WHAT'S A LITTLE FRAUD BETWEEN FRIENDS?THE LEGISLATURE IS HELL-BENT ON GUTTING ARIZONA'S STIFF SECURITIES STATUES
Pope Duzy was out of town when her husband caved in. It was 1985, and for months, the Duzys' broker had been badgering them to put their retirement money into oil and gas.
Limited partnerships in energy investments were hot, the Prudential Bache Securities broker said. Double-digit returns were all but guaranteed, and as oil prices rose, profits would pile up.
"He said there was lots of room for money," Albert Duzy recalls. "He said you're bound to make money. He was talking about 16 percent, 20 percent."
Pope Duzy resisted. Oil sounded risky to her. But her husband was tempted. It didn't hurt that the alluring sales pitch came from a broker working for a subsidiary of the Prudential Insurance Company. The Rock.
When Pope Duzy was on vacation, the broker finally had his way with Albert Duzy--a 65-year-old engineer who, after three strokes, could scarcely walk without help.
Albert Duzy bought in. At his broker's continued urging, he eventually would sink almost $60,000, a huge chunk of the money he had saved for retirement, into the oil and gas partnerships.
Eight years later, the investments are all but wiped out. The couple's retirement house on a golf course in Sun Lakes is on the block. Their finances are in tatters. Their former broker won't take Pope Duzy's calls.
"My husband was 65 years old when Prudential Bache sold him these worthless, risky investments," Pope Duzy says bitterly. "He's a stroke patient. He's on permanent disability. How could any broker morally do something like this?"
A lot of brokers were doing it. The Duzys are but two of an estimated 100,000 investors across the country who sank about $1.3 billion into what would prove to be questionable energy partnerships peddled by Prudential Bache (which has since changed its name to Prudential Securities Incorporated).
Burned investors from coast to coast are suing, saying the company engaged in a massive, nationwide pattern of misrepresentation because it claimed the partnerships were safe, low-risk ventures when in fact, they were highly speculative.
Investigations are reportedly under way by the federal Securities and Exchange Commission and the regulatory agencies of several states, including Arizona. At least one Prudential Bache broker has been indicted in Dallas for pushing the energy partnerships.
Prudential Bache, Arizona investors say, not only lied about the risk of the investments, but fudged its investors' account statements for years to make it look like the partnerships were healthy while the investors' money was vanishing in the depressed energy markets.
While it has admitted no wrongdoing, the company is attempting to settle many of the suits out of court. Phoenix attorney Tom Galbraith, who is representing Prudential in a class-action lawsuit brought by Arizona investors, says he is not allowed to comment on the case.
The Duzys, and as many as 2,000 other Arizona investors, have something on their side that investors in other states do not.
Because of its history of land scams and inventive swindles, Arizona has some of the nation's toughest fraud laws, passed in 1978, after the state's reputation for scams became too embarrassing.
If attorneys for Arizona investors are successful in the class-action lawsuit, Prudential could be forced to pay back threefold the money people like the Duzys invested in the partnerships.
State law also allows fraud victims to win punitive damages--for hardships like that Pope Duzy faces in selling her home and in trying to care for her disabled husband--and have their legal fees paid by the company that victimized them.
Time will tell what the Duzys and other Arizona investors might recover from Prudential. But they may be among the last victims to benefit from the state's stringent securities-fraud laws.
With little notice, the most powerful business and economic interests in Arizona are moving to rewrite the state's racketeering and securities statutes.
Waving the banner of economic growth, lobbyists for key business interests have allied with Republican legislative leaders to press changes that critics say will "eviscerate" protection for fraud victims, particularly for elderly retirees like the Duzys, who are taken in by promises too good to be true.
Senate Bill 1197, introduced by state Senate President John Greene and co-sponsored by House Speaker Mark Killian, is the little-noticed darling of the business community.
It is supported by virtually every banking company, securities trade organization, major corporation and chamber of commerce in the state, who say reform is needed to entice capital into the state.
The bill would, among other things, significantly curtail the damages fraud victims can recover, set a higher standard of proof before plaintiffs in fraud cases can prevail, shorten the time victims have to file lawsuits and, in some cases, prevent companies from being held responsible for the actions of their employees.
While more visible debates about the state budget and Native American gaming have dominated the headlines, the bill has already slipped through the Senate with little scrutiny, and now awaits debate in the House. Governor J. Fife Symington III, a Republican and a failed businessman who has stiffed investors in his ill-fated real estate projects, reportedly has said he will sign the bill if it passes.
Fraud victims and lawyers who represent them are now engaged in a last-ditch effort to block the new laws. But they say they are being steamrollered by a Republican-dominated legislature so hell-bent on adjourning within 100 days that it is passing pro-business legislation with little time to consider the effect on people like the Duzys.
"What's happening here is a big assault on the statutes that have been used to protect victims of financial fraud," says Phoenix attorney Andrew Friedman. "It's no coincidence that the people pushing this legislation are the people who have been responsible for financial fraud in this state. People behind this legislation have a vested interest. They're protecting their pocketbooks."
