THE PRUDENTIAL

A Nest on Shaky Ground


 

Sightings from The Catbird Seat

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September 13, 2010

VA Made Secret Deal with Prudential;

Families Lose Millions to Insurance Giant

Bloomberg Markets Magazine

The U.S. Department of Veterans Affairs failed to inform 6 million soldiers and their families of an agreement enabling Prudential Financial Inc. to withhold lump-sum payments of life insurance benefits for survivors of fallen service members, according to records made public through a Freedom of Information request.

The amendment to Prudentials contract is the first document to show how VA officials sanctioned a payment practice that has spurred investigations by lawmakers and regulators. Since 1999, Prudential has used so-called retained-asset accounts which allow the company to withhold lump sum payments due to survivors and earn investment income on the money for itself.

The Sept. 1, 2009, amendment to Prudentials contact with the VA ratified another unpublicized deal that had been struck between the insurer and the government 10 years earlier one that was never put into writing, Bloomberg Markets magazine reports in its November issue. This verbal agreement in 1999 provoked concern among top insurance officials of the agency, the documents released in the FOIA request show.

For a decade, until the contract was formally changed, Prudential wasnt fulfilling its obligations to survivors of fallen service members, says Brendan Bridgeland, an insurance lawyer who runs the non-profit Center for Insurance Research in Cambridge, Massachusetts.

Violated Terms

Its very clear they violated the original terms of the contract,says Bridgeland, who is retained by the National Association of Insurance Commissioners to represent consumers.

Every veteran Ive spoken with is appalled at the brazen war profiteering by Prudential,says Paul Sullivan, who served in the 1991 Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit advocacy group based in Washington. Now vets are upset at the VAs inability to stop Prudentials bad behavior.

That the VA allowed Prudential to issue retained-asset accounts for 10 years while the contract required lump-sum payouts is more evidence that the VA was asleep at the wheel for a decade,says Sullivan, who was a project manager and analyst at the VA from 2000 to 2006.

When grieving families check the box that they want a lump sum, they should get it. We remain disappointed and irate at the VAs failure to provide advocacy for veterans,he says.

State and U.S. Probes

Since July 28, when Bloomberg Markets first reported that Prudential sent checkbooks instead of checks to survivors requesting lump-sum payments, state and federal officials have demanded the retained-asset system be investigated and reformed. The VA itself launched a probe of its life insurance program the day the first story was published.

The next day, New York Attorney General Andrew Cuomo launched what he called a major fraud investigationof Prudential and other life insurers over their use of retained-asset accounts. Since then, Cuomos office has issued subpoenas to Prudential and at least 12 more insurance companies.

The insurance departments in Georgia and New York have also opened probes. The U.S. House Oversight and Reform Committee plans to hold hearings into Prudentials use of retained-asset accounts to pay money owed to fallen soldierssurvivors.

News to Me

U.S. Secretary of Defense Robert Gates whose department includes the VA and who was in office when the 2009 agreement was signed said when the VA started its probe that he had been unaware that survivors were being sent retained-asset accounts.

Until today I actually believed that the families of our fallen heroes got a check for the full amount of their benefits,Gates said at the time. This came as news to me....

CONTINUED AT: PRUDENTIAL - A NEST ON SHAKY GROUND

 


 

April 8, 2009

Treasury says some insurers
qualify for TARP

By David Lawder

 

WASHINGTON (Reuters) – The U.S. Treasury said on Wednesday some life insurers have met requirements for government capital investments under an existing rescue plan, and their applications for funds are now being considered.

"There are a number of life insurers that have met requirements for the Capital Purchase Program because of their bank holding company status," said Treasury spokesman Andrew Williams. "These are among the hundreds of financial institutions in the CPP pipeline that will be reviewed and funded as appropriate on a rolling basis."

The statement was made in response to a Wall Street Journal story published late on Tuesday saying the Treasury would extend its $700 billion financial bailout program to certain life insurers and would make an announcement in coming days.

Williams said any capital investments in insurers that have bank holding company status would not constitute a new rescue program for the insurance sector.

The Treasury clarification caused stocks to pare gains, particularly the major insurers who were viewed as the likely benefactors of a widening of the Treasury's financial bailouts. Prudential Financial Inc shares had climbed more than 12 percent at one point in early trade, but by mid-morning were up 6.3 percent at $23.50, while MetLife's earlier 10 percent gain was chopped back to about 3.4 percent at $24.98.

In recent months, some insurance companies have received approval to acquire banks, paving the way for them to participate in the Capital Purchase Program, which the Treasury has estimated will top out at $218 billion.

As of Tuesday, the program had $198.5 billion invested, leaving $19.5 billion in available funds, according to Treasury documents. A Treasury official said only a small number of life insurers have met the qualifications for the program.

Reuters reported in February that the Treasury was actively considering applications for capital injections from about a dozen insurance companies.

In addition to Met Life and Prudential, other insurers that now have bank holding company status include the Hartford Financial Services Group Inc and Lincoln Financial.

(Additional reporting by Patrick Rucker and Karey Wutkowski in Washington and Elinor Comlay and Lilla Zuill in New York; Editing by James Dalgleish)

http://news.yahoo.com/s/nm/20090408/bs_nm/us_financial_bailout_insurers


 

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January 18, 2008

Life Insurers Fall on
Investment Concern

Forbes, Associated Press

NEW YORK - Shares of life insurers fell Friday as an analyst said concerns about investment quality and credit cycle exposure have become a legitimate valuation consideration for life insurers including Genworth Financial Inc. and Prudential Inc.

Insurers make money by collecting premiums from customers they insure, and by investing the money they collect that is not paid out in claims. They commonly invest the money in bonds and other securities.

Life insurers' exposure to residential mortgage-backed securities, with the exception of Prudential, is fairly limited, but risk to the industry would rise if the credit cycle downturn spread to commercial or corporate markets, Citi Investment Research analyst Colin Devine wrote in a note to clients.

A bond guarantor collapse would also likely not pose a threat except for Genworth, he said. Bond insurers make payments to cover principal and interest when issuers are unable to pay their obligations. Turmoil in the credit markets is pressuring bond insurers as prices of bonds and other forms of debt sinks....

Genworth shares fell $1.16, or 5.1 percent, to $21.46 in midday trading and earlier touched a 52-week low of $21.09.

Prudential also fell. At 20.5 percent, its risk asset ratio is the highest among the life insurers, followed by MetLife Inc. (nyse: MET - news - people ) at 15.6 percent, Devine said.

Prudential shares fell $3.63, or 4.3 percent, to $80.67 in midday trading. Earlier the shares dropped to a year-low of $79.92. MetLife shares fell $1.83, or 3.1 percent, to $56.43 and earlier touch a year-low of $54.77....


 

June 6, 2007

Prudential Shuts Equity Division
Forbes, Associated Press

Prudential Financial Inc. said Wednesday it is shutting down Prudential Equity Group, the insurer's stock research, sales and trading business.

The Newark, N.J.-based financial services conglomerate did not say why it is closing the unit, which last year turned a profit of $34 million before taxes.

Prudential Equity Group trades stocks for institutional investor clients like pensions and mutual funds. The business distributes research reports about stocks, politics, the economy and investment strategies to these clients to help them decide how to invest their money.

Last year, the division reported revenue of $260 million, a small fraction of the company's $32.49 billion in revenue.

Prudential did not say how many people will lose jobs because of the move. Prudential Equity Group will be "substantially wound down" by the end of the month, the company said.

Prudential expects shutting the business down to cost $110 million, with severance pay to fired workers costing about $75 million. These costs will be recorded as accounting charges this quarter, Prudential said.

The division has offices in New York, Washington, San Francisco, Chicago, Philadelphia, Cleveland, Atlanta, Boston and Kansas City, Mo. Outside the U.S., Prudential Equity Group has offices in London, Zurich, Paris and Tokyo.

Last year, Prudential Equity Group agreed to pay $600 million in fines and reimbursements following a Securities and Exchange Commission investigation that concluded Prudential brokers defrauded at least 50 mutual funds between 1999 and 2003.

Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed  

More On This Topic: Companies: PRU

http://www.forbes.com/feeds/ap/2007/06/06/ap3793197.html


 

January 2, 2007

MetLife Pays $19 Million to Settle Spitzer Investigation

By Mark Johnson

MetLife Inc., the largest group life insurer in the nation, will pay $19 million and change some of its business practices to end an investigation of payments made to brokers to steer clients its way, Attorney General Eliot Spitzer said Friday.

The settlement came as part of a multiyear investigation of bid rigging and price fixing in the insurance industry. Spitzer has argued that "contingent commissions'' paid to brokers and agents to steer business to insurance companies are the equivalent of kickbacks that unfairly increase the prices paid by insurance clients.

New York-based MetLife will ban contingent commissions and disclose broker payments as part of the settlement. The company will pay $16.5 million in restitution to policyholders and penalties of $2.5 million.

MetLife instructed its sales personnel to "leverage'' commission agreements by telling brokers how close they were to meeting certain targets for business provided to MetLife. If met, the targets would guarantee the brokers additional money, Spitzer's office said.

MetLife also arranged lucrative compensation agreements with certain brokers who directed major insurance contracts to MetLife, according to the settlement.

The company, which has more than 70 million customers worldwide, is not admitting to any liability in the settlement. Spokesman John Calagna said MetLife cooperated with Spitzer's investigation and has already changed some of its business practices.

"MetLife believes that resolving this matter is in the best interests of its shareholders, customers and policyholders,'' Calagna said a statement.

Spitzer's probe of the industry began in 2004 and more than 20 insurance companies have agreed to pay more than $3 billion so far.

Earlier this month, Prudential Insurance Co. agreed to pay $19 million in restitution and penalties to settle a similar investigation. Last month, UnumProvident Corp. in Chattanooga, Tenn., agreed to pay $15.5 million in restitution and penalties.

http://www.insurancejournal.com/news/national/2007/01/02/75530.htm


 

September 30, 2006

From The Catbird’s Forum:

Author: Vampire Hunter

Subject: Prudential and Travelers Fraud

Hey there.

The 600 page report on Claude Ballard, Burt Kanter, and Robert Lisle has been posted up. These guys are sleazy!

http://www.ustaxcourt.gov/InOpHistoric/IRA.TCM.WPD.pdf

http://www.romingerlegal.com/fifthcircuit/opinions/01-60640-cv0.wpd.html

Thanks for everything. Without your info these guys would slip by into their coffins without doing one thing right in their lives.

Please keep me anonymous. Just post the links if you want...

Regards.

www.voy.com/129276/291.html


 

August 28, 2006

Prudential settles market timing
charges for $600M

Brokerage unit admits criminal wrongdoing, DOJ says

By Alistair Barr & Robert Schroeder, MarketWatch

WASHINGTON (MarketWatch) -- Prudential Financial Inc.'s brokerage unit agreed on Monday to pay $600 million to settle charges that former employees defrauded mutual fund investors by helping clients rapidly trade funds.

The payment -- the largest market-timing settlement involving a single firm -- ends civil and criminal probes and allegations by the Department of Justice, the Securities and Exchange Commission and several other regulators including New York Attorney General Eliot Spitzer.

Prudential Equity Group, a subsidiary of Prudential Financial (PRU) admitted criminal wrongdoing as part of its agreement with the Justice Department. Prudential Equity Group was formerly known as Prudential Securities.

"This resolution goes a long way in restoring the public trust," Deputy Attorney General Paul McNulty told reporters at the Justice Department.

Prudential will pay $270 million to victims of the fraud, a $300 million criminal penalty to the U.S. government, a $25 million fine to the U.S. Postal Inspection Service and a $5 million civil penalty to the state of Massachusetts, according to the Justice Department.

"We take these matters very seriously and deeply regret the conduct of some former employees that led to these problems," Prudential Chief Executive Arthur Ryan said in a statement. "We have strengthened our compliance programs."

Prudential shares climbed 1.1% to close at $73.72 on Monday.

Federal and state authorities alleged that from 1999 through June 2003, a number of brokers at Prudential Securities deceptively placed thousands of prohibited market timing trades of mutual funds for their clients, who were usually hedge funds, the SEC and the DOJ explained in their statements on Monday.

By placing their trades in multiple accounts, often with multiple identities, the brokers were able to evade efforts by the mutual funds to block the market timing, the regulators said.

Market-timing isn't necessarily illegal. But most funds forbid it because heavy trading of fund shares often weakens profits for long-term fund shareholders. Market-timing involves quickly shifting large amounts of money in and out of a fund.

Mutual fund and financial-services companies, including Bank of America (BAC), Alliance Capital (AB), and Amvescap (AVZ ) division Invesco, have paid more than $3.5 billion in fines and disgorgement since the mutual fund market-timing schemes were uncovered by Spitzer and other regulators.

Prudential's $600 million payment has only been topped by Bank of America, which paid $675 million in a settlement that included FleetBoston, a bank it acquired in 2003. Alliance Capital, which is now called AllianceBernstein, paid $600 million.

Prudential has had expensive run-ins with regulators before. In the 1990s, the company paid billions of dollars to regulators and customers after life insurance sales violations and misleading investors about the risks of limited partnerships.

Three individuals from the Boston branch of Prudential Equity Group have pleaded guilty to wire and securities fraud charges.

Also on Monday, the SEC filed civil charges in federal court against four other former Prudential Securities representatives


 

January 7, 2006

State investigates firm after
kickback allegations

By Rick Daysog, Advertiser Staff Writer

The state is investigating one of Hawai'i's largest real estate companies after a federal agency alleged that the company offered illegal kickbacks.

The company, Prudential Locations LLC, paid $48,000 in September to settle an investigation by the U.S. Department of Housing and Urban Development. Prudential did not admit to any wrongdoing in agreeing to the settlement and said it settled to avoid a costly and time-consuming legal battle.

HUD alleged that Prudential held a party in 2003 for real estate agents who had referred at least $1 million of business to an affiliated company, Wells Fargo Home Mortgage LLC. Prizes given away at the party included use of a Mercedes-Benz for three years and trips to Thailand, Las Vegas and San Francisco.

Under federal and state law, it's illegal for a real estate agent to accept payment from a lender in exchange for steering clients to that lender. The laws were enacted to prevent agents from directing consumers to a particular lender, who may not be the best choice for the consumer.

Jo Ann Uchida, complaints and enforcement officer with the state Regulated Industries Complaints Office, said her staff began its investigation shortly after Prudential settled with HUD. Uchida declined to discuss specifics of the state probe, saying it was a pending matter.

Prudential CEO William Chee said yesterday that the state investigation was a routine matter that arose as a result of the HUD investigation. Chee said the state will find no wrongdoing just as the HUD investigation had found no wrongdoing.

In September, Chee denied HUD's kickback allegations. He said the trips and the use of the Mercedes-Benz had nothing to do with business referrals but were awarded to agents who took part in a drawing at a 2003 "First Annual Wells Fargo Friends Party."

Chee said the trips and the car were like door prizes. He said that Prudential held just one party and stopped the practice after HUD began its investigation in 2004.

The 2003 party was attended by up to 200 real estate agents from Prudential and other firms.

Chee said the gifts were randomly selected from a koa bowl. He said the prizes weren't used to induce new business because they were a last-minute addition to the event.

Brokers were not aware in advance that the prizes would be given out when they did business with Wells Fargo, he said.


 

September 24, 2005

Prudential: Settlement Avoids
Costly Legal Fight

By Rick Daysog, Honolulu Advertiser

The head of one of the state’s largest real estate agencies said yesterday his company agreed to settle a federal investigation for $48,000 to avoid a costly and time-consuming legal battle.

William Chee, Prudential Locations LLC’s chief executive officer, denied allegations by the U.S. Department of Housing and Urban Development that a Prudential affiliate paid kickbacks to real estate agents in exchange for the agents referring business to the affiliate.

Chee signed a settlement with HUD under which Prudential agreed to pay $48,000. The settlement brought to a close HUD’s investigation, which alleged that Prudential provided “kickbacks” in the form of trips to Las Vegas, San Francisco and Thailand, use of a Mercedes-Benz for three years and other prizes to sales agents who referred more that $1 million in business to Wells Fargo Home Mortgage Hawaii LLC, which is affiliated with Prudential.

In agreeing to the settlement, Prudential did not admit any wrongdoing.

It’s illegal for a real estate agent to accept payment from a lender in exchange for steering clients to that lender....

For more, GO TO > > > Predators of Paradise


 

February 23, 2005

Lawsuit Accuses Insurers of
Rigging Bids, Fixing Prices

Two small businesses allege that insurers paid
independent agents a second commission

By Rene Stutzman, Orlando Sentinel

SANFORD - Two small Seminole County businesses are suing some of the insurance industry’s most prominent players, including the Chubb Corp. and Prudential Financial Inc., accusing them of rigging bids and fixing prices.

The suit, which seeks class-action status, names two-dozen insurance companies or insurance brokerages that do business in Florida.

It accuses the insurers of paying independent agents a second commission, or “contingent commissions,” to lock up more business.

Independent agents are supposed to work strictly for their clients, according to the suit, selling the insurance policy that best fits their needs.

The second commission though, skews that, causing agents to push the insurance line that pays them what amounts to a “kickback,” according to the suit. It accuses the insurers and brokers of racketeering, bid rigging and anti-competitive behavior.

As a consequence, customers - all of them businesses - have been cheated out of “hundreds of millions, if not billions, of dollars” since 1994, according to the suit.

The suit makes the same allegations that New York Attorney General Eliot Spitzer did four months ago, when he launched an investigation that, so far, has won guilty pleas from nine insurance company or insurance brokerage executives, including those associated with two of the companies named in the Seminole County suit.

Those two companies are American International Group, also known as AIG, and ACE Insurance.

Shortly after Spitzer announced his investigation, Florida Attorney General Charlie Crist began one of his own. Crist has issued subpoenas to nearly two-dozen insurance companies and brokers, according to Bob Sparks, a spokesman in Crist’s office.

The Seminole County suit was filed Feb. 16 in state Circuit Court here by Palm Tree Computer Systems Inc., a small Oviedo company that sells and services computers and provides Web page design and hosting; and Delta Research Institute Inc., a Longwood financial-research company.

Officers with neither company would discuss the suit. Each, though, is represented by Longwood lawyer Mark Nation....

A tiny, independent insurance agency in Winter Park, First Market International Inc., is one of the defendants. It sold insurance from The Hartford to Palm Tree.

First Market President Tom Rossello called the allegations “ridiculous.”

“No, we don’t get contingent commissions,” he said.

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Prudential Insurance Retired
Employees Pension Plan Lawsuit

In a lawsuit entitled Dupree, et al. v. The Prudential Insurance Co., et al., No. 99-8337-CIV (AJJ) (S.D. Fla.), Lieff Cabraser, along with co-counsel, represents a group of retired employees of Prudential who are participants in Prudential’s Retirement Plan.

