May 1, 1992, was one of the worst days of Lawrence N. Smith's life.

It was on that day that Mr. Smith, an experienced banker and prominent member of the Norfolk community whose family has lived in the area for more than three centuries, was forcefully removed by PaineWebber Inc. as president and chief executive officer of Essex Financial Partners LP.

It was also on that day that he realized he no longer had the chance to redeem the more than $5 million he had raised from 45 friends, local community leaders, and associates from his 30-plus years in banking.

"That was the hardest thing," he says, in his first interview with the media since he was ousted from Essex 2#1/2 ago. "I put everything I had on the line to ensure its success, and it didn't succeed.

"My family and my investors are the losers - that's why I wish I could've played the last card. But I never had the chance."

His second regret is the way PaineWebber kicked him out of the company.

Mr. Smith had no indication about what was to befall him that day when he picked up Stephen Hamrick - at that time in charge of PaineWebber's direct-investment department - at the airport.

Mr. Hamrick had told him he was down vacationing with his family and asked if he could drop in for a visit, Mr. Smith says. The two chatted about the business, went over some spreadsheets, and then placed a conference call to PaineWebber in New York.

A voice came over the line informing Mr. Smith he was being removed from the company. The voice then read him his rights.

"The next thing I knew there were people storming the office," says Mr. Smith, his eyes becoming watery. "There were about a dozen of them running up and down the halls, demanding corporate records and files. I looked outside and saw a truck with a flashing light. Locksmiths were changing the locks."

Unbeknownst to Mr. Smith and other company officials, Gene D. Ross, a turnaround expert who previously had been hired by PaineWebber to take over the company, already had rented office space in the building. He was literally waiting in the wings to take over.

PaineWebber had prepared itself for this day. It had obtained approval from the Office of Thrift Supervision to hand the company over to Mr. Ross. The investment committee, which had a majority of PaineWebber representatives, met and voted Mr. Smith out. Trading of Essex's stock on the American Stock Exchange was suspended.

A legal battle over control of the company ensued but lasted only a few days. Mr. Smith, a banker with impeccable credentials from more than 30 years at United Virginia Bank, was out. His two sons, who also worked at Essex, would shortly follow.

"You've heard of the book 'Barbarians at the Gate,' " says Mr. Smith. "Well, I had the evil empire at my door. Some handle this type of thing with class and dignity; others do it in a Gestapo- type manner."

PaineWebber acted in that manner because it felt that informing Mr. Smith ahead of time could have led to bankruptcy for the company, which would've tied up the company in the courts for months if not years, according to PaineWebber executives.

"We were afraid that the recourse that could've been taken would've been very disadvantageous to the limited partners," says J. Richard Sipes, an executive vice president at PaineWebber who was on the Essex oversight committee. "We were afraid that a proprietary battle of institutions would not have been in our best interests. We believed a clean break was necessary."

For the huge New York brokerage firm, investing in such limited partnerships has been troublesome at best. In the case of Essex, PaineWebber restructured its debt and eventually extinguished all of it, which amounted to $20.5 million. After it was hit with a lawsuit by the original 2,000-plus investors in Essex last year, it agreed to pay all of them back in full.

What's more, PaineWebber, along with most of the other major Wall Street firms, are now under investigation by the Securities and Exchange Commission for its involvement in such limited partnerships. PaineWebber continues to service its preexisting limited partnership investments, but it will not initiate any new ones, Mr. Sipes says.

As for Mr. Smith, he has reversed roles in his present job. He and two other bankers two years ago came to the rescue of Resource Bank, a $60 million-asset bank down the road from Essex that was floundering at the time. With an impressive balance sheet in hand, Mr. Smith is sleeping better these days.

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