The Mess At Pru Bache

George L. Ball's reign is over at Pru-Bache--but his era lives on. After nine years as CEO, Ball resigned on Feb. 13, leaving behind more than $250 million in losses and one nasty mess for Pru-Bache's parent, Prudential Insurance Co. of America.

Pru-Bache and Prudential face legal troubles that could drag down their finances--and images--for years to come. Prudential-Bache Securities Inc. sold more than $6 billion in limited partnerships to more than 100,000 investors during Ball's time. But plummeting values of the underlying investments and stiff up-front fees and commissions have taken their toll. Today, these partnerships may be worth less than $3 billion.

Investors already have named Pru-Bache in over 100 lawsuits claiming more than $2 billion in damages, according to plaintiffs' attorneys. Even a group of former Pru-Bache brokers is preparing a lawsuit alleging they were damaged by the way the firm administered and marketed its limited partnerships.

SERIOUS QUESTIONS. The damage goes deeper. In an investigation including interviews with more than 100 current and former Pru-Bache employees and customers, BUSINESS WEEK has learned of possible conflicts of interest involving James J. Darr, 44, a little-known but ambitious executive who headed Pru-Bache's limited partnership unit from 1979 to 1988. Executives who worked for Darr say that Ball left Darr alone to build his empire because the unit was so profitable. BUSINESS WEEK's investigation suggests that Darr's relationships with some real estate developers may have compromised his responsibility to find the best partnerships to sell to Pru-Bache customers. Serious questions also exist about whether Pru-Bache and Prudential properly disclosed these potential conflicts of interest. In fact, Prudential has initiated its own independent investigation.

According to documents obtained by this magazine, Darr invested in joint ventures with George S. Watson, a Texas developer who sold his partnerships through Pru-Bache. Former senior employees of Watson's company assert that one of the deals was a low-risk and lucrative transaction made to induce Darr to continue doing business with the developer. Even if it wasn't intended as an inducement, this alleged transaction raises disclosure questions: Darr's personal investment dealings with Watson were not made known in offering documents for a subsequent limited-partnership fund co-sponsored by the Dallas developer's company and Pru-Bache. Nor was the fact that Darr obtained $2.1 million in mortgage loans for his home in Connecticut from an Arkansas savings and loan in which Watson and his partner, A. Starke Taylor III, were major shareholders.

Darr, who left Pru-Bache at the end of 1988, has not been named in the many lawsuits examined by this magazine and declined to be interviewed. In a written statement to BUSINESS WEEK, his attorney, Stuart Perlmutter, said: "These allegations are absolutely and completely untrue. Mr. Darr never requested, demanded, or received any personal compensation from general partners, prospective general partners, or others who wanted to sell partnerships or other investments through the Pru-Bache system." In a separate letter Watson said: "I have never known Mr. Darr to demand or receive special personal compensation."

UNAVAILABLE. Actions by Pru-Bache and parent company Prudential also raise some questions. The brokerage firm provided limited disclosure to investors about the involvement of Darr and five other Pru-Bache executives in a New York hotel deal that benefited them while rescuing one of the Texas developers from a debt crunch. Pru-Bache also gave Darr a clean bill of health in a National Association of Securities Dealers filing after he left the firm in 1988. In doing so, it may have violated an NASD regulation by failing to disclose that Pru-Bache had hired an outside law firm to investigate Darr's land transactions in 1988. And while Prudential Insurance stopped investing in Prudential-Bache Energy Income funds in 1986 after Prudential executives raised questions about Darr, Pru-Bache customers were never told of those concerns. Individual investors in those funds ended up having their payouts slashed because of poor results.

Darr also seemed to exhibit poor judgment by selecting Dallas real estate developer Clifton S. Harrison, who sold $100 million in partnerships through Pru-Bache. Pru-Bache failed to disclose to investors that Harrison pleaded guilty in 1967 to a felony count of embezzlement. Both Texas development companies' partnerships have proved to be costly for investors.

Prudential, responding for itself and Pru-Bache, refuses to discuss any matter that deals directly with Darr. Prudential Chairman Robert C. Winters has declined interview requests from BUSINESS WEEK since early in January. Told on Feb. 19 that this article was imminent, a Prudential spokesman said Winters and Robert A. Beck, a former Prudential chairman who was named interim CEO at Pru-Bache after Ball resigned, were visiting the firm's branch managers and unavailable for interviews.