The Plan provides pension benefits to thousands of retirees who used to work for Prudential. Those benefits are protected by a federal statute called the Employee Retirement Income Security Act (ERISA), which was enacted by Congress to prevent employers from exercising improper control over the assets of their retirement plans.

The plaintiff retirees allege that Prudential violated ERISA by using (and continuing to use) the Retirement Plan’s assets to benefit Prudential, instead of its retirees.

Trial commenced on February 17, 2004, and concluded in March. The Court heard closing arguments on January 20, 2005. Plaintiffs request that the Court make Prudential restore to all Plan participants the funds allegedly taken out of the Retirement Plan in violation of the law....

LIEFF CABRASER HEIMANN & BERNSTEIN, LLP

E-Mail: mail@lchb.com
Firm Website:
www.lieffcabraser.com

www.lieffcabraser.com/prudentialretirees.htm

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November 18, 2004

INSURANCE COMMISSIONER JOHN GARAMENDI SUES BROKER
AND 4 MAJOR INSURERS OVER SECRET COMMISSIONS AND
KICKBACK SCHEMES THAT NETTED “MILLIONS OF DOLLARS”

The Commissioner’s suit seeks to end the unethical practices that have
harmed consumers while generating millions for the defendants

SAN DIEGO - Commissioner John Garamendi on Thursday announced a major lawsuit against Universal Life Resources of San Diego and four major insurers accused of hiding millions of dollars in secret commissions....

Commissioner Garamendi began investigating this problem in February. The suit, filed in California Superior Court in San Diego, names MetLife Inc., Cigna Corporation, Prudential Financial Inc., and UnumProvident Corporation as defendants. They are accused of collaborating with ULR to carry out the schemes that caused financial harm to California consumers.

“Employers and consumers put their trust in brokers to help them find the best insurance at the best price,” said Commissioner Garamendi. “But that trust has been broken. This lawsuit is one of many steps I will take to ensure that insurance consumers don’t suffer because of backroom kick-back deals.”...

“These brokers and insurers are lining their pockets at the expense of consumers,” said Commissioner Garamendi.

“This is a scandal that has disillusioned consumers from coast to coast. Confidence must now be restored.”

www.insurance.ca.gov

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November 5, 2004

SEC, Dept. of Labor join insurer probe

Prudential says agencies ask
about payments, bid-rigging

by Alistair Barr, CBS MarketWatch

SAN FRANCISCO - The Securities and Exchange Commission and the Department of Labor have begun investigating the same insurance industry practices uncovered by New York Attorney General Eliot Spitzer.

Prudential Financial, one of the largest U.S. life insurers and annuity providers, said in a filing late Thursday that the SEC and the Department of Labor asked it for information about broker commissions and other practices that could violate antitrust regulations.

Prudential, which has also been subpoenaed by Spitzer and Connecticut Attorney General Richard Blumenthal, said that a number of other insurance companies have received the same requests....

Spitzer sued Marsh & McLennan on Oct. 14 for allegedly rigging bids and accepting payments in return for steering business to favored insurers.

The suit, which implicated the largest firms in the industry including American International Group (AIG), Ace Ltd (ACE) and Hartford Financial (HIG), has spawned other investigations by attorneys general in California, Florida, Massachusetts, Ohio and Connecticut.

Prudential’s comments are among the first indications that Federal regulators are becoming involved.

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October 27, 2004

Questions on conflicts of interest

State pension official wants details
of execs' investments

By Alistair Barr, CBS MarketWatch

A North Carolina state pension official has asked executives of his fund's major holdings if they have the same apparent conflicts of interest found at Marsh & McLennan, the embattled insurance broker.

Marsh & McLennan officials have been found to invest in businesses that provide services to their company, according to a letter distributed Wednesday by North Carolina Treasurer Richard Moore.

The North Carolina state retirement system, with $60 billion in total holdings, owns $16 million of Marsh & McLennan shares.

Moore said that allowing executives to hold economic interests in customers or service providers is "fraught with potential and real conflicts of interests and can result in transactions that misappropriate value rightly belonging to shareholders."

Among the companies Moore contacted are Citigroup (C), Prudential Financial (PRU) and Wells Fargo (WFC).

Marsh & McLennan (MMC) was sued by New York Attorney General Eliot Spitzer on Oct. 14 for allegedly rigging bids and accepting payments for steering business to favored insurers.

Moore's objections referred to MMC Capital, the private-equity arm of Marsh & McLennan that has raised more than $3 billion to invest in the insurance industry.

Jeffrey Greenberg, the deposed chief executive of Marsh & McLennan, and other top company executives and board members have invested in MMC Capital, the New York Times reported this week.

In recent years, MMC Capital has invested in at least 12 insurers, including Ace Ltd. (ACE), a company run by Evan Greenberg, Jeffrey's brother; XL Capital Ltd. (XL); and Axis Capital (AXS), the New York Times reported. Those companies could do business with Marsh & McLennan, which would raise the appearance of a conflict of interest.

Charles Davis, chief executive of MMC Capital, is also a director on Marsh & McLennan's board and sits on the board of Axis.

Jeffrey Greenberg used to be chief executive of MMC Capital from 1996 to 2002, the newspaper added.

Moore is not alone in his concern. The largest U.S. pension fund, the California Public Employees' Retirement System, has voted against such directors as Warren Buffett for having business holdings on both sides of a transaction.

Marsh & McLennan shares closed 18 cents lower at $28.69 Wednesday.

For more, GO TO > > > Ace Up The Sleeve; Claims By Harmon; The Great Nest Egg Robberies; The Kamehameha Schools Retirement Plan; Marsh & McLennan: The Marsh Birds; The Poop on Aon; Vampires in the City

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July 15, 2004

Complaint Alleges
Fund Trading Fraud

Associated Press, www.forbes.com

Five former Prudential Securities brokers and their manager in Boston used fake identities and other tactics to help investors make more than $1.3 billion in improper mutual fund trading, the Securities and Exchange Commission said in a new complaint.

The allegations contained in the complaint filed late Wednesday in U.S. District Court in Boston provide new details in the fraud case against the former Prudential employees. The case is also the latest development in the trading scandal sweeping across the $7 trillion mutual fund industry, ensnaring dozens of fund companies and executives.

The SEC initially accused the former Prudential employees of wrongdoing in November, but was forced to refile when a federal judge said the complaint wasn’t specific enough. The new filing alleges that the five brokers and their manager used different account names, broker identification numbers, and misspellings of their own names to avoid detection of the trades that would otherwise have been rejected. The SEC said the trades generated more than $5 million in commissions for the brokers.

“The broker defendants profited handsomely from their misconduct,” the SEC said in the complaint.

The brokers were Justin F. Finken, 29; Skifter Ajro, 35; John S. Peffer, 41; Marc J. Bilotti, 34; Martin J. Druffner, 35; and their manager Robert E. Shannon. All six resigned last year....

The complaint alleges the brokers made thousands of “market timing” trades from 2001 to 2003 in virtually all of the country’s major mutual fund groups on behalf on seven hedge-fund clients.

Market timing is the use of quick, in-and-out trades that skim profits from longer-term shareholders, often taking advantage of different closing times for markets around the world. The practice is not illegal, but regulators have recently cracked down on companies that officially forbid market-timing but made selective exceptions for big clients or their own managers.

In the past 12 months, several major fund complexes – including Alliance Capital Management, Janus Capital Group and Bank of America Corp. – have paid hundreds of millions of dollars to settle improper trading charges brought by regulators. Fund executives, managers and traders have also been accused of wrongdoing.

In this case, the SEC has not alleged any wrongdoing by the fund companies, but instead portrayed them as alleged victims of the brokers.

The agency alleges the hardest-hit mutual fund was Houston-based AIM Investments, through which the brokers made $166 million in market timing trades. The next-largest sum was at Franklin Templeton Investments of San Mateo, Calif., had $87.3 million, while Putnam Investments in Boston had $42.6 million in market timing, according to the complaint.

Prudential Securities merged last year with Wachovia Securities LLC. Wachovia Corp., the majority owner of the joint entity, has described the case as a “Prudential matter.”

A spokesman for Prudential Financial Inc., which owns 38 percent of the company, said his company has been cooperating with regulators.

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February 17, 2004

Prudential Insurance Retired
Employees Pension Plan Lawsuit

In a lawsuit entitled Dupree, et al. v. The Prudential Insurance Co., et al., No. 99-8337-CIV (AJJ) (S.D. Fla.), Lief Cabraser, along with co-counsel, represents a group of retired employees of Prudential who are participants in Prudential’s Retirement Plan. The Plan provides pension benefits to thousands of retirees who used to work for Prudential. Those benefits are protected by a federal statute called the Employee Retirement Income Security Act (ERISA), which was enacted by Congress to prevent employers from exercising improper control over the assets of their retirement plans.

The plaintiff retirees allege that Prudential violated ERISA by using (and continuing to use) the Retirement Plan’s assets to benefit Prudential, instead of its retirees....

Plaintiffs request that the Court make Prudential restore to all Plan participants the funds allegedly taken out of the Retirement Plan in violation of the law.

www.lieffcabraser.com/prudentialretirees.htm

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U.S. Pension Bailout
Has $11.2 Billion Deficit

By Leigh Strope, The Associated Press

WASHINGTON - The deficit for the government’s pension insurance program ballooned to a record $11.2 billion last year, more than triple the previous year’s total, and officials are warning that taxpayers could be called on for a bailout.

The Pension Benefit Guaranty Corp.’s financial woes are driven by an increasing number of bankrupt pension plans, from such companies as Bethlehem Steel and US Airways, and record-low interest rates, officials said.

Outgoing Executive Director Steven Kandarian said Thursday that the agency could continue to pay pension benefits to retirees in bankrupt plans “for a number of years,” but the growing deficit “puts at risk the agency’s ability to continue to protect pensions in the future.”

Kandarian, who spent more than two years at the helm, urged Congress to act soon to reform the nation’s private pension system, which also is being squeezed by low interest rates, a subdued stock market and laws that do not require employers to maintain full funding levels in their retirement plans.

Underfunding for all pension plans is estimated at more than $350 billion.

The agency’s single-employer program posted a net loss of $7.6 billion for its 2003 financial year ending Sept. 30, adding to a $3.6 billion shortfall in 2002....

Kandarian warned that “the taxpayer might be called upon to make those payments” to workers if the PBGC falls further into debt, a remedy he said he does not favor.

His agency, the Labor and Treasury departments and others are crafting reform plans. Kandarian said the plan is in its final stages and could be offered to Congress soon.

PBGC was created in 1974 to guarantee payment of some benefits earned in traditional pension plans, which are offered by employers and promise workers a set benefit based on salary and years of service. Workers are not required to make contributions as they do in 401(k) plans.

The agency is financed by insurance premiums paid by companies that sponsor pension plans and by PGCG’s investment returns.

PBGC took over 152 pension plans in 2003 covering 206,000 people, up from 144 plans and 187,000 participants the previous year.

It paid a record $2.5 billion in benefits last year, an increase of nearly $1 billion.

PBGC also guarantees pension benefits earned by workers in multi-employer pension plans, which often are collectively bargained by employers and unions. For the first time in more than 20 years, PBGC’s multi-employer program rang up a deficit – $261 million, the largest ever.

Rep. John Boehner, a Republican from West Chester and chairman of the House Education and Workforce Committee, called the PBGC’s growing deficit “startling.”

He pledged to work on a comprehensive reform package this year that would “strengthen the defined benefit system for workers and employers and put the PBGC on sound financial footing so that it can protect the pension benefits of American workers who rely on defined benefit plans for theior retirement security.”

The House already has approved nearly $26 billion in temporary relief to companies struggling to keep up with pension plan payments, while lawmakers consider permanent reforms....

For more, GO TO > > > The Great Nest Egg Robberies

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December 12, 2003

Prudential Securities
Fraud Charged

By Brooke A. Masters and Carrie Johnson, Washington Post

Massachusetts securities regulators charged Prudential Securities yesterday with securities fraud for allegedly allowing several of its Boston brokers to place at least 1,212 illegal after-hours mutual fund trades worth $162 million.

Secretary of the Commonwealth William F. Galvin alleged in an administrative complaint that the giant brokerage firm failed to stop the Boston office from helping clients break a law that requires fund purchase and sales orders placed after 4 p.m. to be filled at the next day’s price. Such “late trades” allowed the firm’s clients to capitalize improperly on news announced after the New York markets closed....

The Massachusetts regulator’s solo action suggests that rivalry between state and federal regulators continues to infect efforts to clean up the $7.1 trillion mutual fund industry. Galvin and SEC officials split publicly last month when he roundly criticized the commission’s decision to reach a partial settlement with Boston-based Putnam Investments over allegations of predatory trading by firm insiders....

According to the complaint, the Boston brokers would take preliminary fund orders from hedge fund clients before the 4 p.m. cutoff, time-stamp the documents and put them aside. After the markets closed, the clients would call in to confirm or pull their orders. The brokers then would fax the approved trades to New York for execution.

“This is yet another example of Wall Street putting the interests of favored clients ahead of retail investors. It’s a dismaying but by now a familiar pattern,” Galvin said.

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November 4, 2003

Funds warned Prudential with
massive letter campaign

BOSTON, Nov 4 (Reuters) - You have mail. Make that you have lots and lots and lots of mail.

In what may be one of the biggest letter-writing campaigns in financial history, mutual fund companies from Massachusetts to Texas fired off between 25,000 and 30,000 letters to Prudential Securities Inc. last year, Massachusetts officials said on Tuesday.

The letters warned Prudential that its brokers, many working in Boston, were involved in market timing, a practice by which investors try to buy and sell mutual fund shares fast to profit from stale prices.

Market timing is prohibited at many fund companies because it is seen as driving up trading costs and watering down long-term investors' profits.

The letters, if laid end to end, would ring Boston's financial district, the hub of the world's mutual fund industry. Had they been sent in one batch, a single U.S. letter carrier would have hauled nothing but these warnings for 13 straight days. Altogether they would have cost about $9,000 to post.

Trouble is, no one acted on the letters, Massachusetts regulators said on Tuesday when they accused a handful of former Prudential brokers of civil securities fraud.

Prudential Securities is jointly owned by Wachovia Corp (WB) and Prudential Financial (PRU).

Executives at several mutual fund companies said this warning message was important enough to call for a real letter, not e-mail. But when they learned the entire industry had sent so many, it left people stunned.

"We have sent roughly 200 letters to a number of account holders, including Prudential Securities, in the last year to inform them that they were caught breaking our company rules," said Meg Pier, a spokeswoman for Eaton Vance Corp., the Boston-based company known for its no-nonsense approach in kicking market timers out of its accounts.

She said the total number of letters sent by the industry surprised her. "And we thought we had sent a large number of letters," she added.

© 2003 Reuters

For another Prudential “letter-writing campaign”, GO TO > > > The Kamehameha Schools Retirement Plan

* * *

November 4, 2003

Mutual fund probe hits
ex-Prudential brokers, Janus

By Herbert Lash, Reuters

NEW YORK, Nov 4 (Reuters) - Federal and state authorities on Tuesday accused seven former Prudential Securities employees of fraud related to mutual fund trading, on the same day that the outrage over improper trading hit Janus Capital Group Inc.

The U.S. Securities and Exchange Commission and Massachusetts securities regulators filed charges against five brokers and two managers in Prudential's Boston office, saying they raked in millions of dollars with their superiors' blessing.

In the first sign that Janus (JNS) will feel investors' wrath, Colorado's biggest public employee pension fund said it was dropping Janus' flagship mutual fund from its employee retirement plan.

And Putnam Investments, which has been in the eye of the mutual fund storm since regulators charged it with fraud last week, could see more hemorrhaging of assets.

The treasurer of California urged the state's two giant pension funds to pull their assets from Putnam.

In another development, New York Attorney General Eliot Spitzer is investigating whether the U.S. arm of Deutsche Bank AG , Germany's biggest bank, helped investors make illegal trades, a person familiar with the situation said Tuesday. The probe could lead to either criminal or civil charges, the person said.

A Deutsche spokesman, Ted Meyer, declined to comment.

In the Prudential case, the alleged fraud was so rife that state authorities said the brokerage received 25,000 to 30,000 letters from clients in the past year warning Prudential about the improper trading.

Massachusetts' top securities regulator, Secretary of the Commonwealth William Galvin, said Prudential executives openly encouraged market timing, which mutual funds discourage.

Lawyers for the accused denied any wrongdoing and said Prudential allowed market timing. The practice usually entails exploiting share price differences across time zones.

"Company policies against market timing and short-term trading were clear," Galvin said in a statement that said brokers connived with managers and were aided by the company's "see-no-evil" stance. "Disciplinary action was nonexistent."

The charges strike another blow to the $7 trillion industry, which manages the savings of 95 million Americans, and suggest that Prudential actively condoned misconduct. The charges are similar to those filed against Putnam, but industry critics said the misconduct at Prudential was much more widespread.

"This is on a much larger scale and this is not the conduct of a few rogue brokers but Prudential itself, who not only failed to detect but actively encouraged it," said David Marder, a former SEC enforcement lawyer who is now a partner at Robins, Kaplan, Miller & Ciresi LLP in Boston.

Prudential is jointly owned by Wachovia Corp. (WB) and Prudential Financial Inc. (PRU)

The former employees, who worked at Prudential until September, became the latest defendants charged with securities fraud in a probe of the mutual fund industry that authorities signaled on Tuesday would expand to how funds are priced.

PRICING UNDER SCRUTINY

Stephen Cutler, director of enforcement at the U.S. Securities and Exchange Commission, told lawmakers at a hearing of the House of Representatives Capital Markets Subcommittee that the agency is looking into the pricing of net asset value, which represents the underlying value of securities in a fund.

"We're actively looking at two situations in which funds dramatically wrote down their net asset values in a manner that raises serious questions about the funds' pricing methodologies," Cutler said.

Cutler did not identify the two instances, and an SEC official could not immediately be reached for further comment.

Shareholder rights advocate Mercer Bullard, founder of the Fund Democracy group, recalled the case of two funds run by Heartland Advisors, which wrote down their net asset value by 70 percent and 44 percent more than three years ago.

"It was the worst mispricing in the history of the industry and the SEC did nothing about it," said Bullard.

"They wrote down the NAVs because they had mispriced the portfolio. They were holding securities for which there was no market."

Roy Weitz, who runs industry watchdog Web site www.FundAlarm.com, also said Heartland is a high-profile example of mispricing.

"It's an embarrassment to" the SEC "because it's dragged on so long," he said. "That's exactly the description of Heartland."

