"If anything took place that was not within the limits of the law," says Joe Vecchione, chief spokesman for Prudential Insurance, "it was not condoned by the company and it was not the policy of the company."
Focus on Exploration
At the heart of the story are two men: James J. Darr, who was in charge of Prudential Bache's vast limited partnership program, and John J. Graham, son of a well-known New Orleans oil executive, who with his father founded the company that became Graham Resources.
Based in modest offices on the unfashionable outskirts of New Orleans, Graham Resources until the early 1980s had focused--without success--on exploration. It struck some oil and gas, but so little that a 1985 Graham filing with the SEC said the drilling produced only losses for investors.
"They had as bad a record in the exploration business as there was in the industry," contends F. Paul Grattarola, a former Graham Resources executive.
There was no way to judge if the firm had the financial savvy to buy and profitably operate already-producing properties. It had bought a few for big institutional investors willing to take risks, but too recently for any clear-cut results.
As the 1980s dawned, then, John Graham was getting nowhere on his dream of transforming little Graham Resources into a big player in the oil patch. With about 100 employees and a net worth of no more than $15 million, the company needed a new line of business and new funds.
In 1982, urgent feelers to Wall Street paid off with a remarkable proposition from Prudential:
Pru-Bache would use its vast army of brokers to sell oil and gas limited partnerships to ordinary small investors, strongly recommending them to retirees and others looking for security and a high return.
And Graham would be in charge of investing the millions that poured in.
Darr had come to Pru-Bache in 1979, helping found its highly profitable Direct Investment Group, the umbrella for the firm's limited partnership programs. In 1982, an oil and gas program seemed a perfect new product for Darr's unit--a seemingly safe way for ordinary Americans to invest directly in U.S. energy production.
Chanin and Darr said there is no mystery in why they entrusted Graham with the task. Both said they were impressed with Graham's management.
But Chanin confirmed that Prudential had spurned dozens of similar proposals, explaining that his choice of Graham was influenced by the strong backing of Darr's group at Pru-Bache. Former Graham and Pru-Bache employees contend, meanwhile, that Darr's enthusiasm seemed influenced by a blossoming friendship with a key Graham executive.
Graham's chief financial officer, Anton H. Rice III, met Darr when they briefly worked together at Merrill Lynch in the mid-1970s. In the early 1980s, both lived in posh Greenwich, Conn.
Former Graham associates said Rice initially regarded Darr as beneath his own social rank. But when it became clear that Darr held the keys to Graham's future, Rice spared little to cultivate him. He provided Darr with coveted entry into Greenwich high society, sponsoring him for membership in the exclusive Greenwich Country Club and a prestigious Manhattan shooting club.
Paul Grand, a lawyer for Darr, said the Pru-Bache executive was accepted into the clubs in 1985 and 1986, well after the Energy Income Funds were up and running. Rice's gestures of friendship, he added, "had absolutely no influence" on Darr's business decisions.
In any event, it did not take long for the Energy Income Funds to become Pru-Bache's largest limited partnership program, leaving tiny Graham Resources beneath a gusher of money. In 1986 alone--the year oil prices crashed--investors poured $371 million into the funds.
John Graham's sudden ascendance caused jaws to drop in the close-knit New Orleans oil community. By the late 1980s, Graham Resources emerged as "probably the top buyer of properties" in the United States, according to Jack C. Stevenson, editor of the Houston-based Oil and Gas Interest Newsletter.
Selling the Funds
A 1985 comic book--a motivational brochure for Pru-Bache brokers--helps explain why by the mid-'80s, Graham found himself awash in money to invest.
"The Adventures of $uper Broker" opens with "mild mannered broker" Clark Barr patiently advising the grandmotherly Mrs. Grimsley to put her $5,000 into safe municipal bonds.
But in the next panel, Barr learns that brokers can win an expense-paid trip to Oktoberfest in Munich, Germany, by selling at least $250,000 of Energy Income Funds partnership units.
The prize galvanizes him. In seconds, conservative, risk-averse Barr becomes the caped $uper Broker. With "a sales pitch more powerful than a locomotive," he sells for 24 hours straight, persuading Mrs. Grimsley and everyone else in sight to put their money into the Energy Income Funds.