Anatomy of a Stock Deal Turned Sour : Texas Investors Saw Riches, Then Ruin After Price Collapsed

To say they were awe struck in this modest ranch country town south of Dallas when Thomas W. Reid came out of nowhere in 1982 is to put it lightly. Reid bought the biggest ranch in the area sight unseen for $1.6 million, hung a giant “TWR” on its front gates, and started inviting people he met in town on free junkets to Las Vegas casinos where he was treated like a foreign potentate and gambled like one, too.

The story was that Reid had made $70 million in the stock market, maybe more, on Southland Royalty Corp., a very successful Fort Worth oil company in which he was one of the biggest shareholders. No one really knew how much Reid had, though, and as a result, says Jimmy Campbell, president of the First State Bank of Cleburne, “Every time somebody talked to somebody else, Tom Reid got richer.”

Called Massive Scheme

To reconstruct Tom Reid’s remarkable time in Cleburne is to reproduce the environment that led to what the Securities and Exchange Commission later charged was a massive scheme to rig the market in the stock of a Los Angeles real estate company called First City Properties Corp.

The SEC did not implicate First City’s majority owners, the wealthy Belzberg brothers of Canada, in the scheme.

Reid and one other defendant have consented to a permanent injunction against securities fraud. Without admitting or denying the charges, Reid also agreed to pay two brokerage firms nearly $160,000 secured by liens on his ranch and a $2.5-million yacht. Charges against other defendants are pending.

The SEC lawsuit seems to have barely scratched the surface of how the people of Cleburne, population 19,000, got entangled in the matter.

The SEC’s court papers also do not communicate those aspects of Tom Reid’s impact on the lives of people in Cleburne and elsewhere that give it the weight of a morality tale. Those who met him were somehow drawn out of their depths to experience, first, euphoric profits, and second, ruin.

To people like Jimmy Campbell, the president of the First State Bank of Cleburne who managed to stay out of Reid’s stock-buying circle, the recent history of this affair is a story of “how one man came into a town like this and appealed to people’s greed.”

Perhaps the story should begin with the Energy Bank, a Dallas institution that now exists only as a file number in a local office of the Federal Deposit Insurance Corp., which shut it down in May. Hungry for deposits and loan customers to compete in the overheated financial-services industry of a furiously expanding Dallas, the Energy Bank welcomed Tom Reid as a star customer, to its eventual misfortune.

Got $1-Million Loan

In June, 1983, Reid strolled in to see Jon Webber, the bank president, with a letter of introduction from another customer. It was the briefcase he carried that everyone remembers, for it was filled with a quantity of marketable securities in “bearer” name--that is, belonging to whoever had them at the time--that left Webber thunderstruck. Reid riffled off a sheaf of Southland stock certificates worth $3.5 million and asked, “How much will you lend me on this?” The bank made him a loan of nearly $1 million.

The people of Cleburne would soon be playing an important role in the Energy Bank’s history, and the glue that stuck them together was Tom Reid.

Chatting incessantly about his favorite stocks, Reid first got his friends in Cleburne interested in buying up shares of First City Properties. When some of those friends needed money, whether to buy more FCP or otherwise, Reid introduced them to his friends at the Energy Bank. Sometimes he would lend them stock to underwrite their loans.

In the end, loans were being made to Reid’s friends, occasionally on his collateral, often to buy stock in which he had an interest, according to court records, interviews and an internal bank report. Now with the Energy Bank having failed, in part because it was too cozy with the “Cleburne connection,” and now with some of Cleburne’s biggest businessmen reeling from millions of dollars in losses they incurred from plunging too deeply into FCP, Tom Reid says he was just trying to help out a few friends and he doesn’t appreciate all this finger-pointing.

People in Cleburne say Reid knew virtually nothing about cattle- and horse-breeding the first time he drove from Dallas/Fort Worth Airport to his new ranch in their town, past the cement plants and scrub ranches that occupy the intervening 55 miles of gently rolling geography.

Purchased Ranch

He had bought the 400-acre ranch through a broker he contacted through Maurice Rind, a Sherman Oaks businessman who had been permanently barred from employment as a securities broker back in 1976 after having served time in federal prison for securities fraud. (Rind was later a co-defendant with Reid and Rogers in the SEC’s manipulation complaint. Charges against Rind are pending.)

In many ways Reid played against type. Nothing about him personally was flashy. He wore ill-fitting, not particularly stylish clothes. When he first arrived he was driving an old Mercedes, which seemed perversely downscale to townspeople who expected a man of his reputed wealth to be riding a limo.