Cutler also told the House subcommittee that the SEC was looking into the charging of annual marketing fees, known as 12b1 fees, by mutual funds that have closed.

Regulators may also consider charging Prudential, according to a source close to the investigation. The SEC and Galvin's office declined to comment.

Massachusetts charged ex-brokers Martin Druffner, Skifter Ajro and Justin Ficken, and former managers Robert Shannon and Michael Vanin, with fraud. The SEC's complaint did not name Vanin, but also charged former brokers John Peffer and Marc Bilotti.

A lawyer for Shannon said the former branch manager carried out company policy and did not break any industry rules.

"This filing is precipitous and entirely without merit," said Steven Fuller, Shannon's attorney. "Market timing is a permitted act and Prudential allowed it."

The SEC said the former brokers earned substantial commissions as they defrauded mutual funds and shareholders by concealing their identities and those of customers in thousands of market-timing trades from at least 2001 through September 2003.

As an example, the SEC said a group headed by Druffner and that included Ficken and Ajro received nearly $5 million in gross commissions in 2002, primarily from market-timing.

(Reporting by Kevin Drawbaugh, John Poirer and Niala Boodhoo in Washington, Mark Wilkinson and Svea Herbst-Bayliss in Boston, and Mark McSherry and Phil Klein in New York)

© 2003 Reuters

* * *

November 13, 2002

Seminole Tribe sues
Prudential over funds

The suit says tribal funds were transferred to Prudential improperly and lost half their value before they were returned.

By JEFF TESTERMAN, St.Petersburg Times

In the midst of a special audit in July 2001, the Seminole Tribe discovered that its investment portfolio, valued at $12.28-million, had been transferred to the Coral Gables branch office of Prudential Securities.

Seminole officials, claiming the transfer was made without authority, demanded that Prudential sell all stocks in the portfolio and return the proceeds. But by the time the funds were delivered five months later, the value of the liquidated portfolio had dwindled by almost half, to $6.37-million.

Those assertions form the basis of a lawsuit filed by the tribe against Prudential that alleges negligence and breach of fiduciary duty, a suit that has bounced from state court to federal court in Miami.

The lawsuit is a sequel to a Seminole suit filed against St. Petersburg-based Raymond James & Associates in September 2001. In that suit, the tribe accused the financial services firm, ousted tribal chairman James E. Billie, fired Seminole administrator Timothy W. Cox and Cox's former Army buddy, Peter T. Ripich, of a stock manipulation scheme that robbed the tribe of $20-million.

The Raymond James suit alleged that Billie and Cox illegally authorized Ripich to invest $30-million of tribal funds. Some of the money disappeared under Ripich's frenetic day trading of risky Internet stocks, the suit says, while $2.7-million was stolen and funneled to a company in Belize called Virtual Data.

A federal judge dismissed the Raymond James lawsuit on jurisdictional grounds, referring the dispute to arbitration. But in June, a federal grand jury indicted Cox and two business partners on charges of conspiracy to embezzle $2.7-million from the tribe and launder it through the Belize company in a scheme to purchase and renovate a hotel in Nicaragua and put a Hard Rock Live franchise in it.

With the criminal trial of Cox and his partners scheduled to begin Dec. 2, tribal efforts to recoup lost investment money continues in civil court.

The Prudential lawsuit says Ripich secretly "orchestrated" the transfer of the Seminole portfolio from Raymond James to Prudential at the same time he was changing his employment from one brokerage house to the other. At the time of transfer, no tribal agreement was completed to open the account at Prudential, to manage tribal funds or to facilitate the use of brokerage loans made on margin, according to the suit.

Yet when the portfolio was transferred, so were millions in margin loans used by Ripich in his day trading of the Seminole portfolio. And when Prudential finally liquidated the tribal portfolio, the firm made "substantial deductions" for margin loan payments, interest on margin loans and other fees, the suit says. The margin loans, interest and fees ate up more than $5-million in tribal funds, funds that the tribe says Prudential "improperly" kept for itself, according to the lawsuit.

Ripich resigned from Raymond James in April 2001. The Seminole portfolio was transferred to Prudential on May 9, 2001, just one day before the tribe fired Cox, Billie's handpicked administrator.

Tuesday, Prudential's attorney, Brian D. Elias, characterized the lawsuit as "ludicrous" and said his client had done nothing wrong. "The tribe transferred its account from Raymond James to Prudential," Elias said. "Prudential is required to accept the account, and it did so."  

© St. Petersburg Times

For more, GO TO > > > The Bureau of Indian Affairs

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October 14, 2002

Big Punitive-Damage Award
Is Levied Against Prudential

By SUSANNE CRAIG, The Wall Street Journal

A $250 million punitive-damage award levied Friday against Prudential Securities Inc. by a state-court jury is a vivid example of why the securities industry long has pushed to get most investor disputes into private arbitration.

The Ohio jury handed out the large award in a class-action lawsuit against the brokerage firm, a unit of Prudential Financial Inc., after a stockbroker sold all his clients' holdings in 1998 without their consent.

The award, which calls for an additional $11.7 million in compensatory damages, is one of the largest-ever punitive awards for small investors suing a brokerage firm, according to an association that tracks awards.

In a suit filed in 1999, three Marion, Ohio, retirees alleged that Prudential broker Jeffrey Pickett, believing a market crash was imminent, sold all the stocks in their portfolios and put them into more-conservative investments, including less-risky mutual funds. Mr. Pickett took the same action with about 250 clients, according to Mark Maddox, a lawyer with Maddox, Hargett & Caruso, which filed the case.

Mr. Maddox estimates that Mr. Pickett's decision to sell cost the broker's clients $11 million; the stock market shot up in late 1998, and soared throughout early 2000.

A Prudential Securities spokesman said the brokerage firm plans to ask the court to set aside the verdict. "There is no legal basis for it," he said. A lawyer for Mr. Pickett, 44 years old, said he was "shocked" at the jury's decision....

The good news for Prudential is that such large jury awards often are overturned or sharply reduced on appeal. In arbitration, by contrast, awards rarely are overturned because the parameters for appeal are so narrow.

Michael Ungar, Mr. Pickett's lawyer, said his client isn't responsible for any portion of the punitive damages, but the jury did find both Mr. Pickett and Prudential jointly responsible for the compensatory award. "This is a guy who admitted to unauthorized trading in his client accounts."

Mr. Ungar says the broker believed a stock-market crash was coming, partly because of the near-collapse of the giant hedge fund Long-Term Capital Management LP, which triggered a global financial crisis. But the stock market soon recovered, and in 1999 and early 2000 kicked into the last phase of the huge bull market.

Mr. Pickett left Prudential in February 1999. In 2001 the New York Stock Exchange censured and barred him from the securities industry for six months following similar allegations.

Mr. Pickett didn't admit or deny guilt in the NYSE case.

Since leaving Prudential, Mr. Pickett has started his own firm in Columbus, Ohio, and some of his clients from Prudential followed him to his new firm, says Mr. Ungar.

Meantime, says Mr. Maddox, the plaintiff lawyer: "This jury is sending a message to Pru and Wall Street that if you find a problem with a customer, you need to fix it right away."

$ $ $

March, 2002

Prudential Capital Group - Case Studies

Kamehameha Schools

$130,000,000
Pru-Shelf Facility

$20,000,000
Senior Notes

Prudential Capital Group
San Francisco
March 2002

$ $ $

October 25, 2002

From the Lieff Cabraser Heimann &, LLP website on 01/25/03:

PRUDENTIAL INSURANCE RETIRED
EMPLOYEES PENSION PLAN LAWSUIT

In a class action lawsuit, entitled Dupree, etal. v. The Prudential Insurance Co., et al., No 99-8337-CIV (AJJ) S.D. Fla.), Lieff Cabraser Heimann & Bernstein, LLP, represents a group of retired employees of Prudential who are participants in Prudential’s Retirement Plan. The Plan provides pension benefits to thousands of retirees who used to work for Prudential. Those benefits are protected by federal statute called the Employee Retirement Income Security Act (ERISA), which was enacted by Congress to prevent employers from exercising improper control over the assets of their retirement plans.

The plaintiff retires allege that Prudential violated ERISA by using (and continuing to use) the Retirement Plan’s assets to benefit Prudential, instead of its retirees. Plaintiffs’ claims have survived two motions to dismiss, and discovery is ongoing. The case is set for trial in June 2003....

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December 13, 2001

Prudential rises in NYSE debut

By Bill Rigby and Elena Molinari

NEW YORK, Dec 13 (Reuters) - Shares of Prudential Financial Inc. (PRU), the No. 2 U.S. life insurer, rose as much as 9 percent on heavy volume in their market debut on Thursday, signaling strong investor interest in the U.S. insurance industry's largest initial public offering ever.

"This is a stock to hold onto longer-term," said Leo Harmon, portfolio manager at Allstate Investments LLC, which bought Prudential stock in the IPO.

"On the surface it is not as well run as MetLife or John Hancock, but on the other hand you have a huge brand name and a nice mass marketing strategy," said Harmon, whose firm has about $8 billion in equity holdings.

Prudential's stock, with 11 million shareholders, immediately became one of the most widely held in the United States. It opened on the New York Stock Exchange at $29.10 on Thursday morning.

It hit a high of $30 in early trading but slipped back to close at $29.30, up $1.80, or 6.5 percent, from the IPO price of $27.50. The broad S&P 500 index fell 1.6 percent.

Shares of Prudential rivals MetLife Inc. and John Hancock Financial Services Inc. have both doubled in value since they went public early last year.

The first day of trading marks the completion of the shift by Prudential from a mutual company -- owned by its policyholders -- to a public company, as it looks to access capital for expansion. Prudential, whose market capitalization is second only to MetLife, first announced the move in February 1998.

A PIECE OF THE ROCK

"There was no question a company like Prudential should be in the public market," Prudential Chairman Arthur Ryan told Reuters in a telephone interview. "It gives us the opportunity to use other currencies -- stock, in particular -- over time, in terms of our growth pattern."

Ryan, 59, who plans to remain at the helm of Prudential for some time, said he was happy with the firm's size, but would look for acquisitions that would boost the firm's historically low return on equity.

"We don't need to get bigger, we need to perform better," said Ryan.

"You're looking at a company that has underperformed as a mutual," said Harmon. "But it has a lot of low-hanging fruit in order to move its return on equity up from low single digits to possibly 10 or 12 percent in the next three or four years."

The Newark, New Jersey, company, which refers to itself as 'the rock,' is the fifth big life insurer to demutualize in the last two years. Investors have gobbled up those new insurance stocks as a safe alternative to technology.

The Sept. 11 attacks on the United States dented that confidence temporarily because the industry is facing record claims. But the stocks have bounced back as consumers, reminded of their mortality, have rushed to buy policies.

The stock was the second most active on the New York Stock Exchange, with nearly 45 million shares changing hands.

'A VERY SOLID STOCK'

"This is a low-risk play and is driving a great deal of interest," said independent IPO analyst Irv DeGraw. "It offers the rare combination of a new investment and a mature industry. It's like buying GE (General Electric Co) for the first time."

DeGraw said he sees room for continued gains, with the stock possibly rising as high as $32 by the end of January.

"It is a very solid stock, one that shareholders likely will keep for many years," said Corey Ostman, chief executive of IPO-tracking firm Alert-IPO of Torrance, California. "It was priced quite conservatively. In deals of this size, underwriters tend to not leave any money on the table."

On Thursday, Prudential shares were trading at about 85 percent of their book value of about $35 a share, reflecting the firm's low return on equity over the past few years.

By contrast, MetLife trades around 1.5 times book value, and John Hancock at about double.

Prudential's stock sale raised $3.03 billion, making it the largest insurance IPO on record, just topping MetLife's offering last year.

Prudential Securities, the company's Wall Street firm, and Goldman Sachs & Co. led the IPO of 110 million shares, or about a 19 percent stake in the company.

The price tag of $27.50 a share was at the midpoint of an anticipated range of $25 to $30.

The latest price gives Prudential a market value of about $16.86 billion, based on about 566.3 million shares outstanding. MetLife's value is about $21 billion.

The Prudential IPO is also the third-largest in a quiet year, after Kraft Foods Inc. and Lucent Technologies Inc.'s spinoff of Agere Systems Inc.

Only 89 new stocks have come to market so far in 2001, raising $38.2 billion, compared with 395 deals and $71.3 billion as of mid-December 2000.

Prudential also raised $600 million through a sale of convertible units. . . .

For more on Goldman Sachs, GO TO > > > Dirty Gold in Goldman Sachs


 

How soon we forget....

< < < FLASHBACKS < < <

CHARLES KEATING AND THE S&L CRISIS

By Brian Downing Quig

From tripod.com, posted by Ron Bell (9/11/92)

Charles Keating, the godfather of the S&L scandal, now sits behind bars, perhaps for the rest of his life. He has been assessed fines exceeding 3.6 billion dollars in just one civil action. Federal prosecution has not yet begun. Yet after several books and tens of thousands of column inches of newsprint, the major features of the Keating story remain, until now, untold. For example, General John Singlaub and the CIA's Latin American military campaigns, Carl Lindner's purchase of UNITED BRANDS and the U.S. Honduran aid program, extensive BCCI transactions, PRUDENTIAL INSURANCE, and Keating's attempt to get a strangle hold on the water supply of Arizona are key essential features of Keating's story that have not had national exposure.

An army of federal regulators, prosecutors, attorneys and judges have combed the affairs of Charles Keating. So why haven't the major features of his operations come to light? Having a brother who was vice president of ASSOCIATED PRESS helped keep items off the wire service. The ownership of Phoenix's two city newspapers helped even more. The ARIZONA REPUBLIC and the PHOENIX GAZETTE are owned by the Dan Quayle family.

The Vice President's involvement in the affairs of CIA Latin American programs provided plenty of incentive for Phoenix newspapers to keep the Keating affair as quiet as possible. And Carl Lindner, a much bigger fish than Charles Keating in these affairs, holds the largest stock interest in KTSP TV, the CBS television affiliate in Phoenix.

Keating is a man who has done favors for many powerful individuals including Presidents Ford, Reagan and Bush. Steven Pizzo, author of INSIDE JOB, one of the best books on S&L looting, supplied Barbara Honegger, author of OCTOBER SURPRISE, a Defense Intelligence Agency telex indicating that the alleged OCTOBER SURPRISE airplane for William Casey's and Heinrich Rupp's Paris trip was arranged by Kenneth Qualls, formerly the chief pilot of Charlie Keating's AMERICAN CONTINENTAL CORPORATION. This and other high level CIA favors may suggest even more sinister reasons why the major features of the Keating story never made it to print.

Savings and Loans were originally chartered to provide home mortgage loans. When Ronald Reagan deregulated the industry, high rollers were free to attempt more ambitious projects with the federally insured deposits. No one was more ambitious than Charlie Keating and no one lost more of the tax payer's money.

To date taxpayers have been assessed $500 billion for the S&L looting – $2 1/2 billion for Charlie's sins alone.

After providing less than a dozen home loans, Keating set out to build THE PHOENICIAN, a $300 million luxury resort hotel financed 55% by his newly acquired S&L, LINCOLN SAVINGS, and 45% by the King and Queen of Kuwait.

November of 1989, six months after Keating's parent company AMERICAN CONTINENTAL finally hit the skids, the Feds took over the PHOENICIAN RESORT in a surprise 1:00 AM raid. At 4:00 AM Keating was summoning bellmen to a side entrance where 24 cartons of files were loaded into Keating's recreational vehicle. When asked about this by a member of the local press the Feds responded that they knew of this and Keating was allowed to take these files because "they were his personal correspondence --- like letters to his family." The federal investigation of Keating was totally compromised from beginning to end.

If the Feds had done even the most elemental examination of the business affairs of Charles Keating, this is what they would certainly have found: On November 26, 1980, just two weeks after the election of Ronald Reagan and George Bush, Keating purchased the property located at 2735 East Camelback Road for his AMERICAN CONTINENTAL CORPORATION Headquarters. For this he paid $3,083,000 to the < NAME OMITTED > DEVELOPMENT CORPORATION. During the period from 1980 to 1984, Maricopa county court records show that sixty civil suits were filed against < NAME OMITTED >....

< NAME OMITTED > purchased what would soon become the AMERICAN CONTINENTAL Headquarters property April 2, 1979, from James E. Patrick II and Herman Chanen for $550,000. The sale to Keating represented a bump of $2.5 million in only 8 months! What is more, Patrick II and Chanen are not stupid when it comes to real estate.

Patrick II is the son of James Patrick, who at this time was President of VALLEY NATIONAL BANK, Arizona's largest bank. Herman Chanen owns the largest construction company in Phoenix and at sale time was Chairman of the State Board of Regents which oversees all state universities.

These men represented the very pinnacle of the Phoenix business establishment. Soon after the Keating deal, James Patrick Sr. retired to become president of ROYAL PETROLEUM in Kuwait, a country closely connected to Charlie's business affairs.

September 19, 1985, Keating received a $5 million loan on this property from PRUDENTIAL INSURANCE COMPANY, a bump of another $2 million. This was a one payment note that was due in total October 1, 1990. The note was secured with nothing more that the property which had been purchased for $3,083,000. When Keating filed Chapter 11 in April of 1989 this $5 million was added to the rest of the money that just evaporated.

Why were these big business interests coming forward to set Charlie up in business? PRUDENTIAL is a big player in this. Not only was George Bush's father, Prescott Bush, on the board of Directors of PRUDENTIAL but Ronald Reagan was one of the largest stockholders.

It was PRUDENTIAL that owned the land upon which Herman Chanin built the lavish shopping center, BILTMORE FASHION SQUARE, which is located just across the street from Keating's Headquarters.

One month after the PRUDENTIAL loan, Keating really became bold when he purchased the property adjoining the HQ property for $13,000,000 for the Arizona branch of LINCOLN SAVINGS! . . .

The RESOLUTION TRUST CORPORATION (RTC) after taking over LINCOLN SAVINGS moved its Arizona operations to this property. They did this to protect Keating. Keating never had clear title to this property. It can not be sold. The RTC attorneys have been presented with all this information as have the attorneys for the bondholders. They have never as much as made a phone call in response!

Why all this high level protection and why would these big business interests provide Keating all this money? Some answers to these questions lie in Keating's origins. Charles Keating started out as an attorney for Carl Lindner, the original owner of AMERICAN CONTINENTAL CORPORATION. According to UC Berkeley professor Dr. Peter Dale Scott, Carl Lindner is a well documented profiteer off the Vietnam war. Lindner is a much bigger player than Keating.

