Investing 101 : College’s Transaction Raises New Questions About Prudential
St. Peter’s College is so small it’s easy to miss on a drive along Kennedy Boulevard through this city’s drab downtown. The obscure Jesuit college’s main campus takes up just one block, a few low brick buildings huddled around a concrete courtyard.
Although neat and proud of its academic record--the college’s emblem is a peacock--St. Peter’s is not rich. Its tax returns list investments of about $6.6 million, and total assets come to $48 million, including all investments, academic grants and the value of its buildings and land.
So how in 1989 did St. Peter’s College quietly acquire from Prudential Insurance Co. of America, for $30.1 million, highly speculative interests in low-grade oil fields in faraway Hot Springs County, Wyo., and western Texas?
The mysterious transaction raises new questions about the role of the giant insurance company in the limited-partnership scandal of its Wall Street subsidiary, Prudential Securities Inc.
They are questions that neither St. Peter’s College nor Prudential--which has longstanding ties to the school a few miles from its Newark, N.J., headquarters--has been eager to answer, although Prudential says the two did nothing improper.
But public records show that the investment was in the very properties that have brought grief to thousands of small investors who bought oil and gas limited partnerships in the 1980s through Prudential Securities, then called Prudential-Bache. In October, allegations of fraud in Pru-Bache’s $8-billion partnership program resulted in a $371-million settlement between Prudential and federal and state securities regulators, one of the biggest such settlements ever.
The tangled story of St. Peter’s College’s foray into oil and gas speculation shows that Prudential Insurance was able to get financial benefit from its own investment in the properties even as small investors in Pru-Bache’s limited partnerships suffered major losses. While Pru-Bache continued to send statements to those customers listing the value of their investments as unchanged, the records appear to show that the insurer knew early on that the properties actually were worth far less than their original purchase price.
Indeed, Prudential never disclosed the St. Peter’s transaction to those investors--and it allowed new partnerships to be sold based on inflated claims about how well earlier partnerships had performed.
St. Peter’s College, it turns out, “bought” the oil and gas interest without actually putting up any money or taking any financial risk. Nor did the acquisition offer the prospect of any immediate financial benefit to the college; it can gain only if world oil prices rise significantly, enabling the college to sell the stake for more than it “paid.”
However, the deal enabled Prudential to take a $33.1-million loss for tax purposes in 1989. Prudential says the transaction was entirely proper. Regulators and tax law experts say it is open to question whether the deal was truly a sale--or was done solely to create a tax loss.
Records also show that Prudential Insurance disposed of its stake for a price three times higher than what the company had listed as its “book value” at the end of 1988--even though oil prices had risen only about 24% to $22 a barrel during the time it held the properties. (The spot price of oil today is about $15 a barrel.)
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Frank J. Barletta, St. Peter’s College vice president for finance and administrative services, would confirm only that the college bought the properties and that no donation to the school was involved.
“It’s an investment the college made back in 1989 which we don’t wish to discuss,” Barletta said. Other top college officials did not respond to numerous phone calls or written questions from The Times.
Joseph A. Vecchione, Prudential Insurance’s spokesman, said the sale and tax deduction broke no rules.
“We don’t believe there was anything improper,” he said. Initially, Vecchione described the transaction as a “straightforward business deal.” Later, the firm said its purpose was to provide “St. Peter’s with an opportunity for a future contribution.”
Vecchione said Prudential was not under any obligation to disclose the transaction to Pru-Bache customers. And regardless of what was listed on those customers’ monthly statements, Vecchione said, semiannual partnership reports showed that there had been a drop in the value of the partnerships’ holdings.
Prudential says St. Peter’s bought the stake with a $30.1-million note--in effect, an IOU. The company confirmed that the college makes no payments on the note; instead, all payments are made directly from any income the properties generate. The college itself receives none of the income.
And if St. Peter’s eventually sells the interest for less than $30.1 million, Prudential--not the college--will take the loss.
“Why in the world would someone do that for valid business reasons?” asked Wayne Klein, chief of the Idaho Securities Bureau who headed a multistate investigation of Prudential Securities. He called the sale “very suspicious.”
Guy B. Maxfield, a law professor and tax and trusts expert at New York University Law School, added that he was “very skeptical” that such a transaction would create a legitimate tax write-off for Prudential. Maxfield said the fact that St. Peter’s College makes no payments and put up no money might cause a tax court to rule that no sale had actually taken place--and hence to disallow any deduction.
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St. Peter’s officials have declined to explain why the college agreed to acquire the oil field stake. But Prudential has long had a close relationship with the college.
Prudential Insurance directors and executives have served on the board of St. Peter’s College. A Prudential Securities executive vice president is currently on the board. From 1985 to 1992, the Prudential Foundation made direct contributions to St. Peter’s totaling at least $330,000, Vecchione said.
In addition, Prudential’s ranks have long been flush with St. Peter’s alumni. “At one time, there were more graduates from St. Peter’s working at Prudential than from any other college,” Vecchione said, crediting the college’s strong accounting program.
Records show that Prudential Insurance bought the interest in the oil and gas properties in 1984 for $68.4 million. But financial statements filed with the New Jersey Insurance Department show that by December, 1988, Prudential had written down the value of its stake to $10.1 million because of the properties’ poor performance and the collapse in oil prices in 1985-86.
On Dec. 28, 1989, the company sold the stake to St. Peter’s for almost three times that sum--$30.1 million--which Vecchione said represented the “fair market value” on the date of sale.
The arcane rules of insurance accounting allowed Prudential to write the book value of the stake back up to $63.2 million on the date of sale--nearly the original purchase price. By subtracting the $30.1-million sale price from the $63.2-million book value, Prudential was able to claim a $33.1-million loss for tax purposes.
Pru-Bache sold about $8 billion in limited-partnership interests to hundreds of thousands of small investors in the 1980s, and the investors lost much of their money. In October, the brokerage settled civil fraud charges by the Securities and Exchange Commission and state securities regulators that it had defrauded customers, agreeing to pay a minimum of $371 million in fines and restitution, without admitting or denying the charges.
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The company is the subject of a federal criminal investigation and still faces numerous lawsuits.
Prudential Insurance has faced no government charges. But in a sign that the partnerships scandal is threatening to affect the parent company, the insurance rating agency A.M. Best said Friday that it may downgrade its rating of Prudential Insurance. Prudential denies any threat to its strong financial position.
The St. Peter’s Deal
* April, 1984: Prudential Insurance buys stake in oil and gas properties in Wyoming and Texas for $68.4 million. Other stakes in the same properties are sold to small investors through the Prudential-Bache Energy Income Funds partnerships.
* December, 1988: Statement filed with New Jersey insurance department shows that Prudential internally lowered the value of its stake on the company balance sheet to $10.1 million--presumably because of the sharp drop in oil prices in 1985-86. But statements sent to Prudential-Bache customers continue to list the value of Energy Income partnerships as unchanged from their original purchase price.
* December, 1989: Prudential Insurance transfers its stake to St. Peter’s College for $30.1 million. St. Peter’s doesn’t put up any money, instead giving Prudential an IOU. The deal poses no apparent financial risk to the college, but also offers no immediate financial benefit.
Through the arcane rules of insurance accounting, Prudential is able to write the book value of the stake back up to $63.2 million on the date of sale--close to the price Prudential paid in 1984. And by subtracting the $30.1-million sale price from the $63.2-million book value, Prudential claims a $33.1-million loss for tax purposes.