“Everyone was in awe of him,” says Michael J. Rogers, the owner of the ranch Reid bought. “It was like Howard Hughes moving in. The story was he was worth $50 million to $75 million.”

The one thing Reid did like a plutocrat was gamble. People from Cleburne and the Energy Bank who were invited along on his gambling junkets recall him playing the tables in Las Vegas with unnerving abandon. He was the kind of high-roller the casinos adore.

“When he first came here he’d pick up the phone and one of those casinos would have a Learjet here within an hour,” Rogers recalls. “They’d treat him like the King of Iran.”

Another acquaintance remembers watching Reid play Chemin-de-fer at the Golden Nugget in Las Vegas for $50,000 a hand. “Money meant absolutely nothing to him,” this man recalls. On that trip, he says, Reid won $350,000. But others watched him lose as much in the blink of an eye.

Went With His Image

“He’d drop $200,000 or $300,000,” says one fellow junketeer. “He wasn’t happy, but he didn’t cry about it. It went with his image.”

Other gambling debts would later surface. Eventually, the man who was worth millions would be telling people he was strapped for cash.

Papers filed with the county court in Cleburne and state court in Dallas show a number of casino judgments against Reid. Bally’s Park Place casino won a $60,000 judgment and Resorts International $55,000, later satisfied, in late 1983. And Boardwalk Regency Co., the owner of Atlantic City’s Caesars casino, dunned Reid for $130,240 to cover $110,000 plus interest for a bad check he floated there in May, 1982.

Also in Reid’s background was a permanent injunction against securities fraud issued in 1978 by a federal judge in Manhattan. The case involved a stock called International Systems & Controls Corp. Reid settled the SEC’s complaint that he was rigging the market by consenting to the injunction without admitting or denying guilt.

Reid, now 42, came from Somerville, N.J., where he wrestled on the high school team, but how he got his start in the market is unclear. Brokers in New York and New Jersey remember him as a strapping guy more than six feet tall--though lately he has lost considerable weight. No one could forget his most winning feature, a freckled face with a disarming Huck Finn grin under a shock of bright red hair.

Huge Stock Trades

Even before he was playing the tables, Reid was playing stocks on a grand scale. His trades were “literally . . . in the $1-million range on a weekly, if not daily, basis,” his lawyer told a federal judge in New York not long ago.

But Reid had his difficulties with some stockbrokers. Says Frank Putnam, Reid’s broker at several firms from 1975 to 1982, Reid would often haul out any of a dozen excuses to avoid paying in time for stock he ordered. “That was one of his famous tricks,” Putnam says. “The money would be due at four in the afternoon, and at five minutes of four you’d get a call that he was stuck in the Lincoln Tunnel. He’d know it would be too late to put the check in.”

Eventually, some brokers would refuse to trade for him. “I found out you lose in the long run,” Putnam said. For all that, Putnam echoes other brokers when he says: “He’s a smart investor--the most successful one I ever knew.”

This air of stock market erudition soon ensnared people in Cleburne. The first one to fall was Rogers. Those who know both men believe that Rogers incurred the most misfortune because of his association with Reid. One of Cleburne’s most successful home-grown businessmen, Rogers, the son of a junkyard owner, became a self-made millionaire and owner of the town’s only Ferrari.

Under Reid’s influence he became perhaps FCP’s biggest booster. At one point, FCP attorney Francis M. Wheat said even he was lectured about the stock’s potential. Rogers began buying FCP at less than $10 a share and rode it up to $20 a share when he owned more than $12 million of it. According to Wheat, Rogers would recount in October, 1984, that an SEC investigator had told him that while Reid was touting FCP to friends in Cleburne, he was unloading his own shares, which they were unwittingly buying.

Reid contends that although he did “mention” FCP to acquaintances as “an undervalued situation,” there was a point at which he warned people off it. He says he told Rogers particularly that “he was getting carried away with FCP.” Reid says that by early 1984 he had sold most of his own stake.

Destroyed Rogers

The stock’s collapse in early 1985 destroyed Rogers. “This was my Waterloo,” he says. Rogers’ businesses, including a title insurance company and a welding business, have been sold to pay creditors. Of his losses, the best estimate is $8 million.

Many in Cleburne say they would scarcely have paid Reid any attention--except they saw him help Mike Rogers parlay $2 million into something approaching $12 million in FCP. “A lot of people were following my smoke,” Rogers agrees.

People were impressed that Reid seemed to have the run of Rogers’ office. Reid would often come in, take over a telephone, and run up $1,000 a month or more in long-distance phone bills. “He was constantly touting something,” Rogers says.

