George L. Ball has "led a charmed life," says Alan R. Bromberg, a securities expert at Southern Methodist University Law School.
Ball was president of E.F. Hutton & Co. from 1969 to 1982, a period when the then-major brokerage house engaged in a huge check-kiting scheme. The brokerage later pleaded guilty to mail and wire fraud. From 1982 to 1991, Ball was chief executive of what is now Prudential Securities Inc. During that time, according to an Oct. 21 Securities & Exchange Commission order, the firm repeatedly failed to supervise its employees properly, most blatantly in allowing them to defraud hundreds of thousands of investors in limited partnerships. On Oct. 21, without admitting or denying wrongdoing, Pru Securities agreed to pay at least $371 million in fines and restitution.
Yet, other than a slap-on-the-wrist censure by the New York Stock Exchange, George Ball has never been charged with illegalities. He continues to work on Wall Street as a senior executive vice-president of Smith Barney Shearson Inc., a unit of Primerica Corp. Ball was hired to recruit brokers, but his current role is unclear. He is no longer on the firm's executive committee.
But now, Ball may be facing a very different atmosphere. The SEC is cracking down on top brokerage officials who failed to supervise underlings properly. While declining to comment about the Prudential case, SEC Commissioner Mary L. Schapiro says in general, the agency "will go right up the line" to the most senior executives.
Ball has not been named by the SEC in charges against Pru Securities. Samuel A. Keesal, Ball's attorney, says: "We can only say that George had no knowledge or understanding of any wrongdoing, if in fact it occurred." Ball, who is on a bicycle trip in France, could not be reached for comment.
In the SEC's Oct. 21 order against Prudential details violations by the firm, it discusses potential securities-law violations by unnamed individuals. William R. McLucas, the SEC chief of enforcement, says the Pru Securities investigation is still going on, but he won't say whether executives will be targeted. Less circumspect is Wayne Klein, the Idaho securities commissioner, who headed a task force of state regulators that assisted the SEC's Prudential investigation. "I expect states will take action against individuals," he says. One Prudential executive identified by title in the SEC order is the firm's general counsel since 1982, Loren Schechter. Ball recruited Schechter from Hutton in 1982, where Schechter was deputy legal counsel. Schechter, who the Oct. 21 order says has been responsible for the firm's compliance since at least 1986, was Pru Securities' top legal officer during Ball's tenure. Despite the raised eyebrows of at least one regulator, Schechter was the firm's key negotiator on the $371 million settlement. Schechter has not been named in any SEC charge. He declined to respond to written questions.
Hardwick Simmons, Pru Securities' chief executive, strongly defends Schechter and says he does not believe Schechter will be charged with wrongdoing. "If the SEC felt he had not done the job, he wouldn't be a credible negotiator," says Simmons. Although Simmons won't name names, he says: "The people who had real responsibility are all gone."
Ball's possible involvement with the scandals at Hutton and Prudential has long been a matter of speculation on Wall Street. Documents, including a memo written by Ball, as well as testimony in the case, indicate that Ball and other Hutton senior executives exhorted branch managers to participate in what amounted to an elaborate check-overdrafting scheme that bilked banks out of millions of dollars. Hutton pleaded guilty to more than 2,000 felony counts in 1985. Ball, who argued later that he was not directly responsible for cash management, was censured by the New York Stock Exchange in 1988.
Regulatory problems followed Ball to Prudential Securities. During his tenure as CEO, the firm repeatedly ignored serious compliance violations. In 1986, the SEC alleged that Prudential brokers in Atlanta failed to disclose important facts about a seafood outfit called Captain Crab Inc. and had funneled money out of customers' accounts. The SEC said the case showed a pervasive weakness by the firm in supervising employees. The Oct. 21 SEC order says the Captain Crab action "was the fifth time since June, 1982, that the SEC found Prudential and its predecessor firm to have failed in their supervisory responsibilities." The order also outlines several instances where Pru "senior executives" were informed about compliance problems and possible violations of securities laws by brokers but did nothing.
In settling the Captain Crab case, Prudential accepted a censure and agreed to recommendations of an outside consultant to beef up its compliance procedures. And it made clear that Schechter was responsible for the firm's compliance. "Schechter made representations that the firm had gotten rid of incompetent people who were involved and that they were cleaning things up. That obviously didn't happen," says Jared L. Kopel, a former SEC enforcement officer who was involved in the case. Kopel is now a defense attorney on the West Coast. Simmons again defends Schechter and says he brought the compliance problems to the attention of his then superiors.