By 1988, Pru-Bache learned of Darr's alleged misconduct, and it hired the Dallas law firm of Locke Purnell Rain Harrell to investigate his land investments. But it's not clear how long executives at Prudential headquarters in Newark, N. J., have known of these allegations. A Prudential spokesman insists that the departure of Ball, who also declined to comment, had nothing to do with questions first posed by BUSINESS WEEK in early January about alleged irregularities in Pru-Bache's limited-partnership operation. However, the New York law firm of Davis Polk & Wardwell has been retained by Prudential to investigate allegations about Pru-Bache's limited-partnership group, including "transactions involving Jim Darr and Watson & Taylor," says a Feb. 7 letter to one former Watson & Taylor employee from David D. Brown IV of that law firm. Three former Pru-Bache executives who had worked in direct investment say they were contacted by Davis Polk lawyers in mid-January and asked specific questions about Darr.

The Darr matter could be costly even for deep-pocketed Prudential, with its $160 billion in assets. Before the allegations involving Darr became known, Lipper Analytical Securities Corp. analyst Perrin H. Long was estimating that legal expenses and settlements in partnership-related cases could cost Prudential $1.2 billion over several years--20% of the limited partnerships Pru-Bache sold. But now that new allegations are surfacing about Darr and Pru-Bache, the number of lawsuits may rise.

Prudential declines to provide an estimate of what it views as Pru-Bache's litigation exposure. Prudential also says in a written statement that it is "unable to respond to questions which deal with matters before the courts."

Prudential attempted to sell its brokerage unit last year. But Pru-Bache's potential total liability played a part in derailing that effort. Parent Prudential refused to cover the cost of settling all suits and claims against Pru-Bache, and no Wall Street rival was willing to shoulder that risk, say two former senior Pru-Bache executives.

CATCH-22. The firm's liabilities may grow if Pru-Bache violated securities laws by not disclosing Darr's involvement with developers. But that's not clear-cut. Securities laws state that "all underwriters are required to make full disclosure of their compensation," says Ira Lee Sorkin, a partner at Squadron, Ellenoff, Plesent & Lehrer and former director of the Securities & Exchange Commission's New York office. "The purpose is so that investors know whether they are being solicited because it is a good investment or because the underwriter is getting a piece of the action."

What exactly is considered compensation requiring disclosure is left to the courts to decide on a case-by-case basis. But however the courts rule on the compensation issue, investors may have had a right to know about Darr's potential conflicts of interest. Based on a 1976 U. S. Supreme Court decision, disclosure is required if its omission would significantly alter the mix of information considered by a customer before investing.

Pru-Bache may now find itself in a regulatory catch-22. As is usual, the SEC isn't talking about whether it is investigating the brokerage firm. But one former SEC assistant director of enforcement points to a dilemma: The SEC could penalize Pru-Bache if it determines that Darr committed irregularities and the firm did not catch the alleged misdeeds. In effect, that would mean that the firm failed to adequately supervise Darr. On the other hand, if Pru-Bache argues that it knew about the alleged misdeeds and forced out Darr, that could compromise its defense in the partnership lawsuits. It also could be an admission that Pru-Bache didn't follow SEC rules that require regulatory filings to be amended to correct previous misstatements or omissions.

MYSTIQUE. Whether Pru-Bache gets into regulatory hot water is of secondary concern to investors who lost money in deals that went sour. "I'm on the verge of personal financial destruction," says Dr. William M. Bethea Jr., a Norfolk (Va.) internal medicine specialist who invested $474,000 in eight Pru-Bache partnerships. In a 1990 lawsuit, he charges that all but two of the partnerships are now practically worthless.

Several former Pru-Bache brokers are currently seeking to pin the blame on their employer for products on which they have already collected commissions. One of them claims he has lost clients because he was misled by Pru-Bache about partnerships that are now performing poorly. He is planning to sue his former employer.

