Star Witness in Journal Case: Portrait of Success Gone Sour

As Exhibit A for the thesis that money, especially on Wall Street, sometimes buys nothing but problems, let us introduce the two Peter N. Brants.

The Peter Brant on display the last two weeks as chief prosecution witness in the stock-fraud trial of former Wall Street Journal reporter R. Foster Winans is a very different man from the one known to many of his older friends and clients and to Winans himself.

That Brant was loud and hale, according to testimony and court records, full of the bravado born of having been the top broker at Kidder, Peabody & Co. several years in a row by the time he was 30, of having racked up $1.8 million in commissions in his banner year of 1983.

That Peter Brant spoke enthusiastically of how rich his clients were, how one of them was a member of British royalty, how he turned away customers with less than $500,000 to invest. He was a member of some of New York’s most exclusive clubs, including the Racquet and Tennis Club on Park Avenue, which boasts the peculiar affectation of being one of the few places in the world where they still play court tennis, a medieval version of squash.

Lavish Life Style

He owned a house in the best neighborhood on suburban Long Island. He owned a co-op apartment in New York’s River House, a building with standards so exacting that its board turned away a purchase application from Gloria Vanderbilt. He had a share of a boat, investments in fine art and a stable of polo ponies.

As Winans recalled in testifying before the Securities and Exchange Commission last summer: “Mr. Brant is very outgoing and sort of boisterous and doesn’t seem to be concerned about who is overhearing him.”

That was a very different Peter Brant from the sullen 32-year-old whose testimony in a federal courtroom here was frequently inaudible, even to the stenographer sitting directly in front of him. Rocking gently back and forth in his chair on the witness stand as he listened to questions, he would pause in reverie before answering. He has admitted lying to the SEC, filing a falsified financial statement with his bank to get a $400,000 credit line and changing his last name (from “Bornstein”).

Brant testified that in October, 1983, Winans proposed that he leak advance information about Wall Street Journal articles to Brant so that they could both profit from subsequent changes in those stocks’ prices. After the SEC uncovered the arrangement the following March, Brant pleaded guilty to three counts of conspiracy and fraud. He agreed to give up the $454,000 he made from the illicit trading.

His testimony implicates not only Winans and Winans’s roommate and homosexual “spouse,” David Carpenter, but Brant’s own college roommate and business partner, Kenneth Felis. All of them are defendants in the criminal case. Brant has also implicated another friend and partner, David W.C. Clark, a New York lawyer who Brant says made more money from the Journal-inspired trading than did he or Felis. Clark has been sued by the SEC but not indicted, though he remains under federal investigation.

Portrait of Desperation

Evidence in the trial and in legal complaints filed by clients who contend that he systematically defrauded them over a number of years contributes to this portrait of Brant’s eroding fortunes and the desperate attempts to repair them that led him to federal court in Manhattan:

It suggests that Brant finally fell victim to Wall Street’s intractable boom-and-bust cycle, which, like some capricious god, often turns out millionaires one year and bankrupts them the next.

Although Brant told his clients he could make them money on speculative situations that he unearthed himself, the evidence indicates that he was almost totally unprepared to manage his own speculative investing. For when the growth-stock market in which he specialized turned against him in the second half of 1983, he had no financial cushion: His money was tied up in real estate and loans against his stock, which was rapidly deteriorating in value.

That October he declared a net worth of $11 million. “Most people would think I was rich,” he testified, “but I felt that I was in a precarious financial position at the time.”

Epitome of Success

Indeed, to outsiders Brant must have seemed the epitome of Wall Street success. His firm, Kidder Peabody, had assisted in burnishing the image. When it opened a lavish branch at 101 Park Ave., Brant was assigned the most prominent office, a vast corner space with Oriental rugs and high-grade bric-a-brac.

Kidder Peabody also designed an advertisement around Brant. Beneath a photograph of him in dark suit and rep tie, the copy stated:

“Experienced. Straight talking. He spends an enormous amount of time and energy going after the unusual situation with potential for massive gains. . . . When you’re planning on investing in stocks and bonds, plan on talking to Peter Brant.”

The company also allowed Brant to bring Ken Felis, his friend from Babson College in Wellesley, Mass., into the business. Felis, as dark and chubby as Brant is trim and athletic, was running his own label-printing company in Connecticut when Brant invited him to join Kidder in July, 1982.

The arrangement was for Brant to give Felis 10% of his own commissions at the outset, while Felis developed his own clientele and serviced some of Brant’s accounts. This would allow Brant to spend more time beating the bushes for new business.