According to Peter Brewton, the star reporter for the HOUSTON POST whose hard hitting exposes have linked the CIA to the looting of 22 other S&Ls, Lindner owned 7 failed S&Ls but has gone virtually unmentioned in regards to the S&L looting scandal. Lindner is reported to be one of the wealthiest men in America and a top financier of the CENTRAL INTELLIGENCE AGENCY.

When Gorbechev came to the United States he visited Carl Lindner. At the same time as Keating was purchasing the AMERICAN CONTINENTAL HQ property, Lindner was transferring almost the total assets of his AMERICAN FINANCIAL CORPORATION (a private company requiring no stockholder reports) into a Honduran company, UNITED BRANDS, taking UNITED BRANDS from a publicly traded to a private company.

UNITED BRANDS was formed when UNITED FRUIT, a CIA front prominent in several Latin American coups, was merged with a second company. CHIQUITA BANANAS is one of UNITED BRANDS well know brand names.

On the deed of Keating's HQ property it stated "When recorded mail to AMERICAN CONTINENTAL 2621 East Camelback Road, Suite 150, Phoenix, Arizona." This was just across the hall from General John Singlaub's U.S. COUNCIL FOR WORLD FREEDOM, the American affiliate headquarters of the WORLD ANTI-COMMUNIST LEAGUE.

General Singlaub's long CIA career goes all the way back to when he was an OSS agent under the direction of William Casey in France and China during WWII. By purchasing UNITED BRANDS Carl Lindner set himself up to become the world's greatest financial beneficiary of the CONTRA/HONDURAN aid program which poured billions in U.S. aid into Honduras to the direct enrichment of Lindner's plantations. Did Lindner send his water boy, Charles Keating, out to Phoenix to facilitate the Contra war with General Singlaub so that Lindner could multiply his fortune?

The summer preceding Keating's purchase of his headquarters property, Keating headed the media relations group for the JOHN CONNALLY FOR PRESIDENT campaign. With Keating in this section was Jim Brady (soon to become Ronald Reagan's Press Secretary) and Joyce Downey. Upon arriving in Phoenix, Downey went across the hall to become General Singlaub's top executive. Former Texas Governor Conally's son Mark later became an AMERICAN CONTINENTAL executive after serving as an aide to "Keating Five" Senator John McCain.

In a very complicated way all this bleeds into Keating's transactions with BANK OF CREDIT AND COMMERCE INTERNATIONAL (BCCI). It is beyond dispute that before it was exposed, BCCI was the largest corporate crime network the world had ever known.

Even TIME MAGAZINE ran a cover story explaining how BCCI had become the favored means of moving dirty money for not only the Medullin Cocaine Cartel, but for the PLO, MOSSAD, Abu Nadal and the CIA as well as various countries like Saudi Arabia and North Korea.

For anyone looking for the possibilities that Keating was laundering illegal funds for Singlaub's Contras campaign, any transactions with BCCI would set off all kinds of bells and whistles.

In early 1986 Keating met a Pakistani in Switzerland named Abbas Gokal. Gokal belongs to a family of shipping magnates who started the downfall of BCCI by defaulting on $700 million in loans. Gokal introduced Keating to Alfred Hartmann, a BCCI director and president of the Bank's Geneva branch.

Steven Pizzo reported in the NATIONAL MORTGAGE NEWS that Hartmann provided $3 billion in loans to Saddam Hussein for nuclear, chemical and ballistic missile programs just preceding the Gulf war and is the director most closely linked to the laundering of Medullin Cartel drug money.

In 1986, Keating, Hartmann and other BCCI directors met in London, Paris, Zurich, Phoenix and the Bahamas where they founded a corporation known as TRENDINVEST. All this was well known by lower level federal regulators who could not get an appropriate response from higher ups.

In testimony before the HOUSE BANKING COMMITTEE a federal regulator, John J. Meek, testified that "AMERICAN CONTINENTAL had no records of Keating's secret role in TRENDINVEST. Regulators learned of the partnership only from an offhand remark by an AMERICAN CONTINENTAL executive."

Keating invested $17.5 million into this company without even informing the board of directors of AMERICAN CONTINENTAL.

Meeks went on to detail an unending train of baffling Keating transactions which included $25.5 million to DIA HOLDINGS, a Netherlands company, $10 million to SOUTHBROOK HOLDINGS, a Panamanian company, $25 million to GFTA, a West German company – all deals that regulators never figured out.

In summary, did Keating have both the motive and the opportunity to launder illegal funds for CIA operations in Latin America and elsewhere? Yes. Yes. Yes.

It is worth mentioning that when Keating moved out of suite 150, POST\NEWSWEEK moved in. Remember, this was just across the hall from where General John Singlaub ran the Nicaraguan Contra campaign. This was the operation that led Ollie North and General Secord into so much temptation. With the parade of mercenaries that processed through Singlaub's office one must conclude that POST\NEWSWEEK was one among many news organizations that never had the slightest inclination to cover any of these stories.

In as much as an animal is undefinable apart from its environment, it is worth analyzing the political setting of Charles Keating. During the high points of Keating's reign the big man in Arizona was Kemper Marley. Marley was the first and only billionaire in Arizona. His wealth was based originally on a liquor monopoly conferred upon him by Sam Bronfman of the SEAGRAMS family.

In Arizona Marley was all powerful.

In 1948, fifty-two employees of Kemper Marley's wholly-owned company, UNITED LIQUOR, went to prison on federal liquor violations – including Gene Hensley, the father-in-law of Arizona Senator John McCain.

Gene Hensley was Kemper Marley's UNITED LIQUOR general manager. On the basis of so many prosecutions some people might feel UNITED LIQUOR could qualify as organized crime. The slick attorney who kept Marley out of this trial and sent McCain's father-in-law to prison in his place was William Rehndquist – currently the Chief Justice of the U.S. Supreme Court.

It was the judgement of the court that Gene Hensley would be prohibited from ever working in the liquor industry. Of course such judgments meant nothing to Marley. When Gene Hensley got out of prison Marley arranged a BUDWEISER distributorship for Hensley which is now in the hands of Senator John McCain and reported to be worth $50 million!

The best source for an introduction to the environment of total political corruption in Arizona is the book, THE ARIZONA PROJECT: HOW A TEAM OF INVESTIGATIVE REPORTERS GOT REVENGE ON DEADLINE. In graphic detail journalist Michael Wendland links the most prominent people in Arizona with various organized crime king pins.

Wendland was part of the group called INVESTIGATIVE REPORTERS AND EDITORS who came to Phoenix in the wake of the fatal car bombing of the ARIZONA REPUBLIC's investigative reporter, Don Bolles.

It was the conclusion of this group that Marley, by far the wealthiest man in Arizona, was behind this murder.

According to intelligence sources of the Phoenix police, who prepared a background profile of Kemper Marley the week following the Bolles murder, Marley was at one time directly connected to the remnants of the old Al Capone mob.

When Marley died July 1990 he owned 5 square miles of Carefree – the highest priced real estate in Arizona. The smallest lot in this most exclusive township is zoned for one acre. By some coincidence the Tax Accessor made the same mistake evaluating Marley's properties as he did on Charlie Keating's properties. This oversight was saving Marley a million dollars a year. Of course the official investigation showed no wrongdoing in either case.

For the last 45 years Marley bankrolled the Republican Party which doled out Marley's great wealth to a slate of Republican candidates who were almost universally successful in obtaining high political office. Marley was able to control the Democratic party as well. Every current congressman and every senator in Arizona owes his position to the Marley machine.

These office holders include the "Keating Five" Senators John McCain and Dennis DeConcini as well as former State Attorney General, Bob Corbin.

At one point Marley served as Chairman of the Board of the VALLEY NATIONAL BANK. When Bugsy Siegel, on instructions from Meyer Lansky, built the FLAMINGO CLUB, Las Vegas's first casino, the money was borrowed from the VALLEY NATIONAL BANK.

Al Lizanetz, who served as Kemper Marley's public relations man for 20 years, is one of the richest sources for background on the liquor magnate. The Bolles murder was part of a package deal that was to include a hit on Lizanetz.

According to Lizanetz, the Marley machine placed the highest priority on placing lawyers in all the key state and municipal positions. The Arizona State Attorney General during the Keating era, Bob Corbin, worked formerly for Marley in the insurance industry in the 1950s.

Corbin accepted a $55,000 campaign contribution from Charles Keating in a race where he was unopposed. Since Corbin did not have to spend the money in the campaign he got to keep the $50,000 when he retired. This is significant since S&Ls are state chartered institutions and it was therefore the responsibility of State Attorney General Corbin to oversee Keating's operations.

Marley placed his people in the top positions of the Department of Public Safety. The county prosecutor was also key to him. Lizanetz claims that Marley recruited Eugene Pullium to come to Phoenix to start the ARIZONA REPUBLIC/PHOENIX GAZETTE, the monopoly newspaper which has succeeded in covering up these matters.

Eugene Pullium is the grandfather of Dan Quayle.

Dan Quayle grew up in the Phoenix suburb of Paradise Valley living just next door to the founder of the JOHN BIRCH SOCIETY, Robert Welsh. Quayle's parents were the local JOHN BIRCH coordinators.

Marley's mentor was Sam Bronfman, the progenitor of the SEAGRAM’S empire. When Sam Bronfman visited Marley in Arizona he came in the company of Al Capone. Lizanetz claims that Jack Ruby, assassin of Lee Harvey Oswald, was also on the Bronfman payroll.

There may be something to this since Louis Bloomfield, the family attorney for the Bronfmans, was the chairman of the board of PERMENDEX, the Italian company whose board also included Clay Shaw, the man prosecuted by District Attorney James Garrison for the murder of President Kennedy.

Many have suggested that Charles Keating fell out of favor with the powers that be and was set up. This is clearly not so. Ironically, after issuing millions in bribes, the downfall of Keating's empire began and ended with one minor public official who was not for sale. Charlie was playing fast and loose with the rules but he did have his end game well planned.

In order to buy time for his failing company, Keating resorted to selling AMERICAN CONTINENTAL bonds through the affiliates of his S&L, LINCOLN SAVINGS. Telephone solicitors were paid to call LINCOLN CD holders just prior to expiration dates and advise them to roll over their investments into ACC bonds. This was good for $230 million of keep alive money.

While the higher rate of interest was mentioned, the fact that these bonds were not federally insured was not. But these minor infractions would all be covered by Keating's most grandiose of all grandiose schemes.

The most precious resource in Arizona is water. Keating was going to pay off his bondholders with the profits he was going to make through his near successful attempt to monopolize the water supply for the city of Phoenix!

In Arizona there are five water tables from which water can be pumped – an enterprise known as water farming. Keating arranged a $200 million dollar loan through LINCOLN SAVINGS for Ron Ober, Senator Dennis DeConcini's campaign manager.

The grand plan was for Ober to purchase all the land suitable for water farming in La Paz county just south of Phoenix that Keating did not already own. Then Keating engineered a bill for the Arizona legislature that stipulated that the city of Phoenix would be legally obligated to purchase 100% of Keating's and Ober's water before they could purchase a drop from anyone else!

Since Keating and Ober were planning to pump a million acre feet of water a year at a thousand dollars an acre foot that meant profits in the hundreds of millions – far more than was necessary to pay off the bondholders. In fact Keating and Ober would have been well on their way to Rockefeller status wealth.

Since Senator DeConcini had purchased land in the other five suitable water tables he would have made out ever better.

This plan was probably conceived by the more cautious DeConcini who intended to use Keating and Ober for stalking horses for his own business interests. Such grandiose scams can only be attempted when one can count on the local media to keep secrets and law enforcement to look the other way.

Despite some obstreperous lower level officials at the Federal Home Loan Bank Board everything was going like clockwork for Keating. While everyone slept and no one even heard of this water legislation, Keating's bill sailed through the Arizona House of Representatives in a record 2 days. It would have done the same in the state senate except for one man – State Senator Jerry Gilespie.

Another man in Jerry's position could have parlayed for a suit case full of hundred dollar bills. But Jerry killed the bill without wasting a heart beat. In the next senate election a massive amount of funding showed up for Jerry's opponent. Today Jerry heads up the BO GRITZ FOR PRESIDENT CAMPAIGN in Arizona.

This fascinating water story made it onto the cover of the November 1989 issue of PHOENIX MAGAZINE under the very appropriate title PARASITES IN OUR WATER.

This unbelievable account of greed and corruption was believable only because it was written by 5-term ex-congressman Sam Steiger. Even so, no wire services picked it up. This article is the first national coverage of Keating's failed end game.

Things still looked rosy on May 20, 1988 when Keating threw a lavish champagne party at his Headquarters celebrating what Keating imagined to be his final victory over the Federal Home Loan Bank Board. K eating always kept magnums of Dom Pernon chilled for special occasions. FHLBB examiners in San Francisco had been motioning to close down LINCOLN SAVINGS. Thanks to backing from John McCain and Dennis DeConcini and the other "Keating Five" senators LINCOLN SAVING's FHLBB files had that day been moved to Washington D.C. where they were guaranteed to receive much more favorable treatment.

At the height of this rancorous party, Keating ripped off his shirt to reveal a tee shirt with a skull and cross bones superimposed over the letters FHLBB. As one top exec poured cold champagne down the front of one secretary's brassier, Keating threw a computer and a typewriter out through the glass of second story windows. Everyone there roared with approval. The $1 million in bribes to senators seemed well spent.

But there was something Keating had not considered – one $15,000 per year state senator who did not have a price....

http://artofhacking.com/IET/POLITICS/KEATING.TXT

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From In Good Faith, The Inside Story of Prudential-Bache’s Multibillion-Dollar Scandal That Defrauded Thousands of Investors and Fractured the Rock, (copyright 1995) by Kathleen Sharp:

Widows’ and Orphans’ Friendly Society

It was midnight, January 27, 1994, barely ten days after a horrific earthquake had shaken Southern California. By now, the earth had settled, the rains ceased, and the fires that had raged for days had finally been brought under control. Nearly every hotel room in the greater Los Angeles area was full of refugees from a trio of natural disasters. In Room 214 of the Burbank Travelodge Motel, a former vice president of Prudential Securities lay sprawled on the floor, wearing his underwear and a three-day growth of stubble.

John Patrick Graner had been lucky to find even this modest $49-a-night room in the midst of such disaster; his cramped quarters overlooked a cement pool area guarded by a chain-link fence. Had Jack Graner still been working as senior vice president and regional director of Prudential Securities, he would have known that the Dow Jones Industrial Average that Thursday had climbed 18 points to close at 3926. Jack always knew his numbers.

But tonight as the full moon rose, the fifty-one-year-old man lay unconscious and unemployed, stoned out of his mind, on the drab carpeted floor. Earlier that evening, he had somehow ingested a lethal mixture of cocaine, heroin, and ethanol, commonly known as grain alcohol. (Exactly how this occurred would remain something of a mystery to many people who believed they knew him well.)

Jack was snoring so loudly he awoke his companion, a petite Asian woman in her twenties with a hard-won knowledge of the streets and a long, creative list of aliases. His companion turned to Jack, who by now had stopped breathing. She tried to wake him, but he didn’t budge. She moved the 176-pound man onto the bed and hastily covered him with the bedspread. Then she ran out of the second-story room, down the stairs, and onto the busy boulevard, where she flagged down help.

At 1:45 A.M., the police arrived, but it was far too late. The former key senior executive of Prudential Securities was pronounced dead. When he died, so too did all of his long-kept secrets, both carnal and corporate.

~ ~ ~

Graner’s quiet graveside funeral attracted about fifty people, most of them men and women who had once worked with him. Some genuinely loved the man. A few harbored hate. “I went to his funeral just to make sure he was dead,” said one former employee. Yet, in eulogy, Graner became better, brighter, and bigger in death than he had ever seemed in real life.

Graner’s sales abilities were remarkable, said his friends, who claimed that he could sell umbrellas in the Gobi. With his dark wavy hair, blue eyes, and beguiling manner, he could dazzle strangers with his charm. “He was a father to the world,” said his wife, Patricia Graner. “He could counsel anybody about anything, whether he knew what he was talking about or not.”

As word of Graner’s death passed along the Prudential grapevine, employees past and present speculated on what, under different circumstances, might be scoffed at as patently ridiculous. “Rumors were that Graner had been knocked off by Prudential,” said one female colleague. Many people, including Graner’s wife, couldn’t fathom why the gregarious salesman would commit such a desperate act as suicide – it simply wasn’t his nature. Nor, apparently, were hard drugs part of the executive’s lifestyle, according to many friends. Said one coworker: “I wouldn’t put it past Prudential to do something like this to silence Jack.”

Within forty-eight hours after Graner’s death, detectives from the Burbank Police Department ruled out the possibility of murder. At the scene of the death, detectives uncovered rocks of cocaine in a woman’s cosmetic bag, and subsequently they arrested his companion. Inside the room, police found a discarded pizza box, drug paraphernalia, and $13,000 worth of Tiffany jewelry that Graner evidently had purchased days earlier on his charge account. Amid the clutter was a note scrawled on a paper napkin. The message was vague and unsigned, but the note clearly indicated that its writer was tired and unhappy.

Given the note, the drugs, and Graner’s unemployed status at the time, the police had a choice. “It was a coin toss between suicide and an accidental drug overdose,” said Detective Roger Mason of the Burbank Police Department. “Suicide” was listed on the police report as the cause of death.

Still, neither suicide nor accidental overdose rang true for those who knew Graner. Over the ensuing months, the vast network of people who worked or had worked for the Prudential Insurance Co. of America unit discussed and dissected Graner’s mysterious death. Gradually, bits of information emerged. Graner had been talking with the Securities and Exchange Commission in its investigation of Prudential Securities and its top executives. Word was, Graner had known too much and possibly had been implicating individuals, perhaps even himself. Whatever the nature of his disclosures, they did not bode well for a number of high-ranking executives, said one former friend. “You have to remember,” said Bill Davis, an attorney, “a lot of people’s careers are at stake in this investigation.”

Most ex-employees sneer at the idea of Pru Securities putting a “hit” on a former officer. Nevertheless, it is startling that so many longtime employees would even consider that a part of “the Rock” – one of the oldest and most venerated companies in America – might arrange the murder of one of its own. Such deep underlying distrust says much about a corporate culture that fostered mistakes, omissions, lies, and crimes for more than a decade.

In some ways, the fate of John Patrick Graner mirrors the history of Prudential-Bache Securities, just as it shadows the parent company’s vain attempts to bury the seed that spawned both tragedies in the first place.

~ ~ ~

Graner’s death was not mentioned in The Wall Street Journal the following day, although the struggles of his former employer, Prudential Securities (formerly known as Prudential-Bache Securities), were duly noted on page C6. For the past four years, Prudential Securities Inc. had been the subject of printed storied and rumored speculation that centered around allegations that for more than a decade – from 1980 to 1990 – the securities brokerage unit of the giant Prudential Insurance Co. of America had sold $8 billion worth of limited partnerships to its customers, in many cases using fraud, deceit, and illegal means.

