl, you’re not seeing what we have here,” Moriarty said. “One or two people aren’t going to mean spit to most regulators or prosecutors. We’ve got five thousand people. Our clients, together, have power. They can make their voices heard. They can make something happen. All we have to do is give them a little help.”
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