Flaws in Partnership

But the partnership never really functioned to Brant’s satisfaction, he testified. Felis did not acquire enough clients to justify his 10% share of commissions. Although Felis was supposed to become an absentee owner of his label business, Brant discovered that his friend was frequently on the phone to the plant.

Brant has admitted that he was misleading Kidder about part of his arrangement with Felis, hiding the fact that he and Felis shared the profits and losses from a trading account in Felis’s name. He also says he had such a profit-sharing arrangement in two of Clark’s accounts at Kidder. Brant did not like to trade stocks under his own name; that could produce the appearance of a conflict of interest if he advised his clients to do one thing and did the opposite himself.

Brant met R. Foster Winans for the first time in May or June of 1983; the broker had received a call from an executive of American Surgery Centers, a small company that had issued stock in a private placement that Brant took part in. The executive told him that Winans was “a friend of the company,” meaning he had treated it positively in his Journal column, “Heard on the Street,” a daily collection of Wall Street gossip and research tidbits.

In fact, Winans and Carpenter had secretly bought stock in American Surgery before Winans’s columns appeared, making a small profit when the favorable pieces drove up the price.

Initial Skepticism

Winans told Brant he wanted to profile Brant in the Journal as a “super-broker,” but Brant was skeptical. “His attitude about the press was that it’s hard to let yourself be profiled without coming out looking like a jerk,” Winans told the SEC.

Nevertheless, they met and chatted informally once or twice. Winans never wrote the profile, but he quoted Brant a couple of times in print.

By mid-1983 the yearlong bull market was running out and the growth stocks Brant had bought heavily were sagging. One stock in which Brant and his clients had a huge interest was particularly hurt: Digital Switch Corp., a small company with a large contract to make telecommunications devices for MCI Corp. that had not even made a profit before 1982.

On the strength of the bull market, Digital Switch’s stock had soared from $15 to $150; Brant and his clients, especially Clark, bought steadily. According to Brant, the two were heavily margining their stock--that is, borrowing money against their holdings as their value rose.

As margin accounts work, an investor reaps all the benefits of a margined stock’s rise in value while paying interest on the loan to the brokerage. But when the value falls so much that it threatens the brokerage’s collateral, the firm can sell as much stock as necessary to recover its loan. In the procedure, known as a “margin call,” the investor’s stake can be wiped out.

Investment Turns Sour

Since Sept. 28, when it had been $35--after an earlier 3-for-1 split that meant an original share was valued at $105--Digital Switch had slid into the 20s. Oct. 12, 1983, was a devastating day for Brant’s and Clark’s holdings in the company. Trial records show that the two Clark-Brant accounts, the Felis-Brant account and another Brant client sold 280,000 shares of Digital Switch on Oct. 11 and 12; those shares had lost $3.5 million in value since Sept. 28 and Brant testified that much of the selling was “forced”--that is, done to satisfy margin calls.

The night of Oct. 12, Brant met with Winans. It is unclear who suggested the meeting at the Racquet Club, but the men had not met since the previous July. What was said between them also is in dispute.

Brant contends that they made small talk and he invited Winans to his Long Island home for the weekend. Winans recalled it this way to the SEC:

“Mr. Brant said something along the lines that if he knew in advance what was going to go into the (Heard on the Street) column, we could make a lot of money. I recall smiling out of nervousness and I didn’t really respond to it. He has a booming voice and we were sitting in a public place and that made me uncomfortable.”

Deal Struck on Weekend

In any event, Winans accepted his invitation for the weekend, knowing that the scheme would come up again.

That Sunday, on a beautiful morning, Brant played 27 holes of golf while Winans trailed him in a motorized cart. Brant testified that Winans proposed the scheme that day, that he said he had done some trading on his own in stocks to be mentioned in the column, but was undercapitalized and needed Brant’s financing and trading expertise. Brant says he told Winans he thought it was “something I could go along with.”

Winans said the initiative was Brant’s. “He said I would become a millionaire and I wouldn’t have to work anymore.” Winans told the SEC he “really wasn’t interested in getting rich, I just wanted to pay off some debts.” But Brant wouldn’t hear of it.

“With Mr. Brant, everything becomes philosophical and we make a lot of money and then we don’t have to ride in elevators with other people, we don’t have to ride in cars with other people, we protect ourselves from the world and we insulate ourselves from the world,” he told the SEC.