Beginning in 1989, a handful of investors began to sue Prudential Securities to recover their lost funds; some filed arbitration claims against the brokerage firm. In 1991, the Securities and Exchange Commission and various state regulators began investigating the firm for shady practices stemming from the limited partnership sales. Still, for five years, the firm vigorously and loudly denied any systemic wrongdoing and defended all of its sales practices as sound and legal. The real culprits for the soured investments, it claimed, were down markets and pure bad luck.

But in October 1993, the company suddenly changed course and settled fraud allegations with the Securities and Exchange Commission in order to avoid a protracted court proceeding, which probably would have bankrupted the firm. As part of its covenant with the SEC, the nation’s fourth-largest securities firm agreed to pay $41 million in fines – including an amount to every state in the nation – plus at least $331 million to individual customers in an open-ended fund specifically formed for that purpose. At the time, investors who had pumped $8 billion into the limited partnerships had received little more than $3 billion back in distributions – or about thirty-eight cents on their dollar. Any client who could prove that he or she was misled in some way, or that the investment was unsuitable, could potentially recover the money.

That settlement was unprecedented on many levels. It was the largest and longest-running securities scandal involving retail individuals, as opposed to corporate chieftains or professional traders. Also, it would prove over the following year to be the most expensive Wall Street debacle in history....

~ ~ ~

During the eighties, VMS raised about $2.6 billion from about 110,000 outside investors; about $1.3 billion was sold through Prudential-Bache Securities. The realty company become one of the two largest packagers of limited partnerships that were sold by Pru-Bache brokers (the other being Graham Energy).

VMS Realty was named after the initials of its three principals: Robert Van Kampen, Peter Morris, and Joel Stone. Initially, the Chicago-based firm had formed limited partnerships to purchase hotels, resorts, apartments, and other properties. Since its inception in 1979, the company had grown from an idea to $9 million in assets, becoming one of the nation’s largest real-estate syndicators....

Perception vs. Reality

During a Pru-Bache executive committee meeting one day in 1988, Loren Schechter announced that there were some “minor” problems with the limited partnerships packaged by VMS Realty, the firm’s second-largest LP sponsor. As he would say two years later, a “vocal minority” was complaining that the investments weren’t performing as promised....

Schechter detailed some of the claims and indicated that at worst, the troubles could cost Pru-Bache about $34 million.

Fowler quipped, “Sounds more like $1 billion to me.”

No one spoke, but Fowler’s figures would prove closer to the mark. Over the decade, Pru-Bache had sold about $1.2 billion of VMS investments to clients, who by 1994 had recouped only half of their funds....

A due diligence team from another brokerage house, as well as from Pru-Bache, were dispatched to review VMS’s books. The team’s consensus was that “insiders at VMS were doing funny things” that undermined the value of the funds....

Problems had festered for years at the Chicago-based realty company, and by March 1988 Pru-Bache knew of those problems. Senior managers at DIG knew that VMS Realty was short of cash and that some properties in the sponsor’s LP funds weren’t making enough money to pay loans. Indeed, years later, DIG executive James Kelso admitted as much to arbitrators, saying that “the mere appearance that the properties were not sufficient to serve loans does not, in and of itself, set off a fire alarm that the fund is going down.”

However, the fund would go down.

Many of the firm’s brokers and clients had complained about the VMS deals. In 1986, when the tax laws changed, VMS officers realized they had trouble pending. In February 1987, Xerox Corp. injected about $80 million on cash into the troubled company in return for a 25 percent equity stake. At the time, at least one market analyst warned Xerox and other big investors about the investment.

Years later, Scott Miller, an independent real-estate analyst in Houston, said, “VMS is not now and never has been worth anything.”

Here’s why. The firm in the early 1980s had played the tax shelter game, paying high prices for properties, such as resorts, hotels shopping complexes, and apartments. Some of these assets were inferior properties, which were then ladened with debt and high fees extracted by VMS.

What VMS had really sold in the early 1980s were tax write-offs. The general partner often didn’t invest its own money in the deals, although it did secure outside financing to complement investor funds. For example, in the Boca Raton Hotel and Club LP, limited partners would later claim that VMS had contributed only $100 to the LP – while taking as much as $50 million in assorted fees.

In addition, without consensus from its limited partners, VMS in 1988 acquired the Boca County Club golf course and an attractive piece of development property, known as the marina parcel. “There was no vote, they just did it,” said one broker. The two properties were encumbered by mortgages payable to Banyan, a VMS affiliate, and each mortgage was collateralized with the other property. By 1990, the mortgages had grown to about a $21 million debt and were in danger of foreclosure; the LP had defaulted on the payments and was in danger of losing the underlying assets.

At the same time, the Boca Raton LP was also straining under the third “wraparound” mortgage, which allowed the VMS entity to siphon off more money. Although it didn’t lend any money to the LP, the loan carried a 13 percent interest rate – or about 7 percent above the prime rate. The net effect of the above-market rate loan was that,k by 1990, the $8 million debt had ballooned to about $21 million – all shouldered by investors....

By 1989, VMS entities were making even more money by “lending” in similar fashion to its other limited partnerships. Why? When the tax laws changed in 1986, the real-estate market began to slip. To keep its earlier private, tax-shelter limited partnerships afloat, VMS turned to raising public “mortgage” funds, which were lent back to its private properties. (Public deals require more disclosure than do its private offerings.)

“Essentially, public investors in VMS were used to pay off private VMS deals, just like a Ponzi scheme,” said Zahn.

According to many brokers and branch managers, this tactic allowed VMS to publish glossy brochures that pointed to great track records from earlier programs, which in turn enticed less sophisticated investors to fund later public programs.

By the late 1980s, some brokers began to privately blast these deals as self-dealing. The interest rates on the loans were inordinately high. To an increasing number of salespeople, the deals clearly benefitted VMS at the expense of Pru’s clients – the investors. Yet the outrageous self-dealing transactions were disclosed in prospectuses, which were rubber-stamped by regulators, who were not required to issue opinions on any stock offering.

All the while VMS helped itself to enormously high fees for “management” and other services it charged limited partners. Pru-Bache also earned millions of dollars in fees, commissions, and other charges. By 1993, many of VMS’s $1.2 billion LPs had dropped so steeply in value that Pru-Bache clients would lose about $600 million.

In the spring of 1988, Pru-Bache and DIG officers knew VMS LPs and funds couldn’t make their loan payments, as DIG executive Kelso testified years later. But in 1988, Pru-Bache’s due diligence people didn’t consider it a problem, Kelso explained.

The mere hint of a problem is usually enough to stop a prudent investor from pumping more money into a trouble venture. But not DIG. It went ahead later that year and sold the VMS Mortgage Investment Fund, which raised about $395.6 million in small, $10 units. People with net worth as little as $50,000 could invest a $5,000 minimum. They were promised “guaranteed” annual returns of 12 percent for the next two years.

Unlike the private offerings, this fund was targeted at the middle-class investor. Based on the representations from Pru-Bache, brokers sold the funds aggressively to senior citizens, who were told it was as safe as a “bank CD.”

For more on VMS Realty, GO TO > > > Dirty Money, Dirty Politics & Bishop Estate

* * *

CONGRESSMAN PETE STARK’S STATEMENT

In Opposition to H.R. 2269,
The Retirement Security Advice Act of 2001

November 15, 2001

Mr. Speaker, I oppose H.R. 2269, the falsely named “Retirement Security Advice Act of 2001,” introduced by Rep. Boehner. The bill not only neglects to provide any type of security for workers’ retirement, but it actually puts worker retirement plans at greater risk for fraudulent activity.

Workers need independent financial advice, not advice plagued by self-interest. Current pension law ensures that those who manage or administer assets of a pension plan cannot engage in any transaction under the plan in which they have a financial or other conflict of interest. These rules, known as the prohibited transaction rules, are designed to ensure that the best interest of the investor is maintained. When these rules are eliminated, as H.R. 2269 calls for, the integrity of the pension system is threatened by fraud and abuse.

For example, one of our nation’s premier investment companies, Prudential, in 1996, agreed to pay at least $410 million in restitution and fines to compensate investors who suffered losses to fraud as far back as 1980. Many Wall Street brokerage firms sold limited partnerships in the 1980’s to customers seeking tax deductions and the potential for profit from asset appreciation. However, these investments were typically suitable only for wealthy investors because of their speculative nature.

Prudential made nearly $1 billion in commissions and fees from the sale of its partnerships. In addition to the limited partnership claims, widespread securities law violations were made at various Prudential branches across the country. These practices included:

   LYING ABOUT RISK——Selling risky real estate and energy partnerships to pension funds, retirees and other individual investors who were told their investments were safe.

   LYING ABOUT RETURN——Publishing promotional material that misled investors about the return they could expect on their money.

   TURNING A BLIND EYE TO A SUBSIDIARY——Inadequately supervising the subsidiary that advertised and sold the partnerships.

   TURNING A BLIND EYE TO EMPLOYEES——Inadequately supervising employees in nine branch offices, whose fraudulent practices resulted in losses of hundreds of thousands of dollars from customers.

   CHURNING——Trading excessively without authorization in clients’ accounts to increase brokers’ commissions.

The settlement affected 8 million investors in every state, the District of Columbia and Puerto Rico. Many of the investors were elderly and faced the risk of not being compensated in their lifetime.

Workers should have access to investment advice they can be certain is neither influenced by corporate profit motives or driven by a company’’s need to unload undesirable financial products. H.R. 2269 undermines that certainty by permitting advisors to provide plan participants with self-interested advice regarding the investment options under the plan, as well as asset allocation. Under H.R. 2269, both financially sophisticated and financially inexperienced workers would lose access to independent investment advice under their 401(k) plans.

Clearly, this provides less security than employees currently receive and has the potential for fraudulent activity that would be virtually impossible to remedy under our judicial system.

The fraudulent Prudential activity illustrates the need for unbiased, independent investment advice for employees. We cannot allow motivation and campaign contributions from the securities, banking and insurance industries to imperil the pensions of 42 million workers who participate in self-directed pension plans. It is easy to see who will benefit from this bill when organizations like Prudential and Citigroup support the bill and organizations that oppose it include AARP and the AFL-CIO.

Workers won’t get the critical independent advice from the Boehner bill, but they will from the Democratic substitute bill. The Democratic substitute bill requires that if a conflict of interest exists, that the investment advisor would be required to provide additional independent advice at no additional charge to the investor. If Prudential is going to make a greater profit by advising the investor to invest in Prudential funds, then an independent advisor with no such direct profit interest, must be available to either validate Prudential’s advice or provide alternative advice to give the employee a less biased opinion.

The debate is clear. The bill before us will hurt the retirement of millions of workers, but it will increase profits for investment advisors and investment companies.

I urge my colleagues to vote for the Democratic substitute bill and vote no on H.R. 2269.

* * *

November 29, 2001

GlobeSpan, Inc.

CASE INFORMATION

Summary: According to a Press Release dated November 29, 2001, this lawsuit asserts claims under Section 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC thereunder and seeks to recover damages.

The complaint alleges that GlobeSpan and certain of its officers and directors at the time of its IPO violated the federal securities laws by issuing and selling GlobeSpan common stock pursuant to GlobeSpan's initial public offering and a secondary offering of GlobeSpan stock without disclosing to investors that several of the underwriters of the GlobeSpan IPO had solicited and received excessive and undisclosed commissions from certain investors.

In exchange for the excessive commissions, the complaint alleges, defendants FleetBoston Robertson Stephens, Inc., Donaldson, Lufkin & Jenrette Securities Corp., SG Cowen Securities Corp., Thomas Weisel Partners LLC, Morgan Stanley Dean Witter & Co., E*Trade Group, Inc., DLJdirect, Inc., Lehman Brothers, Inc., and Merrill Lynch, Pierce, Fenner & Smith, Inc., underwriters of GlobeSpan's IPO, allocated shares of GlobeSpan stock to certain investors at the IPO price of $5.00 per share.

To receive the allocations (i.e., the ability to purchase shares) at $5.00, the defendant IPO underwriters' brokerage customers had to agree to purchase additional shares in the aftermarket at progressively higher prices. The requirement that customers make additional purchases at progressively higher prices as the price of GlobeSpan stock rocketed upward (a practice known on Wall Street as 'laddering') was intended to (and did) drive GlobeSpan's share price up to artificially high levels.

This artificial price inflation, the complaint alleges, enabled both the defendant IPO underwriters and their customers to reap enormous profits by buying GlobeSpan stock at the $5.00 IPO price and then selling it later for a profit at inflated aftermarket prices, which rose as high as $14.38 during its first day of trading.

The complaint also alleges that rather than allowing their customers to keep their profits from the IPO, the complaint alleges, the defendant underwriters of GlobeSpan's IPO required their customers to 'kick back' some of their profits in the form of secret commissions. These secret commission payments were sometimes calculated after the fact based on how much profit each investor had made from his or her IPO stock allocation.

The complaint also alleges that GlobeSpan and Prudential Securities Incorporated, UBS Warburg LLC and Jefferies & Company, underwriters of the secondary offering of GlobeSpan stock, were able to price the secondary offering at an artificially high $100.00 per share due to the continued effects of the foregoing violations.

The complaint further alleges that defendants violated the Securities Act of 1933 because the Prospectuses distributed to investors and the Registration Statements filed with the SEC in order to gain regulatory approval for the GlobeSpan offerings contained material misstatements regarding the commissions that the underwriters would derive from the IPO and failed to disclose the additional commissions.

* * *

October 1, 1993

Prudential Securities Payout Due

By Scott Paltrow, Los Angeles Times

Seeking to end a swarm of government fraud investigations, Prudential Securities has tentatively agreed to pay at least $45 million in fines and an unlimited amount of restitution to customers...

A restitution fund will be established with an initial commitment from Prudential of $320 million...

The money will go mainly to several hundred thousand investors nationwide, who put up $7.7 billion in dozens of limited partnership programs that Prudential marketed aggressively throughout the 1980s.

Sources close to the negotiations said the SEC is expected to continue with a second phase of its investigation focusing on possible action against individual executives, including some who are still senior officials at Prudential, the nation’s fourth-largest brokerage.

Several states, too, are likely to bring civil disciplinary charges against current and former Prudential executives...

As is common in SEC settlements, Prudential will not be required to admit any wrongdoing....

No punitive damages will be paid, but investors could receive back their out-of-pocket losses plus interest, depending on the facts of their individual claims, sources said. . . .

SEC enforcement officials declined to answer any questions about the settlement or investigation....

(For more on the SEC regulators, GO TO > > > Spotting the SEC)

The fines and initial payments to the restitution fund total $345 million, making the package the third largest securities fraud settlement in U.S. history. Drextel Burnham Lambert paid $500 million in 1989 to settle charges related to its junk bond operation, and former Drexel executive Michael Milken paid $600 million in 1990.

The impact on Prudential will be eased by the fact that whatever it pays out in restitution will be tax deductible . . .

Nearly all the partnership programs involved in the investigations and settlement were unsuccessful, with investors’ losses estimated in the billions of dollars.

But the partnerships were extremely profitable for Prudential, bringing in well over $1 billion in commission revenue and management fees.

In numerous civil lawsuits, Prudential has been accused of misleading small investors by claiming that partnership units were as safe as insured bank certificates of deposit and of engaging in financial manipulations to hide losses from investors.

* * *

Reputation Management, 1996:

The Rock’s Tarnished Image

If people at the Prudential Insurance Co. of America could turn the clock back 15 years, to the moment in time when the venerable insurance company acquired the floundering brokerage Bache & Co., probably none of them would do it over again.

The Bache acquisition, presented at the time as a step toward the ideal of offering consumers “one-stop shopping for financial services,” would over the next decade prove to be a disaster for Prudential....

Unfortunately, by the time the Prudential was ready to acknowledge its mistake, the marriage had cost the company billions of dollars in legal settlements, fees and fines and undermined a reputation for integrity that had been a hundred years in the making....

The scandal had its origins in 1981, when the first Reagan tax reform bill and changes in SEC regulations triggered explosive growth in the number of tax shelters available to American investors and opened the door to speculators who saw real estate, energy and airplane-leasing partnerships as a way to limit tax liability. . . .

The marriage was consummated quickly ... and a few months later George Ball, formerly of E.F. Hutton, was named the first head of Prudential Bache Securities.

It was reportedly Ball’s idea that limited partnerships could be marketed to not only wealthy investors seeking tax shelters but also to more mainstream clients interested in traditional income investments.

The marketing of limited partnerships would focus not only on their tax benefits but also on the possibility of providing a hedge against inflation while producing investment income. According to New York Times reporter Kurt Eichenwald, who broke many of the stories pertaining to wrongdoing at Pru Bache, and later detailed the company’s problems in his book, The Serpent on the Rock, this decision set the table for massive fraud. The Direct Investment Group that Ball created ... was, Eichenwald says, “at the center of the scandal....

For executives at the senior reaches of the firm, the flow of cash from the department’s business became personal piggy banks, financing profligate corporate spending, regal lifestyles and even sexual conquest.”...

Unfortunately, many of the deals that Pru Bache put together involved low-quality products priced significantly above even optimistic estimates of their value.

For more than a decade, the Direct Investment Group traded on the Prudential’s Rock-of-Gibraltar image to package and sell billions of dollars worth of dubious investments.

Employees who questioned the ethical or economic premise upon which these deals were based were intimidated into silence or fired. Brokers who refused to push the product were punished....

It was not until the late 80's that the Prudential Bach limited partnerships began to fall apart . . . By the time the true size of the scandal was apparent, more than $8 billion of risky partnerships - most of which had been marketed as safe and secure - had collapsed. . . .

“In the end,” says Eichenwald, “no single brokerage firm, banker, or trader destroyed the financial security of more people than Prudential Bache.”...

The crime was finally visible when, by the thousands, the firm’s clients faced the prospect of losing their homes, their retirements, or their children’s education. Some investors who carefully pinched pennies for decades wound up in bankruptcy.

Scores of Prudential brokers saw their careers, their health, and their lives fall apart because they unwittingly repeated the firm’s lies about the investments.”

Prudential Insurance was experiencing some problems of its own. The company was the subject of a multi-state investigation into charges that its agents have been churning accounts, a practice in which agents pressure policyholders to by new, larger policies. . . . The volume of complaints against Prudential has triggered a 28-state investigation headed by the New Jersey Department of Insurance, and the company is also the subject of several civil lawsuits.

The churning scandal has been compounded by a whistle-blowing incident. Several former Prudential sales managers throughout the country also have filed suit charging that, when they tried to stop churning in their sales offices, they were disciplined and eventually fired by senior company managers.

