Serpent on the Rock Read online

James Holbrooke, a lawyer for Summit Savings, San Antonio, Texas

  In the late 1980s and early 1990s, as the scandal unfolds

  AT PRUDENTIAL SECURITIES, NEW YORK

  Hardwick Simmons, chief executive

  Howard A. “Woody” Knight, president of investment banking and corporate strategy

  THE WHISTLE-BLOWERS

  William Webb, stockbroker, Fort Myers, Florida

  Joseph Siff, stockbroker, Houston

  William Creedon, stockbroker, Los Angeles

  Eugene Boyle, stockbroker, Wayne, New Jersey

  THE PLAINTIFFS’ LAWYERS

  Charles Cox, partner, Cox & Goudy, Minneapolis, Minnesota

  J. Boyd Page, partner, Page & Bacek, Atlanta, Georgia

  B. Daryl Bristow, partner, Bristow, Hackerman, Wilson & Peterson, Houston, Texas

  Stephen M. Hackerman, partner, Bristow, Hackerman, Wilson & Peterson, Houston, Texas

  James R. Moriarty, principal, James R. Moriarty & Associates

  AT LOCKE PURNELL RAIN HARRELL, DALLAS, TEXAS

  Bud Berry, partner

  AT DAVIS, POLK & WARDWELL,

  NEW YORK AND WASHINGTON, D.C.

  (COUNSEL FOR PRUDENTIAL SECURITIES)

  Gary Lynch, partner

  Scott Muller, partner

  AT WILMER, CUTLER & PICKERING,

  WASHINGTON, D.C.

  (COUNSEL FOR PRUDENTIAL SECURITIES)

  Arthur Mathews, partner

  AT THE COURTHOUSE

  Marcel Livaudais, Federal District Judge, New Orleans

  AT THE STATE TASK FORCE

  Wayne Klein, chief, Idaho Securities Bureau

  Nancy Smith, director, New Mexico Securities Division

  Lewis Brothers, director, Virginia Division of Securities

  Matthew Neubert, assistant director, Arizona Securities Division

  Don Saxon, director, Florida Division of Securities

  AT THE SECURITIES AND EXCHANGE COMMISSION,

  WASHINGTON, D.C.

  William McLucas, director of enforcement

  Thomas Newkirk, assistant director of enforcement

  Joseph Goldstein, associate director of enforcement

  Pat Conti, counsel and, later, branch chief, enforcement division

  PROLOGUE

  JUNE 1991—SCOTTSDALE, ARIZONA

  Rhoda Silverman eased her 1984 Chevy Suburban out of the driveway, starting her weekly two-mile trip to her elderly mother’s condominium. Saturday had been their day for years, a time when they could chat over breakfast at Smitty’s or Luby’s Cafeteria. Sometimes, on special days, they even splurged for lunch at Red Lobster.

  She flipped on the car’s air-conditioning. Summer in Scottsdale had arrived early this year, and this Saturday was particularly sweltering. To beat the heat, they probably would spend the day window shopping at Fashion Square Mall, the newly renovated indoor shopping center. Their visits to department stores had become a Saturday favorite in recent years after Rhoda’s mother, Fannie Victor, began to lose her sight to a degenerative eye disease. The eighty-year-old woman loved to sample perfumes, touch the different clothing textures, or just sit in her wheelchair by the fountain, listening to the crowds.

  Rhoda looked ahead to the McDowell Mountains as she turned onto Mountain View Road, the carefully landscaped street leading directly to her mother’s condo. It was a beautiful drive. But she knew this was one of the last Saturdays she would take it.

  Why couldn’t I have protected you?

  The question almost never left Rhoda’s mind. She knew that she and her husband, Bernard, had kept the secret too long, hoping somehow that they would find a solution. But endless tries, sleepless nights, and frequent tears got them nowhere. She was still brooding about it when she reached the parking lot of her mother’s retirement community. Maybe, she thought, maybe today would be the day. Maybe, finally, she could tell her mother the truth.

  But how do I tell a blind, crippled old woman that she’s losing her home?

