Kurt Eichenwald - Serpent on the Rock

Table of Contents

For my wife, Theresa,
whose love, support, and patience
made it possible

O, that deceit should dwell
In such a gorgeous palace!

William Shakespeare, Romeo and Juliet, Act III, Scene 2

As a firm, we must continuously measure what we do against a barometer that is calibrated in integrity. Our standing should be second to none.

George L. Ball, chairman and chief executive, Prudential-Bache Securities, July 21, 1988

When we say Integrity and quality are everything, we mean it.

Loren Schechter, general counsel, Prudential Securities, June 29, 1992

It is fair to say that Prudential-Bache Securities reputation within the securities industry is deplorable.... [The firm] is well known for its abusive sales practices, lack of adherence to compliance procedures, securities law violations and abusive practices towards its own employees.... Prudential-Bache Securities is, quite simply, the author of its own unfortunate reputation.

John P. Cione, former lawyer with the Securities and Exchange Commission, in a sworn statement of July 1990

MORE PRAISE FOR SERPENT ON THE ROCK

A COMPELLING BOOK... details a pattern of misconduct, corporate backstabbing, in-fighting and attempts at cover-up at the highest levels of Prudentials management. There also are tales of wild parties, exotic trips for the sales force, and secret deals with shady characters. Miami Herald

RIVETING... in keeping with the tradition of American financial writing that has been emerging since the best-selling story of the takeover of RJR Nabisco, Barbarians atthe Gate. The Economist

POWERFUL... RICH IN DETAIL AND INSIGHT, it is sure to be the definitive book on the scandal. Indeed, it should be required reading for investors, brokers, and brokerage-firm managers. Business Week

ABSORBING AND DEFINITIVE... A masterful reconstruction of a substantive financial scandal, one that bears comparison with such landmark exposs as Barbarians atthe Gate, Den of Thieves, and The Predators Ball. Kirkus Reviews

A SHOCKING STORY OF GREED AND FINANCIAL MANEUVERING. Dayton Daily News

By the time readers finish this well-reported tale, theyll want to string Prus manager up by their power ties... an appalling indictment of the firms managers, who did dozens of deals with a convicted embezzler, spent millions of investors dollars on lavish trips to places like Cancun and Maui, and made cozy arrangements with developers to make themselves rich no matter how their clients fared. Newsweek

AN ENTERTAINING AND AN IMPORTANT WORK. Publishers Weekly

FOR A BOOK TO RAISE YOUR BLOOD PRESSURE, READ SERPENT ONTHE ROCK... A STUNNING ACCOUNT. Jane Bryant Quinn

What are the ingredients to 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... a fast paced, skillful rendering... engrossing, written in a breezy style and full of revealing details. Institutional Investor

A RIVETING ACCOUNT. National Law Journal

The story would rival a good fictional counterpart in characters, plot, and storytelling. But Serpent on the Rock is true. San Diego Union Tribune

A casebook of how not to manage a financial business. The Financial Times

SIZZLES... A TELL-ALL BOOK... A FANTASTIC PIECE OF WORK. South Florida Business Journal

A MUCKRAKING BOOK. CNN

Eichenwald goes after Pru-Bache big shots with prosecutorial zeal. He exposes many of them as, variously, liars, bullies, bigots, drunks, cads, and vulgarians. USA Today

AN ELECTRIFYING ACCOUNT... dont give this one to your broker. It might give him ideas. The American Spectator

Written in the breathless tradition of The Predators Ball, Den of Thieves and Barbarians atthe Gate.Barrons

AN INCREDIBLE STORY... A GRIPPING ACCOUNT... The next time someone offers you an investment opportunity too good to refuse, head straight to your library or bookstore for a copy of Kurt Eichenwalds Serpent on the Rock, and dont commit a dime until youve read every word. The Press Democrat (Santa Clara, California)

I raved about (Serpent) to everyone... its narrative unfolds at a breathless pace, and the book is chock-full of richly demonic and quietly heroic characters, lending it a moral vision. Insight

PREFACE

As long as there is greed, as long as crimes go unpunished, as long as Wall Street can make millions even when clients lose money, the scandal at Prudential will be just another chapter in an ongoing saga of financial fraud... if history is any guide, that is a certainty. The only questions are: Who will do it next time? And when?

When I wrote those words in 1996 for the paperback edition of Serpent onthe Rock, I knew next to nothing about two fast-growing corporate darlings of the 1990s, Enron and WorldCom. About the time the paperback arrived in bookstores, the first of a long series of crimes at Enronwhich would collapse in a spectacular scandal in 2001had begun. WorldComs first significant crimes were still four years off. But those corporate names, and those dates, were the answer to the rhetorical question I had left with readers. Enron and WorldCom, facilitated by Wall Street investment banks eager to lap up fees, would be the next corporate villains, the next significant culprits in the long line of businesses that have turned to fraud and, in the process, wrecked the lives of untold numbers of Americans.

As I covered the unfolding Enron and WorldCom scandals for the New York Timesand later transformed Enron into a book, Conspiracy of Fools at times, I could not help but think that we as a nation were reaping what we sowed. The outrage at Prudential had been just one in a long series of warnings about weaknesses in our financial system, signals that had all too long been ignored. I am something of a fatalist on this issueas long as big money can be made from fraud, corporate scandals will always be with us. But even I would have thought that the embers from Prudential would have been long cooled before the next fire was lit. For all my pessimism, I was too optimistic.

Why did we learn nothing? Why did corporate America continue down this self-destructive path? To me, the answer is obvious: Despite the vast wreckage caused by Prudentials fraud, no individual was ever held accountable. No one went to jail, no individual was cited by the Securities and Exchange Commission. There were plenty of reasons whymostly revolving around the statute of limitations. But the limited government action contributed to the full story never being understood by much of the public.

Perhaps the biggest missed lesson was one for business itself. The Prudential scandal demonstrated in myriad different ways the damage inflicted on a corporation when managers fail to pay sufficient attention to protecting the brand name. Rather than simply facing what the firm had done and admitting it, Prudential launched a legal and communications strategy designed to conceal, deny, and mislead. That may have served the firm for a time in the courtroomalthough I am hard-pressed to believe that Prudential would have been compelled to pay