@body:A simple notion underlies Arizona's strict racketeering and securities laws. The state is not able to investigate or prosecute most cases of white-collar crime. In many instances, victims are on their own in efforts to get their money back.
"No state will ever have enough resources to pursue every matter," says Dee Harris, head of the Securities Division of the Arizona Corporation Commission. "We've got a lot more companies than we're able to deal with."
So in the late 1970s, lawmakers gave fraud victims a way to go after companies or scam artists who bilk them--racketeering laws that include mandatory treble damages. Under the law, anyone who believes he has been cheated can sue.
The racketeering laws apply not only to securities fraud, but to a whole laundry list of possible criminal behavior by individuals and businesses. Proving that someone committed just one of a wide range of racketeering acts--be it murder, kidnaping, forgery, a real estate scam or the open-ended "scheme or artifice to defraud"--opens the door for a mandatory tripling of whatever damages a jury might award a plaintiff.
The idea, lawyers say, was to give citizens reasons to sue in cases in which the government did not have the resources or the desire to pursue criminal charges.
"The whole concept is to give individuals an incentive to go out and help the prosecutors," says Frank Lewis, a plaintiffs' attorney and the chairman of a State Bar committee on securities law. "The statutes were enacted to give someone a direct action for criminal acts."
But business interests and defense lawyers say the racketeering statutes are so broad that they have been widely abused. Anyone with a gripe about a business deal can sue under the racketeering statutes and try to claim triple damages, says attorney Jim Brophy, who has both filed and defended racketeering cases.
Racketeering claims have been filed in divorce cases by angry spouses, in small-business disputes between former partners and in a whole range of cases that do not fit the general concept of racketeering, attorneys say.
The result, Brophy says, has been a "litigation lottery," in which anyone who has lost money in a business deal can spin the wheel of justice and hope for a big payoff, and in which basically honest businesses can find themselves staring at massive damage claims.
"The act was intended to put the kibosh on white-collar crime," Brophy says. "But the people paying the damages aren't the crooks. The people paying the damages are legitimate businesses. It's not a level playing field. It's a great boon to litigation."
True racketeers generally flee with the money before anyone catches on to their schemes, Brophy says, and it is honest businesses that end up paying large racketeering claims.
One major banking company, Brophy says, will not even sell its stock in Arizona because it does not want to expose itself to liability under the far-reaching fraud laws. He declines to name the bank.
"The more businesses understood how draconian the law is, they'd think twice before doing business here," he says.
Many plaintiffs' attorneys agree that the racketeering laws have been abused, and that they could use some fine-tuning.
But, they say, lobbyists for the state's most powerful business interests--ranging from corporate giants like Phelps Dodge and Dial Corp to virtually every bank and chamber of commerce--are ramming through changes that will gut the law rather than improve it.
The massive revision of the racketeering laws, they say, will particularly chill the ability of securities-fraud victims to recover damages.
"If there's some tinkering that should have been done, that's one thing," says plaintiffs' attorney Van Bunch. "This is emasculating it."
Leading the charge is Senate President John Greene, who has already deftly shepherded the changes through the Senate. His bill cleared the Senate Commerce and Economic Development Committee just three days after it was filed, following a brief committee hearing which, judging from the hearing witness list, was heavily stocked with bill supporters. It passed the Senate two weeks later by a 22-7 vote.
(Earlier this year, Greene, an attorney, joined the law firm of Fennemore Craig, one of the largest lobbying organizations in the state, with clients including banks, stockbrokers and major corporations. Greene resigned from the firm after widespread criticism of conflict of interest.)
Greene says his bill was drafted after consulting with various lobbyists, including attorney Tom Galbraith of Lewis and Roca, who represents Prudential Securities Incorporated and lobbies for the state Securities Industry Association.
Under the legislation, fraud victims will face a much stiffer task in winning damages.
Instead of requiring mandatory treble damages, the new law would leave it up to the judge to decide if additional damages are warranted. Plaintiffs claiming fraud would have to show a "pattern" of racketeering behavior before they could even seek the triple-damage award. (The proposed law defines "pattern" as at least two racketeering acts that occurred within four years of each other that are related in purpose but not related closely enough to "constitute a single episode" of racketeering.)
Further, racketeering lawsuits would have to be filed within five years of the alleged fraudulent act, instead of the seven now allowed, and victims could no longer sue for punitive damages--such as emotional distress--unless they suffered some actual physical injury.
In securities cases, brokers or companies would not be held accountable for misrepresentations to clients unless they made them knowingly. A company would only be responsible for the misrepresentations of one of its brokers if it could be proved that the company knew what the broker was doing, although the broker could still be held liable.
The idea, Greene and other bill supporters say, is to prevent honest business mistakes from turning into huge damage awards.