Rogers understood that Reid owned about 400,000 shares of the stock in 1983. Furthermore, there was a feature of FCP that made the stock eminently manipulatable.

Because the Belzbergs’ stake of 70% was kept off the market, even a modest amount of trading in the remainder could make the stock’s price jump as if struck with a hot poker. And that trading eventually emanated chiefly from people who were associated with Reid.

Of the 30% of FCP stock not owned by the Belzbergs, SEC documents show, almost half ended up in the hands of Tom Reid and his followers in Cleburne. It was as if the town of 19,000 were infected by some wild virus. People whose most exotic lunchtime conversations once involved the breeding qualities of cattle suddenly had millions riding on a speculative play on some company out in Los Angeles. “We once figured out that 70% to 80% of the market for FCP was right here in Cleburne,” Campbell says.

Learned a Lesson

And yet Reid had a way about him that makes even some who believe themselves his victims feel they were in line to learn a lesson.

“I can’t blame the guy completely,” Rogers says. “I put all my eggs in one basket, and that was a very foolish thing to do.”

The Energy Bank, meanwhile, contracted something of a lending fever. Between June, 1983, and March, 1984, the bank lent $10 million to Reid and people he brought through the door, according to an internal bank report. That came to 35% of its total loans, making what bank officials called the “Cleburne mafia” its largest bloc of customers, by a huge margin.

Much of that debt, the bank report and court documents show, was secured by stock in FCP and other stocks Reid was promoting. Some of it was stock already pledged to other loans to Reid associates. By October, that business weighed on the bank like a pair of concrete shoes.

“The problems were insurmountable,” says Rex House, a Texas banker called in that month to try rescuing the Energy Bank. “Mr. Reid’s loans were almost impossible to collect. We tried everything we could, but nothing ever came back to benefit the bank.” In May, the FDIC shut down the bank, sold its good assets to another institution, and started trying to collect from Reid and other associates who still owe money.

The problems with the Reid circle came as a surprise to bank President Webber, who told investigators that he checked Reid out thoroughly. “We had just a ton of references for Tom Reid,” he told bank officials, according to a transcript of his remarks. “Tom produced a financial statement which showed that he was worth approximately $25 million. I considered Tom to be a rare person to do some business with.”

Banker Initiated Loans

So, between June and October, 1983, Reid got $950,000 in loans, all initiated by Jon Webber and collateralized mostly by stock in Southland Royalty.

“Tom had such an appetite for borrowing money that you have no idea,” Webber later told bank investigators. When the bank told him it could not afford to lend him what he needed, Reid offered to bring in brokered deposits.

These are funds deposited by large institutions around the country in large blocks. Banking regulators scowl at brokered deposits because they appeal to banks with a mind to grow imprudently fast, like the Energy Bank, and are quickly withdrawn at the first sign of trouble. At one point the Energy Bank’s total deposits of $24.3 million included $13 million that fell into this category, most of which were arranged by Tom Reid, bank officials told investigators.

Executives who came in later to clean up the bank’s books say the Cleburne transactions were often handled with a shocking informality. The bank had no idea how its money was being used, and thus no formal assurance that it wasn’t violating stock loan regulations. Collateral was poorly documented, according to an internal bank report.

Stock Disappeared

At the end of 1983, a major problem surfaced with the Reid loans. Reid’s collateral, good stock in Southland Royalty, had physically disappeared from the bank vault. In its place was stock of such low quality that the bank was left holding, in essence, unsecured loans.

How the stock got switched is a mystery. Webber has told investigators that Reid romanced his secretary, Debra Underwood, and got her to make the switch after hours. Underwood was fired, and later turned up as Reid’s secretary at his Cleburne ranch.

Reid contends that all the switching was done with Webber’s full knowledge. He and Underwood both deny they did anything behind Webber’s back after hours.

Once all this Energy Bank-financed stock dealing created a Cleburne market for FCP, Reid started some further dealing--and this was the phase that finally caught the SEC’s attention.

By then the Belzbergs themselves had a couple of odd encounters with the Cleburne group starting in 1983, when Reid and Maurice Rind, the former stockbroker, had shown up in President William Belzberg’s Beverly Hills office one day. Reid “said he had a major ranch in Texas and was a significant shareholder of First City Properties and just simply wanted to know the chairman,” remembers Belzberg attorney Wheat. “He seemed like a substantial fellow so they talked.”

In mid-1984, to the management’s surprise, Rogers showed up at the company’s annual meeting in Calgary, Alberta. Soon after that, he told FCP that as a holder of 5% of its shares he was going to file a disclosure statement with the SEC.