Conservative Prudential and commission-driven Pru-Bache always have had different cultures. In 1981, when Prudential acquired Bache, it inherited Darr, who had started Bache's tax-shelter department in 1979. The son of a Worcester (Mass.) shoe salesman, Darr earned a bachelor's degree in history and philosophy at Holy Cross and a graduate certificate in Middle Eastern studies from the University of Utah. He cultivated a tough-guy mystique, often telling stories about being a helicopter and jet pilot during the Vietnam War and working undercover for the Central Intelligence Agency, says Curtis J. Henry Jr., a St. Petersburg (Fla.) businessman who once worked for Darr at Bache. Another former executive in Darr's department, claims that Darr often bragged that he had flown F-4 Phantom jet fighters in Vietnam. To the contrary, however, Air Force records show that Darr spent his active-duty career at Hill Air Force Base in Utah as a logistics officer. Through his attorney, Darr denies having ever made such statements and says: "The substance of those alleged statements is not true." Contacted again by BUSINESS WEEK, Henry and the other source stand by their statements.

Darr was driven by generating volume, since that was the key to his compensation. And by emphasizing Prudential's solid stature in sales literature, he rapidly built a fat book of partnership offerings. In 1982, more good luck came Darr's way when George Ball became his boss. Ball, who had been lured from E. F. Hutton & Co. to run Pru-Bache, had a reputation as a cheerleader for the retail-sales troops, rather than as a forceful disciplinarian. Executives who worked for Darr say Ball used the same light touch with Darr and essentially left him alone. By 1986, Darr's department posted a $40 million profit, more than the rest of Pru-Bache that year.

Other Wall Street firms also were pushing partnerships hard and are now suffering their own litigation hangovers. In the days before the Tax Reform Act of 1986 closed the loophole, losses generated by partnerships could be deducted from investors' income taxes. Brokers got hefty commissions of 8% or more, and brokerage houses raked in huge underwriting fees. But the 20% to 30% in up-front commissions and fees made operating profits highly unlikely. Worse, investors may still face nasty tax battles with the Internal Revenue Service if failed partnerships are judged to have been simply a tax-avoidance device. "I sold $800 million worth of this stuff, and none of it is doing well," says one former Pru-Bache regional supervisor.

'PERSONAL.' Only now are questions surfacing about how Darr chose some of the dozens of powerful general partners who sold their products through Pru-Bache. Consider his relation with Watson & Taylor Realty Co., the Dallas-based development company that teamed up with Pru-Bache to raise nearly $100 million. Watson & Taylor principals included Darr in at least three minimal-risk, high-profit land deals in Texas, say two former Watson & Taylor executives who have seen the company's tax records. Darr also participated in several other Watson & Taylor land ventures by signing loan agreements that entitled him to profits if the deals succeeded and sheltered him from any loss if they failed, say the former employees.

In one instance, Darr invested at least $20,000 in a joint venture called Lombardi No. 3 in November, 1983. Darr knew it was a low-risk transaction, according to the Watson & Taylor employees, because general partner George Watson allegedly had negotiated a contract to sell at a profit the principal asset of Lombardi No. 3--raw land near the Stemmons Freeway, northwest of downtown Dallas. As a result, employees say that Darr received his original investment back within a matter of weeks, and a profit payout of 140% in a little more than a year.

A letter sent by a lawyer at Locke Purnell, the firm hired by Pru-Bache in 1988, to a former high-ranking Watson & Taylor executive makes it clear that Darr was involved in several deals with the Texas developers. The letter says in part: "Watson & Taylor Realty has been cooperating with our firm in this investigation . . . and has provided us with a number of joint venture agreements in which Mr. Darr was a party." Asked about land transactions, Darr told BUSINESS WEEK in a letter dated Jan. 18, 1991: "I consider my investment portfolio to be a strictly personal matter."

Darr's relation with Watson also seemed to come in handy when he bought a $1.8 million house in Greenwich, Conn. Darr borrowed the entire amount in 1984 from FirstSouth F. A., a Pine Bluff (Ark.) S&L in which George Watson and his partner controlled over 25% of the stock. Darr later obtained a $345,000 second mortgage from the same S&L. "George said it was his job to take care of Jim Darr," says a former Watson & Taylor executive, referring to his assistance in arranging the loans. Watson did not respond to BUSINESS WEEK's request for comment on this.

Darr insists that he did not receive preferential treatment. In a written statement, he says the $1.8 million mortgage amounted to a bridge loan, since he applied the proceeds from the sale of his previous home three months later to reduce the balance. And both loans were paid in full by May, 1990, he says. Further, he says he disclosed the transactions to Pru-Bache in advance. Prudential and Pru-Bache declined to respond to questions about this assertion.