One illuminating episode involves a Dallas Pru Securities broker named J. Frederic Storaska, one of the firm's top producers. The SEC's recent order alleges that an unnamed Dallas broker--who sources say was Storaska--operated a Prudential-Bache Securities Inc. office in Dallas virtually unsupervised. By 1989, Storaska was the target of numerous customer complaints accusing him of unauthorized trades. The SEC order says his "disregard for firm policies and procedures, as well as the existence of 10 customer complaints, were brought to the attention of senior management as the result of an examination by the New York Stock Exchange." The SEC, though, says Storaska "was never formally disciplined or fined." He left Pru Securities in 1992.
GLOWING MEMO. Storaska worked for Ball for years, according to arbitration claim filings in Dallas. He worked at Hutton when Ball was president. Ball recruited him for the Dallas office in 1984. According to the SEC order, Storaska told customers and Pru-Bache superiors that he "reported directly to the firm's chief executive." Whenever Storaska was threatened with disciplinary action, he invoked Ball's name, according to Dallas arbitration records. Storaska claimed his employment agreement was with Ball alone. Investors' attorney Tracy Pride Stoneman says arbitration records support Storaska's claim. In 1990, a Pru Securities compliance audit recommended that Storaska's office be disbanded. But the SEC order says "senior management" countermanded the move. Stoneman says there is evidence that Ball protected Storaska, but she declined further comment. Ball is named in at least nine investors' arbitration claims for failing to supervise Storaska.
Ball is fighting the charges. Keesal, Ball's lawyer, says: "When Frederic Storaska was hired, he appeared to be exceptionally capable and exceptionally successful with no significant problems in his past. And I'm hopeful that will be demonstrated in the pending litigation." Storaska's attorney, Dennis J. Bloch, says his client did none of the things suggested in the SEC order, that the allegations are untrue, and that the SEC has not even talked to Storaska.
Ball was also close to another big producer at Pru-Bache: James Darr, who ran it's limited-partnership operation. When Darr left during a 1988 internal investigation of his business practices, Ball wrote a glowing memo to employees. "We are deeply grateful to Jim. Our direct investment group is the finest in the field. Jim started it, nurtured it, expanded it, and led it."
The firm's limited-partnership abuses raise substantial doubt about its compliance procedures. Although the allegedly fraudulent sale of limited partnerships began before the Captain Crab settlement, much of the most egregious alleged wrongdoing occurred from 1986 to 1988, after Pru-Bache was supposed to have instituted reforms.
The SEC's McLucas won't comment directly about who was responsible for the firm's apparent failure to enforce the 1986 order. But he does say: "Theoretically, the top guy--chairman and CEO--could be viewed as responsible for carrying out an [SEC] order."
Two recent SEC cases show the agency's growing willingness to discipline top executives. Last December, the SEC reached settlements with three former Salomon Inc. executives in the aftermath of Treasury-bond trading scandal. Ex-Chairman John H. Gutfreund was fined $100,000 and agreed not to run a securities firm without SEC permission. The SEC also censured Frederick H. Joseph, Drexel Burnham Lambert's CEO, for failing to respond to red flags that should have alerted him to illegal activities by Drexel's junk czar, Michael R. Milken. Joseph was banned from ever running a securities firm again.
Whether Ball knew about systemic wrongdoing at Hutton and Pru Securities during his tenure remains unclear. But if he didn't know, he certainly should have.
A TROUBLED TRACK RECORD 1969-82 Ball serves as president of E.F. Hutton. From 1980 to 1982, Hutton conducted a massive check-kiting scheme that bilked banks. Hutton pleaded guilty to 2,000 fraud counts in 1985. 1982 Ball leaves Hutton to become CEO of Prudential-Bache Securities. 1986 Pru-Bache is censured by SEC for failure to supervise brokers who improperly sold risky securities. Firm agrees to beef up compliance. 1988 Ball is censured by the New York Stock Exchange for failing to provide adequate supervision while at Hutton. 1991 Ball resigns from renamed Prudential Securities and becomes senior executive vice-president of Smith Barney. He steps down from Prudential following allegations of extensive wrongdoing involving