Institutional Investor, September 1995

Snake-Oil Saga

by Susan Webber

What are the ingredients for a world-class scandal? Abuse of power. A cover-up. Kickbacks. Sleazy characters in nice suits. Innocent victims. Some sex, a few drugs.

You name it, the long, sordid tale of Prudential Securities' disastrous foray into the limited-partnership business has it. The scale was immense. The Pru scandals produced investor losses estimated at more than $1 billion, perhaps the biggest fraud settlement paid by a retail brokerage firm in U.S. history, and continuing Securities and Exchange Commission and criminal investigations of nearly all of its senior executives.

Kurt Eichenwald, who covered the Prudential story for "The New York Times", has produced a fast-paced, skillful rendering of the spectacular rise and sickening fall of the firm's limited-partnership unit. Abetted by Prudential's desire to wring profits from its securities subsidiary and by its disinclination to interfere with a big producer despite numerous warning signs, James Darr, who headed the firm's director investment group, created an empire where nothing, not even securities laws, stood in its way. In this topsy-turvy world due diligence was a sham, brokers were hounded — even fired — for questioning the quality of deals, and no executive displayed much interest in knowing what was really going on. As the partnerships foundered, as investor and broker complaints mounted, even as the regulators opened inquiries, the firm continued to pump out poisonous product.

Although Eichenwald reported a number of the breaks in the case for the "Times", this book gives him the opportunity to write the first real narrative of the multifaceted scandal. Indeed, he successfully captures the twists, the turns, the devious dealings and the dumb decisions. "Serpent on the Rock" is engrossing, written in a breezy style and full of revealing details.

The book does, however, have a few shortcomings. It strains to tell a story about the inner workings of Wall Street to a mass audience. Many of the facts may truly be shocking — even to those on the Street — but Eichenwald's horrified tone, presumably meant to jolt general readers, diminishes the book's impact. The author also seems to be afraid that his tale is not lively enough, for he pumps up the writing and foreshadows breathlessly a bit too often. Tightening the focus would have helped, especially since the book is long (more than 400 pages). And although Wall Street lore, such as the early history of Bache & Co. (a predecessor of Prudential Securities) and the workings of the check-kiting scheme at E.F. Hutton & Co., provides entertainment, it distracts from the main event.

Eichwald also draws a misleadingly sharp contrast between Prudential's good and bad guys. In the former category he presents Charles Dawson, a country broker and dairy farmer from Sulphur Springs, Texas, as an innocent bumpkin comically out of place at a Pru bash in a swanky Dallas hotel. Yet Dawson is hardly a brokerage everyman. Although there are many hardworking, honest retail representatives, the brokerage trade has never been known for uniformly high ethical standards. The combination of commission-based pay and unsophisticated clients produces situations ripe for exploitation.

Indeed, the strong-arm tactics that the Pru used to pressure brokers to sell lousy partnerships are the same ones that other firms use to push initial public offerings. Eichwald's indignation obscures the fact that marginal practices are tolerated in retail brokerage and that the lack of clear moral standards within the industry may have contributed to the Pru's slide into criminality.

It's a pity, too, that Eichenwald, obviously an expert on the case, did not address the larger issues. Why did this fraud go so far before the regulators moved in? He notes that as the problems were mounting in the late 1980s, the famous federal prosecutors under now-New York City Mayor Rudolph Giuliani were preoccupied with Drexel Burnham Lambert and slow to act. Was this just an accident of timing, or does it signify that the emphasis on protecting market integrity serves establishment players better than it does hapless individual investors? The SEC was ineffectual until the rot was well advanced. Is a regulatory approach available that would pick up abuses sooner? And should it mete out tougher punishment?

For all of that, "Serpent on the Rock" is an enjoyable read about a significant scandal that will titillate both the lay reader and its Wall Street audience.