Even if Pru-Bache knew about the mortgage arrangement, investors didn't. No mention of it is contained in an SEC registration statement filed in 1985 for Prudential-Bache/Watson & Taylor Ltd.-4, an offering that raised $33 million from investors to build and manage miniwarehouse complexes. That particular partnership, beset by operating losses, suspended cash payouts at the end of 1988 after returning only $22.90 per $500 unit and made a minimal cash payment in November, 1990.

UNSCATHED. Disclosure proved to be an issue with another general partner that Darr selected, Clifton Harrison. In April, 1990, a St. Paul federal court judge ordered Pru-Bache to repay $237,000 to a Minneapolis investor because the brokerage failed to disclose that Harrison was a convicted felon. Two internal compliance executives who worked for Darr say they protested sponsoring deals with the Dallas developer because Harrison had been slapped with a five-year prison sentence in 1967 after he pled guilty to embezzling bank funds. Moreover, Harrison had limited real estate experience.

But Peter M. Fass, a New York attorney whose firm did work for Pru-Bache, says he obtained an opinion from the New York State Attorney General's office in the early 1980s that said Harrison's criminal background didn't have to be disclosed because he received a Presidential pardon in 1974 from President Ford. That cleared the way for nearly $100 million in Harrison-sponsored partnership deals to be sold by Pru-Bache brokers.

Today, Harrison investors have lost millions. Most of his real estate deals have collapsed or been forced to restructure. But, in one case, Harrison emerged unscathed because Darr and five other Pru-Bache executives ended up buying a majority stake in Harrison's interest in the Barbizon Hotel and an adjacent brownstone in New York.

As it turns out, the 1984 Barbizon transaction extricated Harrison for a time from his personal debt woes and rewarded Pru-Bache insiders with handsome tax breaks. In exchange for the Barbizon stake, Darr and the other Pru-Bache insiders assumed $1.3 million of the debt Harrison owed to another firm that also was selling partnerships through Pru-Bache, according to documents Harrison was required to file in Texas. Pru-Bache insiders were willing to assume the debt because they got lucrative tax credits for the historic rehabilitation project. These would have been wiped out if the Barbizon project had defaulted because of cost overruns.

In addition to Darr, the roster of Pru-Bache insiders participating in the Barbizon deal includes Virgil Sherrill, onetime Pru-Bache vice-chairman; Robert J. Sherman, who headed Pru-Bache's retail division at the time and who was Darr's immediate boss until 1986; William Pittman, a onetime due-diligence officer who worked for Darr; Richard Sichenxio, the current head of Pru-Bache's retail division; and Paul Proscia, who succeeded Darr as head of the direct investment unit.

Once the Barbizon deal was struck, Harrison was able to continue sponsoring partnership deals because he was out from under debt. But that raises a question about how forthright Pru-Bache was in disclosing the deal's significance to investors. Buried on page 49 of a 1985 offering document for the Virgin Isle Hotel venture in the Caribbean that Harrison was marketing through Pru-Bache was this minimal disclosure: "Several officers of agent Pru-Bache have participated with Harrison in one other real estate venture . . . ."

In written responses from their attorneys, Darr and Sherman confirmed that they made the Barbizon investment, but both say it had been cleared in advance by Pru-Bache. The brokerage firm was asked by BUSINESS WEEK for comments about the other participants. However, responding in a letter on behalf of Pru-Bache, Prudential said that Pru-Bache required disclosure of personal investments under certain circumstances. Prudential doesn't think it "appropriate to comment on confidential information furnished to us by our employees concerning their personal investments." None of the individuals responded to BUSINESS WEEK's questions. This magazine attempted repeatedly to contact Harrison for comment and sent a letter to his Dallas office listing specific questions. There has been no reply.

Questions about Harrison's dealings with Pru-Bache officials also surfaced in a 1988 Florida lawsuit filed by investors who bought units in the Brazilian Court Hotel in Palm Beach, Fla., against Pru-Bache. Harrison was the general partner in this deal, and the lawsuit claims that "officers and representatives of Pru-Bache's direct-investment group received a series of kickbacks, bribes, and other unlawful inducements and compensations from principals associated with the Brazilian Court Hotel." Neither Darr nor any of the subordinates working for him is specifically named in that lawsuit. Plaintiffs' attorneys are currently negotiating a settlement.