Records Subpoenaed

FCP executives thought little of that until August, 1984, when Belzberg got a call from a friendly banker in Los Angeles, informing him that the SEC had subpoenaed records of 30 bank accounts collateralized by FCP stock.

When FCP’s lawyers scanned the subpoena, Wheat recalls, “sure enough, there were the names of Rogers and Rind and a whole bunch of people down there in Cleburne, Tex., where Rogers comes from. Reid was on it too.”

FCP was about to float a major public offering of debt securities. The SEC, however, assured the company it was not a target of the investigation.

In late 1983, Reid, the Cleburne shareholders, and other Reid contacts started a furious round of trading in FCP, brokerage firms and the SEC have alleged in court. The idea, as the SEC concluded, was that Reid and his associates would order huge blocks of FCP without intending to pay for the stock. By forcing Reid’s stockbrokers to dump the stock back on the market, this maneuver would depress the stock price, causing losses for the brokerage firms but allowing Reid’s people to buy back in at a bargain price, ride the stock up, and sell out at a profit. The whole scheme is known as “free-riding,” and it is illegal.

One such brokerage was Rooney, Pace & Co. On Jan. 4, 1984, Reid met with a Rooney broker named Steve Tallent and persuaded him to order 40,000 shares of FCP. Testimony differs on the terms of the transaction. Reid’s version, according to court documents, is that he got Tallent excited about the stock’s potential, but did not exactly order it himself. When Tallent could not place the block with other clients, Reid says he reluctantly agreed to hold it temporarily in his own account.

Reid Denied Charges

The firm said in court papers that it realized later that Reid placed the order without intending to pay for it, intentionally giving the firm incorrect delivery instructions. Before the firm could even try delivering the stock, Reid stepped up his orders. By Jan. 10, he and an associate, a New York restaurant owner named Armond Zaccaria, had ordered 50,500 more shares of FCP, maintains Rooney, Pace in its lawsuit. Reid has denied the charges. An attorney for Zaccaria declined comment.

While Reid was ordering, court complaints say, people in Cleburne were selling. Gene M. Jackson, a Cleburne auto dealer who had an Energy Bank loan collateralized by Reid and a contract to split profits on stock sales with him, sold more than 40,000 FCP shares on Jan. 4 and 5, according to Rooney, Pace’s allegations.

Yet when the brokerage liquidated FCP in the next two weeks, the Cleburne group was back in the buyers’ market. Between Jan. 16 and Feb. 9, while Rooney, Pace liquidated 90,500 shares, the firm alleged in court, a group made up of Reid, Rogers, Jackson, Zaccaria, and some other Cleburne people bought 96,800 shares.

All in all, the firm says, the Cleburne group initiated trades involving 760,000 FCP shares in slightly more than four months between Nov. 1, 1983 and March 9, 1984. “There is no logical pattern readily apparent from these trades other than an attempt to show activity in the stock,” Rooney, Pace complained in a federal court suit. On some days, the firm discovered, almost all of the FCP trading in the open market could be laid to the group.

Helped Inflate Price

This trading, the SEC believes, helped inflate FCP’s price well above its net worth of $11 a share. There lay the danger, for it would be a steep drop back down from $20 if something happened to shake up the market. And because so much of the FCP ownership in Texas was financed by borrowings from the Energy Bank and brokerages, who would call the loans if the price began to slide, FCP stock was balanced on the edge of a precipice.

In early 1985, the edge began crumbling away. Several brokerage firms had complained about the Reid group’s activities to the SEC, and its probe was in full bore. In January, FCP stock dropped a couple of points. There were signs that Reid was trying to stir up the market; in mid-January Frank Putnam got a call from Reid one day at 5 a.m. in which he said he was trying to raise some money to help Rogers buy Reid’s FCP stock. Putnam says he refused to help.

On one day in February, it all ended. A Los Angeles brokerage holding $4 million in stock pledged as collateral on loans made by the Energy Bank, and nervously watching the slide in FCP’s price, set a Feb. 11 deadline for the bank to retrieve the stock and pay back a $2-million loan it had received for it. That Monday, having heard nothing from the bank, the firm liquidated the stock. By coincidence, the very day the stock was inundating the market, the SEC issued its free-riding charges against Reid, Rogers, Zaccaria, and others.

That day the bottom fell out: 459,000 shares traded as the stock lost nearly $4 a share to land with a thud at $12.13. Brokers were calling in their loans all over Cleburne. With the stock’s value vanishing, the security behind the Energy Bank’s loans was evaporating.

“It just fed on itself,” says Rogers. “I was financially ruined. I’ve lost millions and millions of dollars. The empire I was building is gone.”