  Rhoda still didn’t understand how it happened. Everything had started with such promise. Her mother moved to Arizona in 1985 to be closer to her children. She arrived with about $100,000 from the sale of the small Brooklyn row house she had lived in for decades. It was the first time in her life that Fannie had some money. After all the years of frugality and hard work, of going without vacations or movies or fancy clothes, Fannie finally could live the rest of her life in comfort. All she needed were safe investments.

  That was when Bernard met Steve Ziomeck, a young vice-president with Prudential-Bache Securities, at a Scottsdale businessmen’s club. Ziomeck’s knowledge of finance impressed Bernard, much to Rhoda’s delight. After all, she could think of no place safer for her mother’s money than with “the Rock,” the name that decades of popular advertising helped bestow on the Prudential Insurance Company of America, the company that bought the brokerage in 1981.

  When Fannie and her family went to the local Prudential-Bache branch for the first time, Ziomeck put them immediately at ease. A good-looking young broker with a baby face and a calming sales style, he stressed the words that mattered to them: Safety. Security. Income. None of them quite understood the investments Ziomeck recommended. Still, since neither Rhoda nor Bernard had much college or knowledge of finance, they figured that they should trust their broker’s selections. Besides, the investments seemed well diversified, in a range of businesses like energy, real estate, airplane leasing, and horse breeding. Ziomeck told them that Fannie could expect $792.67 a month from the investments. Combined with Social Security and money from her children, that was enough to let her live in her own apartment.

  With the money tucked away, Rhoda found a spot for her mother at the Villages at McCormick Ranch in Scottsdale. Fannie fell in love with the condo, with its Mexican tile, recessed ceiling, and large bedroom. It was poolside and on the ground level, so she easily could come and go in her wheelchair. Even though her vision was already faltering badly, she still had time to learn her way around before she lost her sight. This was the place, Fannie decided, where she wanted to live out her last days. With Rhoda’s help, she took out a mortgage and bought it.

  The problems started almost immediately. Checks from Prudential-Bache did not come monthly, as they had thought, but instead every three months. Even then, the money was far less than what Ziomeck told them they could expect. Eventually the checks stopped coming entirely. Rhoda and Bernard, who handled Fannie’s bills, began covering her mortgage payments with their own money. But they couldn’t keep that up long— their own business was struggling as the economy slowed, and they just didn’t have the cash.

  Finally, in November 1990, Rhoda telephoned Ziomeck’s assistant, Kelly, exasperated about the investments’ poor performance. Why didn’t the breeding company make some money by just selling the damn horses? Rhoda asked sharply.

  “Didn’t anybody tell you?” Kelly responded. “They went out of business.”

  Rhoda demanded to speak with Ziomeck, and peppered him with questions. She learned that her mother’s financial situation was dire. Her mother didn’t own stocks, as Rhoda had thought, but something called limited partnerships, a name she did not remember hearing before. The partnerships were performing terribly but couldn’t be sold. Unlike stocks and bonds, no real market to buy and sell them existed. All Rhoda’s mother could do was hang on, Ziomeck said, and hope that the partnerships’ fortunes improved.

  But there was no time to wait. Already they were months behind on Fannie’s mortgage payments. Rhoda explained the troubles to the mortgage company and offered to turn over the deed to the condo if her mother could stay on as a renter. But the company said foreclosure was the only option. Her mother would have to move out.

  Rhoda pulled her car into the space behind her mother’s condo. Maybe now was not the right time to tell, she thought. Maybe let her enjoy today.

  She went to the door of the condo, swinging it open as she knocked. Fannie was ready, waiting at her kit
chen table in a flowered sundress. Rhoda hugged and kissed her mother, and sat down beside her. She launched into some idle chitchat.

  Fannie immediately sensed something was wrong. “You’re very tense,” she said. “You’re agitated. What’s the matter?”

  Rhoda stammered for a moment. Then she blurted it out. “There’s a problem,” she said, her voice trembling. “I don’t know how to go about saying this. I guess the best way is the truth straight out.”

  For the next few minutes, she rambled about what had happened: the declining income. The partnerships. The mortgage. The failed attempts to find a solution.

  Her mother listened quietly. It wasn’t sinking in.

  Rhoda took a breath. “We’ve lost the apartment, Mom,” she said. “We’ll keep trying to get out of this. Maybe business will pick up. I’ll try everything I can. But we have to start looking for another place for you to live.”