In a “whistle-blower” suit filed in U.S. District Court in Illinois, former Pru agent Michael Weaver claims he was fired in retaliation for refusing “to participate in fraudulent activities, churning, and/or dealings that were unfair to clients or potential customers” and for reporting Prudential’s “illegal churning activities” to the state insurance department....

“The insurance companies like to portray themselves as victims of a few rogue agents,” says Ronald Parry, a Kentucky attorney who has filed a class-action suit against Prudential. “But at Prudential, the practices were so widespread that I believe the company had to know what was going on.”...

In October 1994, Prudential Securities admitted charges of fraud - an admission that enabled the firm to avoid criminal indictment - and began settling more than $1 billion in claims against it.

The settlement marked the scandal as the costliest in the history of Wall Street.

* * *

National Underwriter, 1/5/98, by Joe Niedzielski: . . . A report by the Florida Attorney General’s office after a nearly two-year probe of Prudential concluded that the company had violated various state civil racketeering statutes. No charges were pressed, however, and the company reached a settlement with the state for $15 million.

“What this investigation has uncovered is that the company is the core of this fraud. Prudential has trained its agents to mislead, misrepresent and defraud policyholders in Florida for years,” the conclusion of an Aug 5, 1996 investigative report states....

The documents also contain testimony from a former Prudential attorney in the Jacksonville regional office, that Prudential CEO Arthur Ryan approved a reported $1.45 million payment to James Helfrich, a former Prudential attorney and consumer affairs and marketing practices director....

The payment was allegedly made because Mr. Helfrich was threatening litigation against the company, according to the former Pru attorney’s testimony. Mr. Helfrich had authored a 1992 memo on financial insurance sales practices, or churning, which suggested an “action plan” to confront prior sales activity....

The former attorney, John Massaro, told Florida regulators during sworn testimony last February that Prudential’s deputy chief legal officer, Deborah Bello-Monaco, told him during a June 25, 1996 conversation that the settlement with Mr. Helfrich was a business decision “that had to be made to avoid having the life company’s top three lawyers from being smeared, that it was too embarrassing and particularly bad timing . . . .

And she said, “We paid him off; he held us hostage,” Mr. Massaro said in his testimony....

* * *

January 19, 1999

From insure.com

“Special Master” in Prudential case turns out to be former counsel for Prudential

The Jacobson vs. Prudential case in California presses on, but with new revelations coming from a concurrent Jacobson vs. Prudential case in Florida....

Prudential had temporarily blocked testimony by whistle-blower and former Prudential attorney Ren Nelson by invoking attorney-client privilege, and Federal Judge Alfred M. Wolin of the U.S. District Court for the District of New Jersey ordered the parties to sort it out in the Florida courts...

Then the week of Jan 11, 1999, Jacobson attorney Ken Chiate discovered that Florida special master Mattox S. Hair – who had been weighing special evidence issues in the case in the Fourth Judicial Circuit Court– was himself formerly employed as outside counsel by Prudential-Bache Securities. Hair had not disclosed this relationship to Jacobson counsel, even though it appears to be a fact of which the plaintiff lawyers should have been aware.

How did this information come to light? Chaite this week discovered an Associated Press story dated Aug 30, 1988, discussing Hair’s representation of Prudential-Bache Securities...

Chaite confronted Hair in person about his undisclosed representation ... suggesting Hair should recuse (or disqualify) himself as Special Master in the case ... where he makes recommendations to the court– including recommendations about the testimony of another former Prudential attorney, Renwick Nelson....

Chiate cited both Florida rules ... and California rules ... stating that a proposed neutral arbitrator must disclose any past attorney-client relationship to a party in the proceeding.

Hair will not comment on the case or his relationship with Prudential.

Hair happens to be co-author of “Ethics Within the Mediation Process” . ... In addition, he is formerly a circuit judge for the Fourth Judicial Circuit of Florida and a former member of Florida House of Representatives and Senate....

For more on the Mediation Process, GO TO > > > Arbitrate This!

* * *

Office of the Chief Accountant:
Regarding Auditor Independence Letter to PricewaterhouseCoopers

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D C. 20549

July 26, 1999

Mr. Nigel Buchanan
PricewaterhouseCoopers
Southwark Towers
32 London Bridge Street
London SEI 9SY

Dear Mr. Buchanan:

You have requested the SEC staff's concurrence with your firm's conclusion set forth in letters dated June 9, and July 9, 1999 that your firm is independent of your client Prudential Corporation plc ("Prudential").

As noted below, the staff is unable to concur with your conclusion.

Investment Management Services

You have represented to the staff in your letters and in meetings with the staff that Prudential provides investment management services to the trustees of a legacy Price Waterhouse LLP ("PW") defined benefit pension plan and that the trustees of the plan are partners in PwC.

Rule 2-01 of Regulation S-X states that, "... an accountant will be considered not independent with respect to any person or any of its parents, its subsidiaries, or other affiliates (1) in which, during the period of his professional engagement to examine the financial statements being reported on or at the date of his report, he or his firm or a member thereof had, or was committed to acquire, any direct financial interest or any material indirect financial interest..." For purposes of interpreting this section, as noted in section 602.02.b of the Codification of Financial Reporting ("the Codification"), "any financial interest in a client, owned by the accountant ... is considered to be a direct interest." And, "[a]s indicated in this section, materiality is not a consideration in the case of a direct financial interest."

Further, as noted in section 602.02.g of the Codification, "direct and material indirect business relationships, other than as a consumer in the normal course of business, with a client ... will adversely affect the accountant's independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client."

The SEC staff position regarding the independence of an auditor under these circumstances is accurately reflected in your correspondence dated July 9, 1999 stating that the "Investment Advisor .. cannot be an attest client of the Firm."

The SEC staff believes that PwC is not independent under circumstances in which Prudential is acting as an investment adviser to the firm.

Unit Linked Insurance Policies

You have represented that Prudential offers, and members of PwC have invested in, unit-linked insurance products where the policy holder pays a premium, a portion of which is used to purchase a death benefit for the policyholder and the remainder is invested and managed by Prudential in unit linked funds. PwC has further represented that the value of the policies is linked to the underlying assets of the policy. You have stated your belief that this arrangement is analogous to the facts set forth in AICPA Ruling 41, Member as Auditor of Insurance Company.

The SEC staff believes that permitting a member to leave on deposit sums with an audit client raises the same independence issues that are raised under similar facts and circumstances where the staff has objected to the independence of the auditor. For example:

   As noted above, and as documented in PwC's correspondence to the staff, an auditor is not independent of an a client that acts as an investment adviser for the auditor. PwC has stated that Prudential manages the investment of the portion of premiums not used to purchase a death benefit for the policyholder. Thus, Prudential appears to be acting as an investment adviser to members that hold investments in unit-linked insurance products.

   The SEC staff has objected to the independence of auditors that allow a broker/dealer audit client to hold the auditor's funds or securities for longer than a normal settlement period. Permitting an insurance company/investment adviser to hold the auditor's cash and securities in a unit-linked fund conflicts with previous SEC staff positions in which the auditor was found to be lacking in independence from a broker/dealer audit client.

You have represented that the unit linked funds appear on the balance sheet of Prudential as "assets held to cover linked liabilities (or the corresponding balance sheet liability associated with the unit-linked policies." As a result, the auditor appears to be placed in the position of auditing the valuation of the respective assets and liabilities that include amounts attributable to the auditor. In essence, the auditor has a direct financial interest in the audit client that creates a lack of independence due to an impermissible mutuality of interest because the advancement of the interest of members of the audit firm would, to some extent, be dependent upon the client's ability to manage and value the members assets."

As noted above, the SEC staff believes that PwC is not independent under circumstances in which Prudential is acting as an investment adviser to the firm with respect to funds that are separately managed in unit-linked investment accounts.

Bookkeeping

You have represented that Prudential sold its Canadian subsidiary and thereafter had no employees in Canada. PwC also represented that PwC Canada performed bookkeeping services for a price that was less than 1% of total audit fees for Prudential. This amount has been permitted under certain circumstances by the SEC Staff as set forth in section 602.02.c.iii of the Codification of Financial Reporting. PwC has also indicated that the service has been terminated. Based on the facts and circumstances, the aforementioned bookkeeping services would not impair the firm's independence.

Contingent Fee

You have represented that PwC received a contingent fee from an entity ("Newco") of which Prudential owns 45% and that Prudential has the right to appoint one of six board members of Newco.

Under Rule 2-01 of Regulation S-X, an auditor would lack independence where the auditor had a direct financial interest in an audit client or any affiliate of the audit client. A contingent fee is viewed by the SEC staff as a direct financial interest that creates an impermissible mutuality of interests between the audit client and the auditor. The staff believes that an auditor lacks independence even if the contingent fee arrangement was with an affiliate of the audit client. The staff does not concur with PwC that Newco is not an affiliate of Prudential.

In this case, PwC indicates that the contingent fee does not cause PwC to lack independence since the fee was immaterial to PwC, and the audit client. However, the staff does not use a materiality test in assessing whether a contingent fee arrangement causes the auditor to lack independence. Consequently, the staff believes that PwC's independence was impaired due to the contingent fee arrangement with Prudential's affiliate.

Investments by Former Partners

You have represented that ownership of investments in audit clients by former partners that continue to share in the profits of PwC is not precluded under applicable independence rules. PwC has represented that it has informed the affected former partners that US independence rules preclude those partners from holding any direct or material indirect financial interests in Prudential, and in Prudential unit trusts (which are not unit-linked insurance policies).

Based on the aforementioned discussion of unit-linked insurance policies, the staff would object to PwC's independence if former partners that continue to share in the profits of PwC hold unit-linked insurance policies in Prudential or its affiliates.

Investments in Prudential Held in Retirement Plan

You have represented that several years ago, C&L acquired Deloitte, Haskins & Sells-UK ("DH&S") and that the DH&S retirement plan was not discontinued. The plan held 292,OOO shares in Prudential and 16,226 shares in Prudential Property Managed Fund (which was not an audit client). PwC has represented that these shares "have recently been disposed of" Based on the facts and circumstances, the investments held in the DH&S retirement fund would not impair the firm's independence.

Summary

Based on the facts and circumstances that you have provided the staff in your letters dated June 9, and July 9, 1999 and in subsequent discussions, the Staff is unable to concur with your conclusion and can provide you with no comfort that you are independent of Prudential under the U.S. independence rules.

In order to comply with the US independence rules, you must undertake the following:

1. Terminate the relationship through which Prudential provides investment management services to the trustees of the legacy PW benefit pension plan.

2. Eliminate any investments by members of PwC in unit-linked insurance products offered by Prudential and any of its affiliates. Also, please provide the SEC staff with a copy of the letter(s) notifying the affected former partners and describe to the staff the procedures that PwC and Prudential will undertake to assure that no affected former partners continue as investors in Prudential.

3. Discontinue providing any services to Prudential and any of its affiliates or investees on a contingency fee basis. Also, please provide the staff with a copy of the PwC policy on contingent fees as well as a description of the quality controls in place to assure that the firm does not enter into contingent fee arrangements with other US and foreign registrants or their affiliates.

You may be aware that where an auditor has complied with home country independence requirements for all periods, the staff has permitted the inclusion of the auditor's reports in an initial registration statement if the auditor was independent under U.S. requirements for at least the most recent fiscal year covered by the reports. You have represented to the staff that PwC was in compliance with the independence requirements applicable in the home country in this instance.

This letter outlines steps that PwC must take to comply with U.S. independence rules. If PwC completes those steps before beginning its audit of Prudential's 1999 financial statements, and Prudential's registration statement includes audited financial statements for a period in 1999 of not less than nine months, the staff will not object to the inclusion of PwC's audit reports for all periods presented.

This should not be construed as a conclusion by the staff that PwC was independent for any period prior to January 1, 1999....

Sincerely,

Lynn E. Turner
Chief Accountant

For more on PricewaterhouseCoopers, GO TO > > > What Price Waterhouse?


 

From The Cheating of America: How Tax Avoidance and Evasion by the Super Rich Are Costing the Country Billions, by Charles Lewis and Bill Allison:

HAVEN’S GATE

Burton Wallace Kanter was a pioneer in the world of offshore companies and banks. Unlike his modern counterparts, with their Web sites and flashy advertisements .... Kanter never advertised his services. He was discreet – a trait that his clients no doubt appreciated. And he was wildly successful.

From its founding in 1964, Castle Trust Ltd. was a shady affair. Bahamian law required a corporation to have five directors; Castle’s original board included two fictitious people ... Throughout the course of its 14-year existence, Castle Bank was primarily a vehicle for tax avoidance and evasion.

A complete list of those who made use of the bank’s secret accounts was never revealed, but some of those identified as having deposits there included some of the blue chip names in American commerce. Members of the Pritzker family, owners of the Hyatt Hotel chain and Royal Caribbean Cruise Lines, Ltd, had accounts there, as did Hugh Hefner, of Playboy fame, who was involved in casino deals with the Pritzkers. Tony Curtis, the actor, had an account. Henry Ford II, his wife, Christina, and several top Ford Motor Company executives, including Lee A. Iacoccca, used the bank to hold their shares of a land development project on what was then the sleepy Caribbean island of St. Martin. . . .

Castle Bank came to the attention of the IRS in 1972, when federal narcotics agents working in California requested information on the institution. They had arrested one Allan George Palmer after watching him unload 900 pounds of marijuana from a plane. Palmer had cashed three checks for $22,500 that had been drawn from commercial accounts that Castle Bank maintained at the American National Bank and Trust Company of Chicago. IRS officials found that the signature cards for Castle Bank listed nine names, including its president, A. Goodling, the fictious A. Alipranti, Florida attorney Paul Helliwell, and Burton Kanter.

IRS agents interviewed Kanter, who claimed to know almost nothing about the affairs of Castle Bank. Later investigation would prove that he lied about the extent of his knowledge, yet he never suffered any consequences for misleading federal investigators or for operating what the IRS came to believe was a money-laundering scheme and a tax-evasion scheme. . . .

Kanter has always liked to blend business with tax avoidance. In the 1970s, for example, he became part of a massive kickback scheme with two executives from the Prudential Insurance Company, Claude Ballard and Robert Lisle.

Ballard and Lisle managed Prudential’s real estate investments, and could choose companies that the insurer hired. Ballard was senior vice of equities; Lisle was president of PIC Realty Corporation, Prudential’s real estate subsidiary. Their company controlled upward of $20 billion worth of properties across the United States, and Ballard and Lisle decided who developed and managed those assets. As a result, an introduction to the two could be worth millions of dollars to business.

Kanter met them sometime in the late sixties or early seventies, when the Hyatt Corporation was involved in negotiations with Prudential over the management of the hotel. The three concocted a scheme to get kickbacks from contractors and management companies in exchange for the lucrative Prudential business. Kanter found some of the willing participants in the scheme and hid the payments using yet another elaborate series of companies and trusts. In exchange for his services, he got 10 percent of the kickbacks. Ballard and Lisle split the rest evenly.

Kanter turned to some of his old clients for business. The Hyatt Corporation, owned by the Pritzker family, got Prudential business. So did Bruce Frey, who ran BJF Development, Incorporated, a large real estate developer based in Illinois. (In 1993, Frey and Kantger tried to buy the Miami Dolphins.) The other participants in the kickback scheme were John Eulich, whom Kanter met through Abraham Pritzker sometime in the late sixties or early seventies. William Schaffel, who ran W.D. Schaffel & Company, a New York real estate developer and mortgage broker; J.D. Weaver, who managed Hyatt properties; and Kenneth Schnitzer, a Houston-based real estate developer.

The five individuals and their companies earned millions of dollars’ worth of contracts, thanks to their connections to Ballard, Lisle, and Kanter. In return, over a period starting sometime in the 1970s and lasting until 1989, they paid $13 million to four companies controlled by Kanter – Investment Research Associates and its subsidiaries, KWJ Company, Zeus Ventures, and The Holding Company.

Lisle left Prudential for Travelers Insurance Company in 1982, where he did virtually the same type of work. He also continued to participate in the kickback scheme until his retirement in 1988. He died on September 17, 1993.

The IRS ... discovered the scheme. Agents audited Investment Research Associates’ 1987 tax returns...

Agents spent years unraveling the scheme, covering office walls with ad hoc flow charts showing the participants, the transactions, bank deposits, loans back and forth between related parties, and the other minutiae of the scheme. The Service issued more than 28 Notices of Deficiency to Lisle and his estate, as well as to Ballard, Kanter, and the companies Kanter used to hide the kickbacks. . . .

The case went to trial on June 14, 1994, before Special Trial Judge Iring D. Couvillion. There were nearly five weeks of testimony, producing a transcript of more than 5,400 pages. The briefs ran to more than 4,600 pages, and the exhibits totaled hundreds of thousands of pages. Couvillion then weighed the evidence.

For five years.

On December 15, 1999, he issued his ruling – adding another 606 pages to the case file....

He went into great detail about various projects for which “the Five” – the companies to which Lisle and Ballard steered business – won contracts. He wrote at length on the alleged kickbacks they paid to the three conspirators...

He described the evidence presented on the complicated scheme to cover up the payments. . . . “As a result of the intended confusion created by similar names, Kanter could substitute on entity for another,” he wrote....

Kanter disputed the judge’s ruling....

As of this writing, Couvillion had yet to determine Kanter’s tax liability. Whatever the amount, if Kanter agrees to pay it, it will represent one of the few times in his life he’s written a big check to the Treasury.

Kanter, who helped his well-heeled clients avoid their income taxes, is a master of avoiding his own. He paid nothing from 1979 to 1990. . . .

SWEET CHARITY

Saving a few million dollars in taxes or swapping contributions with another charity is small potatoes compared to the con game John G. Bennett Jr. ran in Philadelphia.

Bennett founded the Foundation for New Era Philanthropy in 1989; a few years later, he said his organization would help fellow nonprofit groups prosper through the donations of “anonymous benefactors,” with the promise of doubling within six months any amount a group sent to him.. A charity that paid Bennett’s group $1 million would soon be paid $2 million, thanks to Bennett’s roster of wealthy donors who wished to make their gifts in secret.

For a time, Bennett was the toast of his city, drawing accolades from the local press for his charitable works. . . .

While he was praised for bringing a religious fervor to his fundraising, Bennett was actually running an elaborate pyramid scheme. He told the charities he suckered that New Era had a board of directors, and that their contributions were being held in a “quasi-escrow” account at Prudential Securities.

In fact, Bennett was the sole director of New Era, and the donations were being used to secure a loan Prudential made to him.