But they struck their deal; the next day, Brant sent Winans a $15,000 check as a “loan” that would later be forgiven. As Brant testified, they were to segregate half of any profits for taxes and split the remainder evenly among Winans, Brant and Felis.

Invitation to Clark

Within a day, however, Brant secretly added another partner, David Clark. Clark, who had originally met Brant playing polo and shared several investments with him, had called the broker to his uptown office and morosely confided that he was contemplating suicide because of his financial losses and alcoholism.

To cheer him up, Brant invited him into the Winans deal. Ultimately, Clark would make more than $500,000 on the illicit trading, Brant said. But Winans never heard Clark’s name until March 1, when the SEC called him at the start of its investigation.

The partners traded frequently in October, November and December, with Winans calling Brant from a pay telephone near the Journal office to tip him to columns about to appear.

They also met occasionally; the locales read like a Baedeker to Manhattan’s elite dining spots, from the Plaza Hotel’s staid Oak Bar to the Cafe Seiyoken, a gleaming black-and-chrome combination sushi bar-continental restaurant where financial types in business suits and punk artistes in leopard-skin garb glare at one another along the bar. Brant picked up the checks.

By Jan. 27, 1984, according to an accounting filed in court, Brant, Felis and Winans had turned a gross profit of $195,734.51 trading in 14 stocks. After half was set aside for taxes, Winans’s share came to $31,122.42, or about what he ultimately received from Brant and Felis.

Trouble at Kidder

But the trading then slowed. Brant’s world appeared to be falling apart. Since November he had been intermittently questioned by Kidder executives about the suspicious trading in Clark’s and Felis’ accounts; they had forced Clark to take his trading elsewhere. Also, he faced a fraud complaint from a client, Nancy Huang, who contended that he had mishandled her account, losing much of her $500,000 investment by speculative trading.

Huang was not the only client of Brant’s losing money in the languid stock market. Recalled Winans: “His clients were losing their shirts. . . . He became progressively more morose and disinterested in everything, including his own life; I remember one conversation when I felt I was literally trying to talk him out of killing himself.”

This period inspired Winans to remark to the SEC: “I believe he takes a great deal of Valium, and frequently, and I think that that affects his judgment.”

Brant confirms that he did use Valium and acknowledges that this was a time of serious depression. He would periodically get weak at the knees and suffer crying jags. Clark was also desperate. Brant testified that his lawyer friend repeatedly tried to interest him in a cocaine deal that could make them “$20 million to $30 million a year.” Brant says he turned Clark down.

Questioned by SEC

At the end of February everything was about to unravel. On March 1, Clark got a call from the SEC inquiring about his sources of information for his suspect trading. He cooked up a story about having many sources on Wall Street. Winans had also been called by the SEC, who asked him if he knew Clark. He replied, truthfully, that he did not.

Clark and Brant, meanwhile, made abortive plans to flee to Brazil. “It was not a well-conceived plan,” Brant testified. “The event occurred in a moment of panic and I quickly overcame it.”

Although Clark maintained that trading on advance knowledge of Journal articles was legal, Brant says they were concerned that an SEC probe would unearth irregularities in a Kidder account that Brant managed for Roger W. Wilson, an actor client of Clark’s.

Wilson had opened the account with about $3.5 million in 1981, giving Clark full discretion over it while he pursued his acting career.

Client’s Lawsuit

In a lawsuit, Wilson contends that Clark and Brant steadily transferred cash and securities out of the trust account and traded actively in it. In one yearlong period they made 450 trades, generating $200,000 in commissions while incurring losses of $330,000, the suit alleges. In February, 1984, the account was down to zero. Much of the money, Wilson contends, was moved to Clark’s brokerage accounts.

Brant now contends that he made all the transfers and trades at Clark’s direction; Clark told Wilson, and has asserted in court papers, that Brant stole the money.

Brant, who resigned from Kidder in April, will be sentenced after the Winans trial ends. The Wilson lawsuit is pending, although the actor’s attorney says settlement talks are under way. The River House co-op has been sold for $2 million, but the money is in escrow because Wilson claims the apartment was bought with his money and Clark says it was his.

Now Brant’s friends have dropped away. Felis sat in the courtroom during Brant’s testimony, smiling as his former roommate’s discomfiture on the stand increased under cross-examination. And when Felis’ lawyer, cross-examining Brant, mentioned Clark and asked: “He was your friend, was he not?”, Brant replied, “I thought he was.”