  For an instant, the two sat in silence at the table. And then Rhoda heard a throaty, guttural sound like nothing she had ever heard. It was her mother’s moan of horror.

  “Why would they want to throw an old lady out into the street?” Fannie sobbed, tears streaming down her face. “I don’t want to be homeless. I don’t want to leave.”

  Rhoda sank down off her chair and, on her knees, wrapped her arms around her crying mother.

  “This is my home,” Fannie cried. “I love it here. Oh, please, I don’t want to go.”

  Rhoda could not find the words to calm her mother. Her own guilt and sense of failure overwhelmed her. She began crying, apologizing again and again.

  It seemed like they sat there forever. Rhoda held her mother close, rocking her, fruitlessly trying to calm her. Finally, her tears exhausted, Fannie looked up at her daughter.

  “Rhoda,” she said. “Where did all the money go?”

  AUGUST 1993—SAN DIEGO, CALIFORNIA

  Mike Piscitelli stared down at the stainless-steel .357 magnum revolver in his hand. The silvery metal of the gun was clean and bright, perfectly reflecting the light of his bedroom. Such was his reward for cleaning the gun every time he fired it and polishing it even if he didn’t.

  He looked up and saw himself in the bedroom mirror a few feet away. He almost didn’t recognize his reflection. Even with his tall, wiry frame, Piscitelli had never seen himself so gaunt. In the last few months, he had lost about two inches from his waist. The dark circles under his eyes from his daily insomnia gave his face a worn, hollowed-out look.

  So much had changed. So much had been lost.

  Piscitelli watched his reflection as he raised the handgun. Slowly he slid the tip of the six-inch barrel between his teeth. He paused, staring at his image in the mirror as he held the powerful gun in his mouth.

  A few years earlier he could never have imagined reaching this point. Piscitelli had been a success. With only a year of college and a career in the wholesale liquor business, he had become a stockbroker in the early 1980s and worked his way up to being a top salesman with Prudential-Bache, the country’s third-largest brokerage firm. He earned almost $200,000 a year. He married a woman he loved. He counted many of his 125 clients as friends.

  And then the lies wrecked everything. The lies the firm told him. The lies he repeated to his customers.

  The lies helped bring him to Prudential-Bache in 1986. Lewis Jacobsen, the firm’s branch manager in Rancho Bernardo, recruited him from Merrill Lynch that year, telling Piscitelli about Pru-Bache’s limited partnerships, which pooled small investors’ money to buy expensive assets like apartment buildings, oil wells, and airplanes. Pru-Bache had the best partnerships on Wall Street, Jacobsen had said. They gave clients handsome returns and big tax benefits. And, unlike other firms, Prudential-Bache not only paid brokers large commissions for selling the investments but also gave them a share of the cash the partnerships produced later. By selling partnerships, Bache brokers could create their own personal retirement plan, without ever contributing a penny of their own.

  It took six months, but Jacobsen sold Piscitelli on Prudential-Bache. It was worth the effort—Piscitelli soon became one of the firm’s top salesmen. Using computer programs provided by the brokerage, he recommended how his clients should diversify their investments. The computer almost always said that a chunk of the clients’ money should go into Pru-Bache partnerships.

  Piscitelli never reviewed the dense, legalistic documents each partnership filed with the Securities and Exchange Commission—he had neither the time nor the desire. That was not his job. Instead, like most stockbrokers, he examined the sales material provided to him by the firm. That was supposed to summarize, in simple English, what the filings said. Then he passed that information on to his clients: The partnerships were safe investments, some as secure as certificates of deposit in the bank. Still, they paid a huge yield, often as much as 13 percent to 19 percent, with some of that money tax-free. Investors could scarcely resist that pitch. By 1988, Piscitelli had sold more than $9 million worth of the partnerships to his clients and friends. The sales material was so convincing that he even bought some for his own portfolio.

  But by the late 1980s something terrible started to happen. The Prudential-Bache partnerships began to fall apart, starting with one of the biggest, VMS Mortgage Investment Fund. A real estate partnership, VMS Mortgage had guaranteed high income for three years and then return of the original investment. But instead it simply collapsed. The once-guaranteed income vanished, and most of the principal was lost. Suddenly some of Piscitelli’s friends were forced to take out second mortgages on their homes to continue their retirement. Piscitelli called Pru-Bache executives in New York demanding to know what was happening. His was one of hundreds of telephone calls from brokers around the country. Eventually New York stopped answering questions.