As for the wealthy philanthropists who wished to remain anonymous– the Inquirer reported that Bennett kept the names of all 125 of them locked in a safe-deposit box – there were none. Just as in the original Ponzi scheme, Bennett made good on his promises to his earlier “investors” by paying them off with money he raised from the newcomers. In the end, his foundation bilked $135 million out of more than 500 charitable groups. . . .

When New Era filed for bankruptcy protection in May 1995, it reported only $80 million in assets and more than $550 million in debts owed to the various charitable groups that had given it their money. While Bennett was in court facing multiple federal charges, the court-appointed bankruptcy trustee for New Era reached a settlement with the defrauded charities to repay a portion of their lost contributions.

Prudential also settled before the charities could bring a suit, agreeing to pay $18 million for its role in the scandal.

In 1996, Bennett was indicted on charges of mail, bank, and wire fraud, money laundering; tax evasion; and making false statements to the government. Federal investigators charged that Bennett had diverted hundreds of millions of dollars from charities to his personal businesses rather than depositing the money in escrow accounts or investing it in low-risk government securities, as he had promised to do. . . . He pleaded no contest and was sentenced to 12 years in federal prison.

Bennett’s case may be extreme, but it’s by no means the only example of an individual spending money destined for the public good on his own private interests. While most tax-exempt groups follow the rules and exist for charitable or educational purposes, the IRS recognizes that nonprofit abuse is an emerging issue.

“The large amount of money involved in employee plan trust funds and tax-exempt organizations provides both a temptation and an opportunity for fraud,” the Service noted in a 1999 publication....


 

The Catbird chronicles some other Prudential connections worthy of note:

 

         Prudential Insurance Co. is the 4th largest institutional investor in Chubb Group.

         Prudential Securities is the 6th largest institutional investor in Putnam, a Marsh & McLennan subsidiary.

         Prudential Insurance Co. is the 6th largest institutional investor in AXA Financial.

         AXA Financial is the #1 institutional investor in Goldman Sachs.

         AXA Financial is the 3rd largest institutional investor in Citigroup.

         AXA Financial is the 3rd largest institutional investor in American International Group.

         AXA Financial is the 8th largest institutional investor in scandal-ridden Columbia/HCA

         AXA Financial is the #1 institutional investor in Loral Space.

         Prudential Insurance Co. is the 6th largest institutional investor in Loral Space.

         Prudential Insurance Co. is the 4th largest institutional investor in Columbia/HCA

         Columbia/HCA’s financial restructuring was handled by Goldman Sachs.

         Bishop Estate invested millions in Columbia/HCA.

         Bishop Estate owned approximately 10% of Goldman Sachs before Goldman’s IPO.

         Bishop Estate was the #1 institutional investor in Underwriters Capital (Merritt) Bermuda.

         Prudential handles Bishop Estate’s pension plan.

         Prudential was engaged in other non-insurance business deals with Bishop Estate.

         Marsh & McLennan is Bishop Estate’s insurance broker.

         Marsh & McLennan was the 2nd largest investor in Underwriters Capital (Merritt) Bermuda.

         Citigroup is the 3rd largest institutional investor in Marsh & McLennan.

         Citigroup is the 3rd largest institutional investor in Chubb Group (Federal Insurance Co., etc.)

         Citigroup is the 10th largest institutional investor in American International Group.

         Putnam (Marsh & McLennan) is the 2nd largest institutional investor in Chubb Group.

         Putnam is the 6th largest institutional investor in Citigroup.

         Putnam is the 5th largest institutional investor in AXA Financial.

         Putnam is the 3rd largest institutional investor in Starwood Hotels.

         Goldman Sachs is the 10th largest institutional investor in Starwood Hotels.

         Wellington Management Co. is the 9th largest institutional investor in Starwood Hotels.

         Wellington Management Co. is the #1 institutional investor in Marsh & McLennan.

         Putnam (M&M) is the #1 institutional investor in Harrah’s Enterprises.

         Putnam (M&M) is the 6th largest institutional investor in Isle of Capri Casinos.

         Goldman Sachs is the 3rd largest institutional investor in Isle of Capri Casinos.

         etc., etc., etc.


 

From No One Left to Lie To: . . . The late Les Aspin, Clinton’s luckless and incompetent secretary of defense, once told me that he had planned to make a brief personal appearance in Sarajevo, in order to keep some small part of the empty campaign promise made by Clinton to the Bosnians, but had been ordered to stay at home lest attention be distracted from “Hillary’s health-care drive.” . . .

Perhaps you remember the highly successful “Harry and Louise” TV slots, where a painfully average couple pondered looming threats to their choice of family physician. As Mrs. Clinton put it in a fighting speech in the fall of 1993: “I know you/ve all seen the ads. You know, the kind of homey kitchen ads where you’ve got the couple sitting there talking about how the President’s plan is going to take away choice and the President’s plan is going to narrow options, and then that sort of heartfelt sigh by that woman at the end, ‘There must be a better way’...

What you don’t get told in the ad is that it is paid for by insurance companies.”...

It is fortunate for the Clintons that this populist appeal was unsuccessful. Had the masses risen up against the insurance companies, they would have discovered that the four largest of them — Aetna, Prudential, Met Life, and Cignahad helped finance and design the “managed-competition” scheme which the Clintons and their Jackson Hole Group had put forward in the first place....

Dr. David Himmelstein, one of the leaders of the group, met Mrs. Clinton in early 1993. It became clear, in the course of their conversation, that she wanted two things simultaneously: the insurance giants “on board,” and the option of attacking said giants if things went wrong....

The “triangulation” went like this. Harry and Louise sob-story ads were paid for by the Health Insurance Association of America (HIAA), a group made up of the smaller insurance providers. The major five insurance corporations spent even more money to support “managed competition” and to buy up HMOs as the likeliest investment for the future.

The Clintons demagogically campaigned against the “insurance industry,” while backing — and with the backing of — those large fish that were preparing to swallow the minnows.

This strategy, invisible to the media . . . was neatly summarized by Patrick Woodall of Ralph Nader’s Public Citizen:

“The managed competition-style plan the Clintons have chosen virtually guarantees that the five largest health-insurance companies — Aetna, Prudential, Met Life, Cigna, and The Travelerswill run the show in the health-care system.”...

And Robert Dreyfuss of Physicians for a National Health Program added:

“The Clintons are getting away with murder by portraying themselves as opponents of the insurance industry. It’s only the small fry that oppose their plan. Under any managed-competition scheme, the small ones will be pushed out of the market very quickly.”...

Having come up with a plan that embodied the worst of bureaucracy and the worst of “free enterprise,” and having seen it fail abjectly because of its abysmal and labyrinthine complexity, the Clintons dropped the subject of health care....

Since they had been gambling with other peoples’ chips, the First Couple felt little pain....

The same could not be said for the general population, or for the medical profession, which was swiftly annexed by huge HMO’s like Columbia Sunrise.

Gag rules for doctors, the insistence on no-choice allocation of primary “care givers,” and actual bonuses paid to physicians and nurses and emergency rooms that denied care, or even restricted access to new treatments, soon followed.

So did the exposure of extraordinary levels of corruption in the new health-care conglomerates.

Until the impeachment crisis broke, no comment was made by the administration about any of these phenomena, which left most patients and most doctors measurably worse off than they had been in 1992. . . .


 

December 22, 1997

THE HEAT IS ON CLINTON’S MONEYMAN

Laborers.org

Controversy is swirling around fund-raiser Terry McAuliffe....

As finance chairman for the Clinton/Gore Reelection Committee, McAuliffe pulled in a staggering $43 million in eight months. That made him the front runner to head the DNC - a job he turned down. Instead, McAuliff has turned his attention to his home building, insurance, and marketing businesses....

But McAuliff is finding that it’s not easy putting politics behind him. His name has been linked to the fund-raising scandal that resulted in the disqualification of Teamsters President Ronald Carey....

The U.S. Attorney’s Office in Washington is trying to learn more about how McAuliffe earned a lucrative fee in helping Prudential Insurance Co. of America lease a downtown Washington building to the government. Prudential just settled a civil case involving that lease for over $300,000 without admitting any liability....


 

From Red Mafiya: . . . The FBI got particularly lucky in the autumn of 1994 when Bank Chara in Moscow collapsed under suspicious circumstances, costing it depositors more than $30 million.

Some $3.5 million of the money had been invested in Summit International, a New York investment house that had been founded by two of Chara’s Russian board members, Alexander Volkov and Vladimer Voloshin. The Summit executives were no strangers to organized crime. Volkov, Summit’s president, is an ... ex-KGB officer with a noxious temper. Voloshin, Summit’s VP, is a member of the Lyubertskaya crime family in Moscow, where he had once mixed up a target’s address and torched the wrong apartment, as well as its female inhabitant.

Their unlicensed Wall Street investment firm was actually a giant Ponzi scheme, preying mostly on Russian emigres who were promised up to 120% per annum returns on phony companies with names like “Silicon Walley.”

To cover itself in a cloak of fiscal respectability, Summit entered into a contract with Prudential Securities vice president Ronald Doria to serve as its financial adviser.

(Doria was later terminated by Prudential, and took the Fifth, refusing to testify, during a National Association of Securities Dealers arbitration hearing.)

Between 1993 and 1995, Volkov and Voloshin took in $8 million from investors, spending nearly the entire sum on their own lavish entertainment: beautiful women, long weekends in the Caribbean, and gambling junkets to Atlantic City. In one night alone, Voloshin lost $100,000 at Bally’s Hotel, he covered it with his investors’ money.

In the spring of 1995 Bank Chara’s new president, Roustam Sadykov, flew to New York to ask Summit’s directors to return the bank’s missing funds. When the men refused, Sadykov turned to (Vyacheslav Kirillovich) Ivankov to collect the debt....

When Ivankov and two henchmen paid a visit to Summit’s Wall Street offices, Volkov and Voloshin fled in terror to Miami. But Ivankov’s men caught up with them when they returned to Manhattan, kidnaping them at gunpoint from the bar of the Hilton Hotel and forcing them to sign a contract promising to pay one of Ivankov’s associates $3.5 million.

“You understand who you are dealing with?” snarled Ivankov to the Summit officials....

As an inducement to honor their commitment, Voloshin’s father was stomped to death in a Moscow train station....


 

May 2, 1997

Weiss Recommendations to Prudential Policyholders

Weiss Ratings

If you feel that you were misled by your Prudential insurance agent, then you should undoubtedly pursue relief under the Alternative Dispute Resolution Process. Without going to the expense of filing your own lawsuit, this is the only way you will recoup the money you feel you were cheated out of....

In November 1996, 43 states adopted a Policyholder Remediation Plan designed to compensate more than ten million policyholders of Prudential Insurance Company of America who may have been the victims of misleading sales practices.

After some modification, the Remediation Plan has since been adopted by all 50 states, and Prudential has agreed to pay out a minimum of $412 million....


 

CHARLES KEATING AND THE S&L CRISIS

By Brian Downing Quig

From tripod.com, posted by Ron Bell (9/11/92)

Charles Keating, the godfather of the S&L scandal, now sits behind bars, perhaps for the rest of his life. He has been assessed fines exceeding 3.6 billion dollars in just one civil action. Federal prosecution has not yet begun. Yet after several books and tens of thousands of column inches of newsprint, the major features of the Keating story remain, until now, untold. For example, General John Singlaub and the CIA's Latin American military campaigns, Carl Lindner's purchase of UNITED BRANDS and the U.S. Honduran aid program, extensive BCCI transactions, PRUDENTIAL INSURANCE, and Keating's attempt to get a strangle hold on the water supply of Arizona are key essential features of Keating's story that have not had national exposure.

An army of federal regulators, prosecutors, attorneys and judges have combed the affairs of Charles Keating. So why haven't the major features of his operations come to light? Having a brother who was vice president of ASSOCIATED PRESS helped keep items off the wire service. The ownership of Phoenix's two city newspapers helped even more. The ARIZONA REPUBLIC and the PHOENIX GAZETTE are owned by the Dan Quayle family.

The Vice President's involvement in the affairs of CIA Latin American programs provided plenty of incentive for Phoenix newspapers to keep the Keating affair as quiet as possible. And Carl Lindner, a much bigger fish than Charles Keating in these affairs, holds the largest stock interest in KTSP TV, the CBS television affiliate in Phoenix.

Keating is a man who has done favors for many powerful individuals including Presidents Ford, Reagan and Bush. Steven Pizzo, author of INSIDE JOB, one of the best books on S&L looting, supplied Barbara Honegger, author of OCTOBER SURPRISE, a Defense Intelligence Agency telex indicating that the alleged OCTOBER SURPRISE airplane for William Casey's and Heinrich Rupp's Paris trip was arranged by Kenneth Qualls, formerly the chief pilot of Charlie Keating's AMERICAN CONTINENTAL CORPORATION. This and other high level CIA favors may suggest even more sinister reasons why the major features of the Keating story never made it to print.

Savings and Loans were originally chartered to provide home mortgage loans. When Ronald Reagan deregulated the industry, high rollers were free to attempt more ambitious projects with the federally insured deposits. No one was more ambitious than Charlie Keating and no one lost more of the tax payer's money.

To date taxpayers have been assessed $500 billion for the S&L looting – $2 1/2 billion for Charlie's sins alone.

After providing less than a dozen home loans, Keating set out to build THE PHOENICIAN, a $300 million luxury resort hotel financed 55% by his newly acquired S&L, LINCOLN SAVINGS, and 45% by the King and Queen of Kuwait.

November of 1989, six months after Keating's parent company AMERICAN CONTINENTAL finally hit the skids, the Feds took over the PHOENICIAN RESORT in a surprise 1:00 AM raid. At 4:00 AM Keating was summoning bellmen to a side entrance where 24 cartons of files were loaded into Keating's recreational vehicle. When asked about this by a member of the local press the Feds responded that they knew of this and Keating was allowed to take these files because "they were his personal correspondence --- like letters to his family." The federal investigation of Keating was totally compromised from beginning to end.

If the Feds had done even the most elemental examination of the business affairs of Charles Keating, this is what they would certainly have found: On November 26, 1980, just two weeks after the election of Ronald Reagan and George Bush, Keating purchased the property located at 2735 East Camelback Road for his AMERICAN CONTINENTAL CORPORATION Headquarters. For this he paid $3,083,000 to the < NAME OMITTED > DEVELOPMENT CORPORATION. During the period from 1980 to 1984, Maricopa county court records show that sixty civil suits were filed against < NAME OMITTED >....

< NAME OMITTED > purchased what would soon become the AMERICAN CONTINENTAL Headquarters property April 2, 1979, from James E. Patrick II and Herman Chanen for $550,000. The sale to Keating represented a bump of $2.5 million in only 8 months! What is more, Patrick II and Chanen are not stupid when it comes to real estate.

Patrick II is the son of James Patrick, who at this time was President of VALLEY NATIONAL BANK, Arizona's largest bank. Herman Chanen owns the largest construction company in Phoenix and at sale time was Chairman of the State Board of Regents which oversees all state universities.

These men represented the very pinnacle of the Phoenix business establishment. Soon after the Keating deal, James Patrick Sr. retired to become president of ROYAL PETROLEUM in Kuwait, a country closely connected to Charlie's business affairs.

September 19, 1985, Keating received a $5 million loan on this property from PRUDENTIAL INSURANCE COMPANY, a bump of another $2 million. This was a one payment note that was due in total October 1, 1990. The note was secured with nothing more that the property which had been purchased for $3,083,000. When Keating filed Chapter 11 in April of 1989 this $5 million was added to the rest of the money that just evaporated.

Why were these big business interests coming forward to set Charlie up in business? PRUDENTIAL is a big player in this. Not only was George Bush's father, Prescott Bush, on the board of Directors of PRUDENTIAL but Ronald Reagan was one of the largest stockholders.

It was PRUDENTIAL that owned the land upon which Herman Chanin built the lavish shopping center, BILTMORE FASHION SQUARE, which is located just across the street from Keating's Headquarters.

One month after the PRUDENTIAL loan, Keating really became bold when he purchased the property adjoining the HQ property for $13,000,000 for the Arizona branch of LINCOLN SAVINGS! . . .

The RESOLUTION TRUST CORPORATION (RTC) after taking over LINCOLN SAVINGS moved its Arizona operations to this property. They did this to protect Keating. Keating never had clear title to this property. It can not be sold. The RTC attorneys have been presented with all this information as have the attorneys for the bondholders. They have never as much as made a phone call in response!

Why all this high level protection and why would these big business interests provide Keating all this money? Some answers to these questions lie in Keating's origins.

Charles Keating started out as an attorney for Carl Lindner, the original owner of AMERICAN CONTINENTAL CORPORATION. According to UC Berkeley professor Dr. Peter Dale Scott, Carl Lindner is a well documented profiteer off the Vietnam war. Lindner is a much bigger player than Keating.

According to Peter Brewton, the star reporter for the HOUSTON POST whose hard hitting exposes have linked the CIA to the looting of 22 other S&Ls, Lindner owned 7 failed S&Ls but has gone virtually unmentioned in regards to the S&L looting scandal. Lindner is reported to be one of the wealthiest men in America and a top financier of the CENTRAL INTELLIGENCE AGENCY.

When Gorbechev came to the United States he visited Carl Lindner. At the same time as Keating was purchasing the AMERICAN CONTINENTAL HQ property, Lindner was transferring almost the total assets of his AMERICAN FINANCIAL CORPORATION (a private company requiring no stockholder reports) into a Honduran company, UNITED BRANDS, taking UNITED BRANDS from a publicly traded to a private company.

UNITED BRANDS was formed when UNITED FRUIT, a CIA front prominent in several Latin American coups, was merged with a second company. CHIQUITA BANANAS is one of UNITED BRANDS well know brand names.

On the deed of Keating's HQ property it stated "When recorded mail to AMERICAN CONTINENTAL 2621 East Camelback Road, Suite 150, Phoenix, Arizona." This was just across the hall from General John Singlaub's U.S. COUNCIL FOR WORLD FREEDOM, the American affiliate headquarters of the WORLD ANTI-COMMUNIST LEAGUE.

General Singlaub's long CIA career goes all the way back to when he was an OSS agent under the direction of William Casey in France and China during WWII. By purchasing UNITED BRANDS Carl Lindner set himself up to become the world's greatest financial beneficiary of the CONTRA/HONDURAN aid program which poured billions in U.S. aid into Honduras to the direct enrichment of Lindner's plantations. Did Lindner send his water boy, Charles Keating, out to Phoenix to facilitate the Contra war with General Singlaub so that Lindner could multiply his fortune?