Before and after he left Pru-Bache, Ball did not respond to BUSINESS WEEK's questions about his relations with Darr. But he has been dogged once before by queries about how much he knew of activities that occurred when he was president of E. F. Hutton. Questions arose about his role in a 1980 scheme to boost Hutton's interest income by overdrafting branch-office checking accounts at banks around the country. A memo written by Ball turned up years later showing that Ball, then the Hutton president and No. 2 executive, encouraged branches to overdraft local banks to boost profits. Hutton agreed to plead guilty to more than 2,000 felony counts in 1985 and paid a $2 million fine. Ball, who argued that he was not directly responsible for cash management, was issued a censure from the New York Stock Exchange in 1988.

SOURED. While Ball seemed to have paid too little attention to Darr, Darr was noticed by high-level Prudential executives in Newark. Prudential had been an early investor in a small Louisiana oil-drilling company, Graham Resources Inc., and now holds a 15% stake. After Graham teamed up with Pru-Bache in 1983 to raise money for a series of energy partnerships, Prudential initially agreed to invest its own money in the fund alongside the public. For a time, three senior Prudential executives sat on the oversight board that guided the Graham staff in operating the funds. Thanks to promises of yearly double-digit returns, the Energy Income funds raised more than $1.4 billion.

By 1986, the Prudential representatives soured on Darr, says an ex-Prudential source with direct knowledge of the matter. According to this executive, the three left the board that year, after their warnings about Darr went unheeded, at the same time that Prudential moved to stop investing in the funds. "He was more volume-oriented," says the source, "and not as concerned about making sure quality investments were being acquired with the limited partners' money."

That insight wasn't shared with Pru-Bache customers in the Energy Income funds. Last October, Pru-Bache cut quarterly cash payouts on many of the funds by up to half. Prudential says in a written response that its executives resigned because of changing investment aims, so "Prudential employees on the fund boards were no longer necessary."

As late as 1987, Darr was still a rising star at Pru-Bache. That spring, Ball sent Darr to Harvard business school's prestigious three-month Advanced Management Program. Within months of his return from Boston, however, Texas developers George Watson and Starke Taylor were summoned to Pru-Bache's New York headquarters. Officials of the brokerage firm wanted to strip the Texans of their management role in several underperforming partnerships they co-managed with Pru-Bache, and to use outside managers instead.

After it was clear they would be ousted, Watson coldly asserted that he was getting shabby treatment for someone who had been gracious enough to cover Darr's cash calls on several land deals, says one eyewitness. Pru-Bache Vice-President Frank W. Giordano and General Counsel Loren Schechter said nothing. Within days, lawyers from the Dallas law firm of Locke Purnell, working for Pru-Bache, were combing through Watson & Taylor records. They found that Darr was a participant in a number of land deals with the principals of Watson & Taylor. Prudential declined a request for comments from Schechter and Giordano.

George Watson is now saying little about that inquiry. Watson did not respond to questions about the 1988 Locke Purnell investigation, other than saying: "You should know that Mr. Darr is not a participant in any of the business activities we have ongoing." Locke Purnell lawyers declined to comment.

By Thanksgiving, 1988, only months after the Locke Purnell investigation had begun, Darr left Pru-Bache. The following May, Pru-Bache told the NASD in a regulatory form that it was a voluntary resignation. The brokerage firm also answered "no" when asked if "currently or at termination, was the individual i.e., Darr under internal review for fraud . . . or violating investment-related statutes, regulations, rules, or industry standards of conduct?" If indeed the Locke Purnell probe had ended before Darr's official departure, that may have been a technically correct answer because he was no longer under investigation. But based on information provided to him by BUSINESS WEEK, a former SEC enforcement official says that Pru-Bache may have violated the spirit of the regulation, which requires brokerages to let regulatory bodies know if an employee left as a result of a probe.

GLOWING REPORT. Darr states that he was not forced to leave. In the Jan. 18, 1991, letter to BUSINESS WEEK, he writes: "My departure from Pru-Bache was voluntary, amicable, and on the best of terms, and motivated by my desire to engage in business for myself."

As for Ball, if he was aware of any allegations of Darr's misconduct, it was not evident from his internal memo praising the departing Darr. "We are deeply grateful to Jim," Ball wrote on Nov. 25, 1988. "Simply put, our direct-investment group is the finest in the field. Jim started it, nurtured it, expanded it, and led it. Clients, account executives, and the firm alike have benefited from his talent and accomplishments." Former co-workers say that Darr's severance arrangement entitles him to residual payments from some limited partnerships sold during his regime. Through his attorney, Darr declined comment on his severance package.