"Right now, you're a racketeer if you make an honest mistake in a business deal," Greene says. "There isn't a securities prospectus or purchase offering memorandum known to man that doesn't have either a mistake in it or something that can be construed to be misleading, no matter how hard people try or how honest people are."
Under his bill, Greene says, "the [Charles] Keatings of the world will not go away scot-free." Fraud victims and the state attorney general can still sue, he says, and they can win treble damages in outrageous cases.
"All we're trying to do is stop people from abusing the law and using it as a hammer against people who are not crooks," the Senate president says.
House Speaker Mark Killian, a co-sponsor of the bill, did not return repeated telephone calls.
Attorneys who see the victims of securities fraud in their offices say Greene's bill is a thinly disguised effort to gut a law that the business community finds costly and bothersome.
"I think the business community sees an opening, and they're zealous," says Rob Carey, first assistant attorney general. Eliminating mandatory triple damages and requiring a "pattern" of racketeering behavior, Carey says, "eviscerates the entire cause of action, the rights of victims to pursue this."
The Attorney General's Office backed another bill that Carey says would have fine-tuned the racketeering laws to prevent frivolous lawsuits without the wholesale changes in Greene's bill, but that legislation died in the Senate.
"They're trying to gut it [the racketeering law]," Carey says. "And they've got a good shot at it."
Democratic Senator Chuck Blanchard, who voted for Greene's bill in committee, contends that business sentiment against the racketeering laws is so strong that critics should be glad the legislation didn't go even further.
Blanchard managed to tack an amendment onto the bill setting the statute of limitations in racketeering cases at five years, instead of the four originally contained in the bill.
"There was a growing consensus of both the legislature and the business community to get rid of civil racketeering laws altogether," he says. "It came very close to being worse."
@body:Attorneys Van Bunch and Andrew Friedman are not masters of the slippery byways of the statehouse. The lawyers at Bonnett, Fairbourn & Friedman are in the business of helping fraud victims get their money back, for which they receive healthy fees.
The two attorneys represented bondholders in the failed Lincoln Savings and Loan who sued Charles Keating, and the lawyers won almost $2 billion in judgments against Arizona's best-known modern financial swindler.
Bunch and Friedman are now co-counsels in the class-action suit against Prudential, hoping to win damages for hundreds of investors like the Duzys.
From their side of the bar, the attorneys say, Senate Bill 1197 will be a disaster for victims of securities fraud who harbor any hope of getting their money back.
Likening Greene's bill to an ambush, Friedman and Bunch are attempting to wage a counteroffensive, mailing letters to clients urging them to protest to legislators about the bill.
"We're not political people," Bunch says. "This law is a threat to a population of people who move here to take it easy, play a little golf and die. This allows the fox in the henhouse."
Retirees like the Duzys, Bunch points out, are the most common victims of fraud, and Arizona has an ample number of retirees. While selling the energy partnerships in Arizona, Bunch says, Prudential Bache targeted just such potential buyers.
Exhibits introduced as part of the class-action suit against Prudential in Superior Court indicate that the company urged its brokers to target older customers seeking "financial security" and to sell them the risky ventures.
In accord with state law, Prudential Bache had promised the state Corporation Commission that it would include a prominent warning on literature about the partnerships stating that they were highly speculative. But no such warning was contained on hundreds of prospectuses sent to Arizona investors, Bunch says.
Instead, the energy partnerships were sold as safe, worry-free investments. That is the type of misrepresentation, Bunch says, that the existing law is needed to prevent.
Under the proposed law, the Duzys would not even be allowed to sue Prudential Bache, because the five-year statute of limitations would have run out before the elderly couple even knew anything was wrong with their partnerships.
In effect, critics say, the law would reward financial schemers, like those running pyramid scams, who are able to keep their deceit going long enough to wait out the five-year statute.
Even if the Duzys could still sue, they could recover no damages for the turmoil and heartache they are now suffering by having to sell their house.
Eliminating mandatory treble damages and requiring proof of a "pattern" of racketeering practice will make it unlikely that many other fraud victims will be able to press their claims in the future, Bunch says. "It is an extraordinary chill on people's right to go to court."
Albert Henderson, a 70-year-old retired Sun City businessman who was born on the Fourth of July, agrees.
Henderson invested some of his wife's retirement money in the Prudential Bache oil and gas partnerships, and lost about $35,000. The couple is well enough off that the loss will not cripple them, he says.
But it will take tough laws like those in Arizona if he is to recover any of the lost money, Henderson says, and he is outraged that lawmakers are now moving to protect "swindlers."
Before he retired, Henderson himself was an attorney, first for American Airlines and then for the Hertz and Avis car-rental companies. He hopped around the country negotiating business deals and airport contracts. He does not consider himself an unsophisticated investor, but he says he was taken in by the Prudential Bache partnership.
"I'm not as much going to the poorhouse over this as I am annoyed and irked that this looks like something that was concocted as a swindle," he says. "They ought to leave the law the way it is, but they [the securities industry] have the brass to say some of our guys got caught; let's put the arm on the legislature to take care of them.
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