  Piscitelli’s chest pains started soon afterward, followed by intense headaches. He took eight aspirin a day, but the headaches just grew worse. As other partnerships came undone, he spent his days dealing with angry clients while desperately trying to hold his own life together.

  Friends filed lawsuits against the firm and Piscitelli. His constant anxiety destroyed his marriage. His annual income dropped to $20,000. A few anonymous telephone callers threatened to kill him. Fearful for his safety, Piscitelli purchased a .25-caliber pistol and a .357 magnum. He loaded them with hollow-point bullets and carried one of the guns at all times, ready to defend himself against his former friends.

  By 1993, Piscitelli could no longer function in his job. He couldn’t concentrate. He was always irritable. He frequently wept. That May, he went on disability leave. A doctor for Prudential would later diagnose Piscitelli as suffering a major depression caused by anxiety related to the partnership troubles. The broker could not overcome his sense of having betrayed his friends and of having been betrayed by his employer.

  Piscitelli looked into the mirror. Tears were streaming down his face and onto the gun in his mouth. He was crying uncontrollably again. He took the barrel out from between his lips and wiped away the tears. Then he turned to put the weapon back into his closet.

  He had put the gun in his mouth before. He was sure he would do it again.

  Maybe, someday, the time would be right.

  But not today. Not today.

  SLOWLY, ALMOST imperceptibly, the truth settled in as the 1990s began. One at a time, until they numbered in the hundreds, then the thousands, then the hundreds of thousands, people in every state and around the world awoke to realize that they had been victims of the most destructive fraud ever perpetrated on investors by Wall Street.

  Although the magnitude of the crime was unparalleled, it was not engineered by the shady penny-stock promoters or crooked savings and loan operators who exist on the underbelly of the financial world. Rather, the scheme emerged full-blown from the New York headquarters of one of the brokerage industry’s brightest lights, an investment firm with a name that conveyed the essence of reliability and trust: Prudential-Bache Securities.
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  The cost of the fraud, in financial and human terms, was so large it surpasses imagination. More than $8 billion worth of risky partnerships packaged by Pru-Bache collapsed after they had been falsely sold as safe and secure. Even after the partnerships lost most of their value, investors had no idea what had happened. Every month, on millions of account statements, Prudential-Bache lied about the true worth of the partnership portfolios, showing them as never having lost a penny in value. And so the damage spread unchecked for more than a decade, like a low-grade fever building slowly toward a fatal disease.

  In the end, no single brokerage firm, banker, or trader destroyed the financial security of more people than Prudential-Bache. The losses from the celebrated insider-trading and junk-bond scandals of the 1980s add up to only a small fraction of the damage suffered by investors from the betrayals at Pru-Bache. And yet the hue and outcry that swept the country over the harm inflicted on powerful corporations and institutions by those scandals went unheard for years in the partnership debacle; for too long, the financially unsophisticated victims of Prudential-Bache’s crimes did not have powerful lawyers fighting for them or the financial firepower to make their voices heard in Washington. They suffered alone, their scars unseen or ignored for years.

  The crime was finally visible when, by the thousands, the firm’s clients faced the prospect of losing their homes, their retirements, their children’s education. Some investors who carefully pinched pennies for decades wound up in bankruptcy. Scores of Prudential-Bache brokers saw their careers, their health, and their lives fall apart, often because they unwittingly repeated the firm’s lies about the investments. Still other brokers, caught up in the greedy revelry of the firm, violated securities laws and common sense by concentrating the portfolios of elderly retirees in the high-commission investments.

  The fraud, beginning in the early 1980s, brought in more than a billion dollars in profits to the firm, through the fees and commissions paid by the partnership sales. At the center of the scandal was the Direct Investment Group, the little-known department that propelled Prudential-Bache to the forefront of the partnership business. For executives at the senior reaches of the firm, the flow of cash from the department’s business became personal piggy banks, financing profligate corporate spending, regal lifestyles, and even sexual conquest. Limousines, wild parties, and expensive overseas junkets became the order of the day, paid for out of clients’ investment dollars.