NEW YORK — In January, 1986, Prudential-Bache Securities was launching one of the most aggressive sales campaigns in the history of Wall Street.
Even as world oil prices were collapsing, Pru-Bache was putting heavy pressure on its brokers to sell oil and gas interests to small investors, especially the elderly and retirees.
The firm fired up its salespeople with promises of lavish European vacations, bonuses and commissions far higher than they got for selling municipal bonds or stocks. It assured brokers that the investments had been thoroughly researched both by Pru-Bache and its mighty parent company, Prudential Insurance.
The incentives worked. Armed with sales material painting the Energy Income Funds as the "ideal investment alternative" to government-insured certificates of deposit, Pru-Bache brokers sold thousands of investors on the dubious notion that, for them, the nose dive of oil prices "spelled OPPORTUNITY."
For the 137,000 customers who ultimately poured $1.4 billion into the partnerships, the investments instead have spelled hundreds of millions of dollars in losses. And for Prudential--which sold more limited partnership units than anyone on Wall Street in the 1980s--the funds have spelled big problems.
Prudential denies any wrongdoing. But its brokerage (since renamed Prudential Securities) is at the center of the biggest set of investigations into a Wall Street firm since the furors over junk bonds at Drexel Burnham Lambert and Treasury securities at Salomon Bros.
The details of what went wrong are beginning to emerge, in part because of a federal judge's order releasing thousands of internal documents in one of two massive class-action lawsuits that together seek at least $500 million in damages for investors.
And the pressure on Prudential is building, with the partnerships targeted by the biggest joint investigation ever conducted by state securities regulators, a high priority Securities and Exchange Commission probe and a recently launched federal criminal investigation by the U.S. attorney's office in Manhattan.
No charges have been filed. But because of the magnitude of the losses in the energy funds and other Prudential partnerships, regulators want Prudential Securities to agree to civil penalties and restitution that would total at least as much as the record $650 million exacted from Drexel in 1988. Prudential in the last few days raised its offer to $200 million. If a settlement is not reached, the brokerage could lose its license to do business in several states.
Meanwhile, Prudential Securities has scrambled this spring to arrange a purchase of the partnership units under terms that would return much of their original investment to Energy Income customers, an estimated 20,000 of them Californians.
Should those investors have known better, even in a decade of financial excess? Prudential contends that the risks were spelled out. Yet, the newly disclosed records show that from the start, warning signs of trouble never were disclosed to Prudential's customers.
Back in January, 1986, as Pru-Bache brokers launched their sales blitz, Matthew J. Chanin--who directed the parent company's oil and gas investments--told a Pru-Bache executive that the oil market had become far too risky. As a result, he said, Prudential Insurance was putting its \o7 own \f7 investments in the Energy Income Funds "on ice."
Indeed, after reluctantly investing another $23.5 million into the partnerships later that year, Prudential Insurance withdrew completely from its namesake energy investments. The insurer wrote off $10 million in losses, even as small investors continued to be told their stakes were worth what they paid for them.
Prudential, in fact, never took steps to slow or stop its brokerage's hard sell. Records show that for five years, moreover, it allowed its own insurance agents to sell the partnerships--though most were not licensed to do so.
The records show that the Energy Income Funds meant big profits for Pru-Bache. Both the brokerage and Prudential Insurance collected steep fees from the program--including 15% right off the top of small investors' money. And documents show that the insurer's separate set of investments in the company hired to manage the partnerships put Prudential at risk of losing up to $30 million if sales of the partnerships were halted.
While by no means alone in the limited-partnership business, Pru-Bache was a dominant player. Including not only oil and gas but real estate, aircraft leasing and even Arabian horse breeding--Pru-Bache partnerships took in $6 billion from investors in the '80s.
Even Prudential Securities agrees that customers have lost at least $1 billion on those investments. And state regulators say the losses are much greater.