Finally, Prudential Securities Inc. Chief Executive Hardwick Simmons had an upbeat message to deliver. Talking to brokers on the firm's internal squawk box on July 16, Simmons said he was confident Pru was close to reaching a settlement with the Securities & Exchange Commission over its longstanding problems with billions of dollars in limited partnerships the firm sold during the 1980s. Investor losses exceed $1 billion. Simmons has said that by reaching a deal with the SEC and paying restitution to investors, which sources close to the firm say could be $400 million, the cloud over Pru Securities will quickly pass.
Unfortunately for Pru Securities, that could take a lot longer than Simmons thinks. The leader of a multistate task force of state securities commissioners that is independently investigating the firm says his group won't simply rubber-stamp any deal Pru Securities might reach with the SEC. While the task force is being briefed about the status of the SEC-Pru talks, "we have had no face-to-face settlement negotiations with Pru," says Wayne Klein, chief of the securities bureau in Idaho's Finance Dept. "So any talk about a global solution is just that: talk." SEC enforcement chief William R. McLucas declined comment, as is the agency's practice.
"SYSTEMIC PROBLEM." Klein declines to say how much state regulators expect Pru Securities to pay, though some states would like the total to be considerably larger than $400 million. William F. Jordan, an accounting professor at Florida State University in Tallahassee who has been retained as consultant by the state of Arizona, says $400 million is "hardly adequate. This was a systemic problem at Pru."
Moreover, Klein warns that if an acceptable settlement is not reached, several states may begin formal proceedings to bar Pru Securities from their states. That could be very damaging to Pru's business prospects. Following the guilty plea to federal fraud charges in 1985 by E.F. Hutton & Co. in a bank-overdraft scheme, several state regulators began actions to censure or bar the firm. Continuing negative publicity about those proceedings helped weaken Hutton, which was eventually taken over by Shearson Lehman Brothers Inc.
Further delays could arise from the states' investigations, which appear to be much broader in scope than the SEC's. Klein says the task force plans to examine all 112 limited partnerships that Pru-Bache not only sold but actively helped manage as co-general partner. All told, Pru-Bache sold $7.7 billion in 650 separate limited partnerships, Klein says. Today, those holdings are worth only a fraction of that amount.
Some states are also interested in the role of General Counsel Loren Schechter, the key negotiator for Pru Securities. Schechter was the top legal officer at what was then Prudential-Bache Securities during former Chief Executive George Ball's tenure. According to James J. Darr, then a key Pru-Bache employee, Schechter may have known about some of Darr's questionable private investments with a Dallas real estate developer. Darr headed the limited-partnership unit at Pru-Bache from 1979 to 1988.
WHO KNEW WHAT WHEN? Darr selected the real estate developers as sponsors for Pru-Bache partnership products, which were then sold to retail investors. At issue is whether Darr continued working with Watson & Taylor Realty Co., a Dallas real estate developer, because it would do the best job for investors or because the firm's principals let him in on private investment deals. George S. Watson denies any conflicts of interest.
In a recent interview, Darr told BUSINESS WEEK that he told Schechter about a number of Darr's private investments. "I discussed several of these transactions" with Loren Schechter, says Darr. "The statement is untrue," says a Pru spokesman, adding that "Schechter did not approve any investments that Darr made."
In his own defense, Darr says he does not view his private land deals as a conflict of interest. Nor were they particularly lucrative, he notes, pegging his pretax profits at less than $2,000 over 10 years on investments of more than $233,000.
Pru Securities insists that it is not underestimating the states' concerns and that it will start negotiating with them as soon as it completes a deal with the SEC. But based on the states' view of the impending deal with the SEC, Simmons' recent squawk-box talk on the limited-partnership mess will probably be far from his last.
WHY STATE REGULATORS MIGHT BALK They aren't participating in settlement negotiations between the SEC and Prudential Securities. Pru hopes most states will accept the SEC deal. Some states want Pru to pay restitution that would be more than the $400 million the firm is discussing with the SEC. The states are considering probing issues beyond those in the current settlement talks, including all of the 112 partnerships that Pru Securities helped manage as co-general partner. DATA: BUSINESS WEEK