Excerpt

Chapter 4

The First Response

What if the right solutions aren't arrived at? What does Keith Schooley do then?
—HM

The bomb that was my memo had started to make waves, and the ripples were spreading throughout Merrill Lynch. By the end of the day on June 29, 1992, my memorandum had been faxed to Ellis in Oklahoma City and to Leo Roepke, the district director of the Arkoma District (which had replaced part of the Texoma District as the result of a recent reorganization). Sherman had been promoted to New York and was now in charge of the Eastern Sales Division. Roepke was Ellis' new superior and was considered by many to be an institution within Merrill Lynch, given his 32 years with the firm. In addition, my memo had also been faxed to the compliance department in Merrill Lynch's New York headquarters where, I would soon learn, senior management was quickly putting things in motion to control the situation.

Among the immediate measures taken by Merrill Lynch was the direct involvement of Helmuth Meditz, manager of internal reviews. Meditz was a more than 20-year veteran of compliance matters in the securities industry and was in charge of internal investigations for the firm. He called me on July 1 and informed me the matter was serious and he would like to meet with me on July 7 in Enid.

I agreed the matter was serious but did not realize how unusual it was for Meditz himself to visit a branch office when doing an investigation. Meditz later testified he interviewed more than a hundred people a year, mostly in New York, and only on occasion would he go out to a branch. Furthermore, he also later testified he was surprised and disturbed by my memorandum, enough to be in Enid within days of receiving it in order to make every effort to immediately jump on the situation and try to resolve it.

I knew virtually everything reported in my memo, although showing a distinct pattern of bad judgment by the management of the Oklahoma City Complex, could be easily dealt with by New York senior management. Everything, that is, except for one matter: the allegation of the widespread use of cheat sheets or other improper means used in taking the self-administered life insurance examinations in the Texoma District. Although I believed the insurance cheating was widespread, I had no idea the extent of it.

On July 7, Meditz and Rich Cordell, a vice president of the Western Sales Division from Los Angeles, both came to Enid to meet with me. Cordell was present to provide a business perspective as a complement to Meditz' compliance expertise, so they could completely understand the report I had made.

Meditz and Cordell decided it would be best to meet with me away from the Enid office so we met at the local Best Western. Meditz, who I found to be intense but likable, was in charge of the meeting. He said New York wanted an independent review of the situation pursuant to the memorandum; and Cordell said Chairman and CEO Dan Tully and Vice Chairman and General Counsel Stephen Hammerman both meant what I had quoted them as saying in my memorandum about the importance of integrity.

The meeting began with each of us providing some background information. During the next several hours, Meditz and Cordell listened attentively as I provided the details of the events I had reported. They seemed especially interested in the Tour de France CMA contest cheating. They seemed shocked to learn that, against Oklahoma City management's wishes, I had signed about 30 of my clients' new CMA account forms as the FC of record even after my production number had been taken away because of the contest cheating. My signing of the new account forms had led Ellis to instruct the Enid manager, initially Barton, then Thomas, to have my name replaced with another FC's signature who still had his production number. I told Meditz and Cordell that honest managers with Merrill Lynch would be irate at Ellis' scheme because his superior annual evaluation was deceptive.

I was surprised at how little Meditz and Cordell seemed to be concentrating on my allegation of widespread cheating in taking the insurance exam. Their interest was not even piqued after I told them I knew Hall had walked a number of Merrill Lynch FCs through the insurance exam on a question-by-question basis, with the knowledge of Ellis. I also informed them I had received from Graham what she called a cheat sheet, and she said the FCs were using it to get the exam behind them so they could study the course at their convenience.

Notwithstanding my providing this information, I did not perceive the serious concern by Meditz and Cordell I had expected, even after I suggested there could be national scandal implications. Later, I came to believe their seeming lack of interest was intended to downplay what Merrill Lynch would soon be hiding.

After five hours, Meditz and Cordell went to the Enid office and met with Thomas behind closed doors for an hour. They then came back to my office to visit with me again. They tried to convince me the cheat sheet I had received was most likely for a practice exam and not the real exam. I said I did not think so and that was certainly not the impression Graham had made in our phone conversation. Meditz then suggested, since the title on the cheat sheet Graham sent me was Estate Planning Training Course, it likely was a course for financial planning rather than life insurance. I pulled a file out of my desk drawer and showed them a voluminous document that listed the various life insurance correspondence courses that had been approved for continuing education requirements. One of the courses listed was, in fact, the Estate Planning Training Course. At this point it seemed to me Meditz and Cordell were up against a wall.

Meditz said he understood my feelings. He paused for several seconds, then asked, "What is it Keith Schooley wants to come out of all this?"

"The right answers," I replied.

"And what are the right answers?" Meditz asked.

"Quinton Ellis and Brent Barton need to go, and based on your assessment of Jack Thomas' involvement, maybe he needs to go too," I said. "At a minimum he needs to be reassigned to Oklahoma City. All I have ever wanted was a proper environment to do business in."

"You know, I don't know Ellis that well but he has been with the firm for more than 20 years—" Meditz said.

"Ellis and Barton are not Merrill Lynch's kind of people," I interrupted. "They need to go."

"What if the right solutions aren't arrived at? What does Keith Schooley do then?" Meditz asked.

"I don't know," I answered. Our eyes locked on each other's for several seconds, and I said again, "I really don't know."

The next sequence of comments and questions by Meditz spoke volumes to me and led me to believe Merrill Lynch feared a possible widespread scandal concerning the insurance cheating. Meditz said the matter was "really serious" and when I did not respond he asked me, "Why did you do it—why the memorandum to Jack? You had to know it would have to go all the way to senior management. You had to know."

I responded that the thought had crossed my mind. However, I always knew the memo would go to New York senior management. I knew this because if the memo had not made it to New York on its own, I would have sent it myself. I felt the people running the company should know what was going on here. At one point Meditz had even commented that based on the way the memo was written, it was clear I had intended outsiders' eyes to see the document. Indeed, I had compiled the memo in such a way that someone unfamiliar with the players or their backgrounds would be able to understand the context.

"If you hadn't written that memorandum maybe things could have been resolved," Meditz said. "You know, it's like you are out on the middle of a bridge and you're not sure what will happen. The bridge could hold or it could collapse. What does Keith Schooley do after the movie?" I now felt Meditz knew where I thought this could lead, to a scandal that could hurt the firm.

"A movie was never my intention," I said.

Meditz and Cordell politely thanked me for my time. I told them to let me know if I could be of further help. As they left the office, I sat in my chair for several minutes, drained and introspective. I believed Merrill Lynch had a major problem on its hands with insurance cheating that appeared to be widespread and I could only imagine the possible course of events that would play out. But never could I have imagined what the future would really hold.