The summer preceding Keating's purchase of his headquarters property, Keating headed the media relations group for the JOHN CONNALLY FOR PRESIDENT campaign. With Keating in this section was Jim Brady (soon to become Ronald Reagan's Press Secretary) and Joyce Downey. Upon arriving in Phoenix, Downey went across the hall to become General Singlaub's top executive. Former Texas Governor Conally's son Mark later became an AMERICAN CONTINENTAL executive after serving as an aide to "Keating Five" Senator John McCain.

In a very complicated way all this bleeds into Keating's transactions with BANK OF CREDIT AND COMMERCE INTERNATIONAL (BCCI). It is beyond dispute that before it was exposed, BCCI was the largest corporate crime network the world had ever known.

Even TIME MAGAZINE ran a cover story explaining how BCCI had become the favored means of moving dirty money for not only the Medullin Cocaine Cartel, but for the PLO, MOSSAD, Abu Nadal and the CIA as well as various countries like Saudi Arabia and North Korea.

For anyone looking for the possibilities that Keating was laundering illegal funds for Singlaub's Contras campaign, any transactions with BCCI would set off all kinds of bells and whistles.

In early 1986 Keating met a Pakistani in Switzerland named Abbas Gokal. Gokal belongs to a family of shipping magnates who started the downfall of BCCI by defaulting on $700 million in loans. Gokal introduced Keating to Alfred Hartmann, a BCCI director and president of the Bank's Geneva branch.

Steven Pizzo reported in the NATIONAL MORTGAGE NEWS that Hartmann provided $3 billion in loans to Saddam Hussein for nuclear, chemical and ballistic missile programs just preceding the Gulf war and is the director most closely linked to the laundering of Medullin Cartel drug money.

In 1986, Keating, Hartmann and other BCCI directors met in London, Paris, Zurich, Phoenix and the Bahamas where they founded a corporation known as TRENDINVEST. All this was well known by lower level federal regulators who could not get an appropriate response from higher ups.

In testimony before the HOUSE BANKING COMMITTEE a federal regulator, John J. Meek, testified that "AMERICAN CONTINENTAL had no records of Keating's secret role in TRENDINVEST. Regulators learned of the partnership only from an offhand remark by an AMERICAN CONTINENTAL executive."

Keating invested $17.5 million into this company without even informing the board of directors of AMERICAN CONTINENTAL.

Meeks went on to detail an unending train of baffling Keating transactions which included $25.5 million to DIA HOLDINGS, a Netherlands company, $10 million to SOUTHBROOK HOLDINGS, a Panamanian company, $25 million to GFTA, a West German company – all deals that regulators never figured out.

In summary, did Keating have both the motive and the opportunity to launder illegal funds for CIA operations in Latin America and elsewhere? Yes. Yes. Yes.

It is worth mentioning that when Keating moved out of suite 150, POST\NEWSWEEK moved in. Remember, this was just across the hall from where General John Singlaub ran the Nicaraguan Contra campaign. This was the operation that led Ollie North and General Secord into so much temptation. With the parade of mercenaries that processed through Singlaub's office one must conclude that POST\NEWSWEEK was one among many news organizations that never had the slightest inclination to cover any of these stories.

In as much as an animal is undefinable apart from its environment, it is worth analyzing the political setting of Charles Keating. During the high points of Keating's reign the big man in Arizona was Kemper Marley. Marley was the first and only billionaire in Arizona. His wealth was based originally on a liquor monopoly conferred upon him by Sam Bronfman of the SEAGRAMS family.

In Arizona Marley was all powerful.

In 1948, fifty-two employees of Kemper Marley's wholly-owned company, UNITED LIQUOR, went to prison on federal liquor violations – including Gene Hensley, the father-in-law of Arizona Senator John McCain.

Gene Hensley was Kemper Marley's UNITED LIQUOR general manager. On the basis of so many prosecutions some people might feel UNITED LIQUOR could qualify as organized crime. The slick attorney who kept Marley out of this trial and sent McCain's father-in-law to prison in his place was William Rehndquist – currently the Chief Justice of the U.S. Supreme Court.

It was the judgement of the court that Gene Hensley would be prohibited from ever working in the liquor industry. Of course such judgments meant nothing to Marley. When Gene Hensley got out of prison Marley arranged a BUDWEISER distributorship for Hensley which is now in the hands of Senator John McCain and reported to be worth $50 million!

The best source for an introduction to the environment of total political corruption in Arizona is the book, THE ARIZONA PROJECT: HOW A TEAM OF INVESTIGATIVE REPORTERS GOT REVENGE ON DEADLINE. In graphic detail journalist Michael Wendland links the most prominent people in Arizona with various organized crime king pins.

Wendland was part of the group called INVESTIGATIVE REPORTERS AND EDITORS who came to Phoenix in the wake of the fatal car bombing of the ARIZONA REPUBLIC's investigative reporter, Don Bolles.

It was the conclusion of this group that Marley, by far the wealthiest man in Arizona, was behind this murder.

According to intelligence sources of the Phoenix police, who prepared a background profile of Kemper Marley the week following the Bolles murder, Marley was at one time directly connected to the remnants of the old Al Capone mob.

When Marley died July 1990 he owned 5 square miles of Carefree – the highest priced real estate in Arizona. The smallest lot in this most exclusive township is zoned for one acre. By some coincidence the Tax Accessor made the same mistake evaluating Marley's properties as he did on Charlie Keating's properties. This oversight was saving Marley a million dollars a year. Of course the official investigation showed no wrongdoing in either case.

For the last 45 years Marley bankrolled the Republican Party which doled out Marley's great wealth to a slate of Republican candidates who were almost universally successful in obtaining high political office. Marley was able to control the Democratic party as well. Every current congressman and every senator in Arizona owes his position to the Marley machine.

These office holders include the "Keating Five" Senators John McCain and Dennis DeConcini as well as former State Attorney General, Bob Corbin.

At one point Marley served as Chairman of the Board of the VALLEY NATIONAL BANK. When Bugsy Siegel, on instructions from Meyer Lansky, built the FLAMINGO CLUB, Las Vegas's first casino, the money was borrowed from the VALLEY NATIONAL BANK.

Al Lizanetz, who served as Kemper Marley's public relations man for 20 years, is one of the richest sources for background on the liquor magnate. The Bolles murder was part of a package deal that was to include a hit on Lizanetz.

According to Lizanetz, the Marley machine placed the highest priority on placing lawyers in all the key state and municipal positions. The Arizona State Attorney General during the Keating era, Bob Corbin, worked formerly for Marley in the insurance industry in the 1950s.

Corbin accepted a $55,000 campaign contribution from Charles Keating in a race where he was unopposed. Since Corbin did not have to spend the money in the campaign he got to keep the $50,000 when he retired. This is significant since S&Ls are state chartered institutions and it was therefore the responsibility of State Attorney General Corbin to oversee Keating's operations.

Marley placed his people in the top positions of the Department of Public Safety. The county prosecutor was also key to him. Lizanetz claims that Marley recruited Eugene Pullium to come to Phoenix to start the ARIZONA REPUBLIC/PHOENIX GAZETTE, the monopoly newspaper which has succeeded in covering up these matters.

Eugene Pullium is the grandfather of Dan Quayle.

Dan Quayle grew up in the Phoenix suburb of Paradise Valley living just next door to the founder of the JOHN BIRCH SOCIETY, Robert Welsh. Quayle's parents were the local JOHN BIRCH coordinators.

Marley's mentor was Sam Bronfman, the progenitor of the SEAGRAM’S empire. When Sam Bronfman visited Marley in Arizona he came in the company of Al Capone. Lizanetz claims that Jack Ruby, assassin of Lee Harvey Oswald, was also on the Bronfman payroll.

There may be something to this since Louis Bloomfield, the family attorney for the Bronfmans, was the chairman of the board of PERMENDEX, the Italian company whose board also included Clay Shaw, the man prosecuted by District Attorney James Garrison for the murder of President Kennedy.

Many have suggested that Charles Keating fell out of favor with the powers that be and was set up. This is clearly not so. Ironically, after issuing millions in bribes, the downfall of Keating's empire began and ended with one minor public official who was not for sale. Charlie was playing fast and loose with the rules but he did have his end game well planned.

In order to buy time for his failing company, Keating resorted to selling AMERICAN CONTINENTAL bonds through the affiliates of his S&L, LINCOLN SAVINGS. Telephone solicitors were paid to call LINCOLN CD holders just prior to expiration dates and advise them to roll over their investments into ACC bonds. This was good for $230 million of keep alive money.

While the higher rate of interest was mentioned, the fact that these bonds were not federally insured was not. But these minor infractions would all be covered by Keating's most grandiose of all grandiose schemes.

The most precious resource in Arizona is water. Keating was going to pay off his bondholders with the profits he was going to make through his near successful attempt to monopolize the water supply for the city of Phoenix!

In Arizona there are five water tables from which water can be pumped – an enterprise known as water farming. Keating arranged a $200 million dollar loan through LINCOLN SAVINGS for Ron Ober, Senator Dennis DeConcini's campaign manager.

The grand plan was for Ober to purchase all the land suitable for water farming in La Paz county just south of Phoenix that Keating did not already own. Then Keating engineered a bill for the Arizona legislature that stipulated that the city of Phoenix would be legally obligated to purchase 100% of Keating's and Ober's water before they could purchase a drop from anyone else!

Since Keating and Ober were planning to pump a million acre feet of water a year at a thousand dollars an acre foot that meant profits in the hundreds of millions – far more than was necessary to pay off the bondholders. In fact Keating and Ober would have been well on their way to Rockefeller status wealth.

Since Senator DeConcini had purchased land in the other five suitable water tables he would have made out ever better.

This plan was probably conceived by the more cautious DeConcini who intended to use Keating and Ober for stalking horses for his own business interests. Such grandiose scams can only be attempted when one can count on the local media to keep secrets and law enforcement to look the other way.

Despite some obstreperous lower level officials at the Federal Home Loan Bank Board everything was going like clockwork for Keating. While everyone slept and no one even heard of this water legislation, Keating's bill sailed through the Arizona House of Representatives in a record 2 days. It would have done the same in the state senate except for one man – State Senator Jerry Gilespie.

Another man in Jerry's position could have parlayed for a suit case full of hundred dollar bills. But Jerry killed the bill without wasting a heart beat. In the next senate election a massive amount of funding showed up for Jerry's opponent. Today Jerry heads up the BO GRITZ FOR PRESIDENT CAMPAIGN in Arizona.

This fascinating water story made it onto the cover of the November 1989 issue of PHOENIX MAGAZINE under the very appropriate title PARASITES IN OUR WATER.

This unbelievable account of greed and corruption was believable only because it was written by 5-term ex-congressman Sam Steiger. Even so, no wire services picked it up. This article is the first national coverage of Keating's failed end game.

Things still looked rosy on May 20, 1988 when Keating threw a lavish champagne party at his Headquarters celebrating what Keating imagined to be his final victory over the Federal Home Loan Bank Board. Keating always kept magnums of Dom Pernon chilled for special occasions. FHLBB examiners in San Francisco had been motioning to close down LINCOLN SAVINGS. Thanks to backing from John McCain and Dennis DeConcini and the other "Keating Five" senators LINCOLN SAVING's FHLBB files had that day been moved to Washington D.C. where they were guaranteed to receive much more favorable treatment.

At the height of this rancorous party, Keating ripped off his shirt to reveal a tee shirt with a skull and cross bones superimposed over the letters FHLBB. As one top exec poured cold champagne down the front of one secretary's brassier, Keating threw a computer and a typewriter out through the glass of second story windows. Everyone there roared with approval. The $1 million in bribes to senators seemed well spent.

But there was something Keating had not considered – one $15,000 per year state senator who did not have a price....

http://artofhacking.com/IET/POLITICS/KEATING.TXT

~ ~ ~

For more on Resorts International, GO TO > > > The Game Birds


 

July 27, 1998

Deal makers

From Business & Technology

Prudential Insurance Co. plans to create a jointly owned investment management company with Japan's Mitsui Trust & Banking Co.

Anticipating the December dismantling of Japan's law against domestic banks selling mutual funds, Prudential--Mitsui Trust Investments wants to offer investment products to a nation of savers sitting atop $8.51 trillion.

For much more on Mitsui Trust, GO TO >>> Broken Trust


 

December 6, 1999

Blowing the Whistle at Pru

By Jane Bryant Quinn, Newsweek

What’s the best way of righting a massive financial wrong? I’m thinking of the dishonest life-insurance selling that stained the 1980's and early 1990's. Several insurers settled national class-action lawsuits -- among them New York Life, John Hancock, Transamerica Occidental Life and Prudential Life. A plan for Metropolitan Life is up for approval now.

The insurers are offering various forms of restitution to the consumers who were bilked.

But some say they’re still getting a raw deal -- especially the policyholders at Prudential Life.

Recently, a group of Prudential employees and ex-employees in Plymouth, Minn., stepped forward to say that the angry policyholders may be right. In affidavits filed in the New Jersey federal district court (which is overseeing restitution), they allege that Prudential twisted the process to limit what consumers get...

A number of these whistle-blowers are filing lawsuits in Minnesota, charging that Pru retaliated against them for speaking out at work. . .

~ ~ ~

For more on Prudential’s accounting practices, GO TO > > > What Price Waterhouse?.

* * *

Community Values, Prudential Style

by Tom Wheeler

Just a few years ago, Prudential was in the midst of a scandal of epic proportions, when the multinational insurance giant got caught red-handed ripping off hundreds of millions of dollars from its customers.

Some policyholders, many of them elderly, lost their life savings. Thousands of Prudential clients faced the prospect of losing their homes, their retirements, or money set aside for their children's education. This was fraud on a truly massive scale.

Throughout much of the 1980s and early 1990s, Prudential sold billions of dollars worth of dubious policies that were intentionally misrepresented through misleading sales techniques and outright forgery.

The abuses included the practices of "churning" and "twisting."

"Twisting" is the sale of insurance based upon incomplete or fraudulent comparisons. "Churning" refers to a practice in which agents pressure current policyholders to buy new, larger policies with the promise that the dividends from their existing policy will pay off the new monthly premium.

What the agents often failed to explain is that dividends eventually run out and the policyholder is forced to make a huge cash payment to salvage the old policy and then fork out a large premium to pay for the new policy.

Prudential initially made big profits in the scheme. For some senior executives, the huge flow of cash from these activities helped finance extravagant corporate spending and lavish lifestyles, while Prudential employees who questioned the scheme or refused to participate were intimidated into silence or fired.

After initially getting caught, Prudential offered a measly 2-cents-on-the-dollar settlement back in 1993. A year later, the company finally admitted that it had committed widespread fraud. The admission was necessary in order to avoid criminal indictments. Eventually, Prudential was forced to pay the largest fraud settlement in American legal history. Beset by this public relations nightmare, Prudential's marketing department needed a way to repair its reputation.

Welcome to "community values," Prudential style.

Hearts and Minds

In the wake of the churning scandal, Prudential's revamped communications department launched two new initiatives: the "Helping Hearts" campaign and the "Spirit of Community Initiative."

The Helping Hearts program is a matching grants initiative that provides portable cardiac defibrillators to volunteer emergency medical service squads. The "Spirit of Community Initiative" is a series of programs designed to "rekindle America's community spirit by encouraging young people to become actively involved in making their communities better places to live." It includes the "Prudential Spirit of Community Awards," created in 1995 to "recognize students in middle and high school grades who have demonstrated exemplary, self-initiated community service," as well as the Prudential Youth Leadership Institute "to teach leadership and community service skills to high school-age students."

Given Prudential's history, the Leadership Institute perhaps gives new meaning to the old joke that "those who can't do, teach."

Elisa Puzzuoli, Prudential's director of issues management, acknowledges that the real purpose in giving awards to schoolkids is to award the company itself a better image. Speaking at the Issues Management Conference, Puzzuoli talked about how these "reputation programs" helped reposition Prudential as a company that really cares about the communities where it operates.

An intensive PR blitz touting Prudential's community initiatives generated "great publicity," Puzzuoli said, and "helped us get through the darkest days of Prudential." She estimated that the programs have raked in millions of dollars of "added value" for the company.

Puzzuoli stressed the importance of "forming strategic alliances" and "picking a third party" as cover to ensure credibility for the company's PR initiatives. To legitimize its work with schoolkids, Prudential formed a partnership with the National Association of Secondary School Principals (NASSP), sought endorsements from groups like the National 4-H Council, and recruited prominent figures such as former President Jimmy Carter and actor Richard Dreyfuss officials to help build "goodwill" by participating in the awards program.

"We really are a community-based business," Puzzouli said without a hint of irony.

While Prudential lectures children about the values of "community spirit" and flacks tout its efforts to be a "responsible corporate citizen," the company's internal problems continue to mount, with recent reports that the company has destroyed documents related to the churning scandal in regional offices as far apart as Massachusetts and Florida.

In 1996, the Los Angeles Times obtained an internal memo from the Prudential home office, ordering managers in over a dozen states to destroy documents relevant to the investigation.

"We just learned this morning that one state is looking into possible violations regarding our 'private pension' materials," the memo said.

"You must destroy all private pension letters other than the approved versions I referred to in my earlier focus message today. Again, destroy and discard any other letters."

© Center for Media & Democracy, 520 University Ave., Suite 310, Madison, WI 53703; phone (608) 260––9713; email

editor@prwatch.org

# # #

 


 

For more, GO TO > > >

Aloha, Harken Energy!

Arbitrate This!

Birds in the Trailer Park

The Blackstone Group

Claims By Harmon

Confessions of a Whistleblower

Dirty Gold in Goldman Sachs?

Dirty Money, Dirty Politics & Bishop Estate

The Great Nest Egg Robberies

Nests of the Insurance Vampires

P-s-s-t. Wanna buy a good audit?

The Accountants’ Hoedown

RICO in Paradise

The Eagle Hooded

The Indonesian Connection

The Kamehameha Schools’ Prudential Retirement Plan

The Poop on Aon

The Silence of the Whistleblowers

The Strange Saga of BCCI

The Story of Enron

The Title-Insurance Vultures

Tracking the Tyco Flock

Harmon’s Letter to the New Trustees

Harmon’s Letters to Hamilton McCubbin

The Morgan, Lewis & Bockius Report

Harmon’s Letter to the SEC

The Vultures in WCI Communities

What Price Waterhouse?

 


 

 

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Originally posted April 10, 2001

Last Updated September 22, 2010, by The Catbird

 

CHRONOLOGY

April 10, 2001: Originally posted on www.the-catbird-seat.net .

March 13, 2007: The U.S. Dept of Justice obtains Order from Judge David A. Ezra to shut down website.

September 22, 2010: Latest update on new phoenix website www.kycbs.net

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THE CATBIRD SEAT ARCHIVES

The Catbird Seat Archives: 2000-2002

The Catbird Seat Archives: 2002-2007

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