The book had been sitting on my nightstand for at least a decade, so I finally read Serpent on the Rock, which details the securities fraud committed by Prudential Bache in the 1980s. The author, journalist Kurt Eichenwald, should be praised for the research he did in writing a tale that is better than anything John Grisham could ever dream up. He tells an incredible story of greed, egotism, corruption, and the perpetrators' indifference to the welfare of burned investors.
In essence, people were persuaded to buy billions of dollars in risky, overvalued investments that were falsely touted as being as safe as CDs.The villains threatened to have fired anyone who raised concerns about the deal, including the company's own due-diligence department. If that didn't work, Prudential's legal department would exert even more pressure to keep silent. Those who dared even to question the value of the products being pushed on them and their clients were told to simply shut up -- or else.
When the fraud was uncovered, the company went into cover-up mode, misleading regulators and pushing investors into settling class-actions, which enriched lawyers while resulting in huge losses for investors. And when Prudential learned it had been working with convicted criminals, it covered that up, too.
Eventually, a handful of courageous lawyers and regulators stood up to the mighty "Rock," as Prudential was known. After years of legal battles, they eventually succeeded in forcing Prudential to pay the largest fines in SEC history, costing the firm well over $1 billion. Despite the scandal, the company never apologized to its employees or its customers.
The book exposes Prudential's management as incompetent at best. They either ignored the problems or exhibited willful blindness, determined to preserve the lucrative partnerships.
Consider -- the most basic tenet of finance is that risk and expected return are related. Yet Prudential's sales literature and marketing pitch for the partnerships they marketed promised yields of 15 percent and the financial security of CDs. The best you could say for any broker who ever sold one of these instruments is that they either turned a blind eye or exhibited enormous stupidity, ignoring the impossibility that the product could be both safe and deliver a high expected return. Bernard Madoff had little on these guys.
Eichenwald's book is both a compelling read and a strong reminder that you should never purchase investment products from those who receive commissions from their sale, and why you should never work with an adviser who isn't providing you with a fiduciary standard of care. Those aren't guarantees against fraud, but they sure do improve the odds.