Ball's praise of Darr is ironic since the limited partnership debacle has played a major part in Pru-Bache's woes. Sobered by the failed attempt to sell the firm, Ball and Prudential executives agreed late last year to cut back Pru-Bache to its retail brokerage core. That required $370 million in special charges and left Pru-Bache with a $250 million net loss for 1990. The insurance giant had little choice but to pump $200 million in new capital into Pru-Bache late in 1990 hoping profits could be made by concentrating on Pru-Bache's core business.

'STRONG FUTURE.' Prudential insists that Pru-Bache has been profitable so far in 1991. And it continues to deny that it is worried about its AAA rating on nearly $10 billion in public debt. But if the Pru-Bache litigation losses mount, it puts more pressure on the performance of Prudential's non-Wall Street investments. Prudential is one of the largest owners of real estate in the U. S. and has a sizable portfolio of junk bonds. Given the mounting problems in those areas, it's not surprising that after surging by $1.14 billion in 1989, the company's capital surplus remained flat last year, at $7.9 billion.

The big question now is whether Beck has simply been brought out of retirement to dispose of Pru-Bache. Prudential is standing by its vow not to sell the firm and indeed changed the broker's name to Prudential Securities Inc. on Feb. 20 to show the firm "has a strong future as part of the Prudential family," says Winters in an official statement. At least in the short term, the surging stock market should lessen the pressure by bringing some investors back. But the residue of ill will from the limited partnership imbroglio won't easily be cleansed. Whatever the outcome, it won't involve the marketing of new partnerships. Months before he was ousted, Ball ordered the shutdown of Jim Darr's direct-investment fiefdom. They're both gone, but unwinding their legacy is now the costly responsibility of Prudential.

      Darr was included in a low risk 1983 land deal by Texas real estate developer 
      Watson & Taylor that more than doubled his money in little over a year. This 
      and other land investments with developer were not disclosed in offering 
      documents for 1985 limited partnership fund co-sponsored by Pru-Bache and 
      Watson & Taylor
      RESPONSE Darr refuses to discuss allegation. `I consider my investment 
      portfolio to be a strictly personal matter,' he says
      In 1984 and 1985, Darr received a $1.8 million first mortgage and a $345,000 
      second mortgage on his home in Connecticut from First South F.A., a Pine Bluff 
      (Ark.) savings and loan in which Watson & Taylor principal George Watson was a 
      major shareholder. Neither transaction was disclosed in 1985 Watson & Taylor 
      limited partnership offering document
      RESPONSE Claims both loans disclosed to Pru-Bache in advance. States that 
      second mortgage paid back in December, 1986, and first mortgage paid in full in 
      May, 1990
      BUSINESS PARTNER Darr selected real estate developer Clifton Harrison to be 
      co-general partner of about $100 million in Pru-Bache limited partnerships 
      without Pru-Bache disclosing to investors that Harrison pled guilty in 1967 to 
      felony count of embezzlement. But in one case, federal judge orders Pru-Bache 
      to pay back investor for failing to disclose Harrison's criminal record
      RESPONSE An opinion was obtained by outside counsel that Harrison's 
      Presidential pardon in 1974 gave him a clean slate
      Darr and five other Pru-Bache executives bought a majority stake of Harrison's 
      interest in New York's Barbizon Hotel and an adjacent brownstone in 1984, 
      helping Harrison avert personal debt crunch. Prospectus in later Harrison 
      partnership discloses only that several Pru-Bache insiders invested in an 
      unidentified venture with him
      RESPONSE Parent company Prudential Insurance refuses to discuss any allegations 
      concerning Darr
      Darr is subject of investigation by outside law firm in 1988. When he leaves 
      brokerage firm months later, Pru-Bache answered `no' on regulatory form asking 
      if Darr was `currently or at termination, under internal review for fraud . . . 
      or violating investment-related statutes, regulations, rules, or industry 
      standards of conduct.' The answer may have been technically correct, depending 
      on when the investigation ended, but it raises questions about the adequacy of 
      RESPONSE Parent company Prudential Insurance refuses to discuss any allegations 
      concerning Darr
      Prudential Insurance stopped investing in Pru-Bache Energy Income funds in 1986 
      and pulls its representatives from oversight board after those Prudential 
      executives raise questions about Darr not ensuring that quality investments are 
      being made. Pru-Bache customers not told of concerns
      RESPONSE Prudential says participation by its employees on oversight boards `no 
      longer necessary' after 1987 because decision was made to invest its limited 
      dollars for oil and gas properties in drilling programs rather than acquisition 
      of proven reserves, the investment object of the Energy Income funds
      DATA: BW
      Limited partnerships are a way for the little guy to own a piece of, say, a big 
      office building or a producing oil well. Partnership units are usually sold in 
      increments of $1,000 and entitle the holder to receive a percentage of income, 
      capital gains, and tax benefits after expenses are deducted. They also offer a 
      chance for a big payday at a specified date years later if the assets are sold 
      for a profit. About $142 billion worth have been sold since 1977 by numerous 
      firms. The general partners organize the partnership, determine which assets 
      will be acquired, and then manage them for the limited partners--all for hefty 
      fees and a percentage of capital gains and income.
      VMS REALTY PARTNERS In the 1980s, Pru-Bache brokers sold at least $1 billion of 
      the total $2.6 billion raised by Chicago-based VMS from eight publicly traded 
      funds and more than 100 private real estate partnerships sold to more than 
      110,000 investors
      STATUS VMS hobbled by cash crunch, plunging property values. Management of the 
      public funds removed from VMS. Funds originally worth $10 now trade for $37~ to 
      $3.60 per share. Secondary-market makers refuse to quote prices for most 
      private partnerships. Among the few that trade, VMS Boca Raton Club partnership 
      sells for about 50~ on the dollar
      LITIGATION Pru-Bache is a defendant in more than 35 lawsuits asking about $2 
      billion. Cases consolidated into two class actions in Chicago federal courts. 
      Pru-Bache and VMS now in settlement negotiations with attorneys for private 
      More than $1.3 billion raised by Pru-Bache from 121,000 investors from 1983 to 
      1990 to buy oil- and natural-gas-producing properties. Marketed as a 
      high-yield, safe investment. Pru-Bache is co-managing general partner with a 
      unit of Graham Resources in Covington, La.
      STATUS Pru-Bache announced last October that quarterly cash payouts being cut 
      by up to half. Plans to roll up funds into a publicly traded stock fund called 
      off by Pru-Bache last November. Now trying to boost output through drilling 
      program. Partnership units trade on secondary markets for 10~ to 60~ on the 
      LITIGATION One investor files lawsuit in February
       $323 million raised from more than 27,000 investors in 1987 and 1988 for four 
      blind-pool funds, G-1 through G-4. Pru-Bache and Graham resources co-general 
      partners. Marketed by Pru-Bache as `vulture funds' to acquire energy-related 
      properties and mortgages at deep discounts
      STATUS G-1 fund has never been profitable. G-2 through G-4 funds saddled with 
      loans to Offshore Pipeline, which went public last July at $17 a share and now 
      trades below $9. G-1 partnership units trade for 10~ the on dollar. G-2 through 
      G-4 funds trade for 30~ to 40~ on dollar
      LITIGATION A handful of lawsuits have been filed against Pru-Bache alleging G-1 
      didn't purchase loans at a discount, and a Houston law firm says it's preparing 
      a suit on behalf of 1,100 clients. In court filings, Pru-Bache denies the 
      Dallas developers of mini-warehouse storage complexes raised about $100 million 
      in four offerings sold by Pru-Bache from 1983 to 1987. Marketed as 
      tax-sheltered income funds with potential for capital appreciation
      STATUS Watson & Taylor Realty Co. dropped as managing general partner in 
      November, 1988. Pru-Bache hired Public Storage to manage most complexes. Annual 
      cash payout yields on funds never topped 4%. Secondary-market price for funds 
      range from 10~ to 15~ on the dollar of original investment, but one buyer 
      reports paying 30~ on the dollar for Watson & Taylor partnership No. 1
      Texas developer raised nearly $100 million from 1981 to 1985 for 13 
      private-placement partnership deals sold by Pru-Bache brokers
      STATUS Most of these real estate deals have collapsed or have been forced to 
      LITIGATION Judge ordered repayment of $237,000 to Minnesota investor for his 
      investment in Federal Archives partnership. Pru-Bache named in other lawsuits 
      asking for similar repayment of all money invested, plus interest for 
      investments in at least five other Harrison hotel and office
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