Den of Thieves

by James B. Stewart

  Now Gleacher began to take the matter seriously. He met with Criton’s general counsel and landed the business. Gleacher and Levine, as well as Sokolow, who was enlisted to handle the serious valuation work, flew to Seattle to meet with the company chairman. Later, Gleacher met alone with John Moran, leading the buyout group. Using Lehman’s valuations, Gleacher managed to get Moran to boost his bid substantially, to $46 a share. Criton capitulated, happy at the rich price, and the deal was announced. For little more than one day of intense work, Lehman’s investment banking fee—traceable directly to Levine’s tip—was $2.5 million.

  Suddenly the buffoon was a hero. Gleacher arranged for Levine to have a Quotron computer terminal so he could monitor trading activity in scores of stocks at once. He would get immediate news announcements, and wouldn’t have to bother with the actual ticker tape. With a 30-foot cord on his telephone, Levine could roam as he worked the phone, broadening his circle of arbitrageurs and other potential sources of deal intelligence. And Levine was freed from the analytical work he hated, and encouraged to spend his time trying to generate new clients. His colleagues on the same level of seniority resented this, but Levine was happier than he’d ever been. He was carving out a niche in investment banking that had not existed before: he was someone who used information to hustle clients.

  Levine had other reasons to celebrate the Criton deal. On August 17, a week before the deal was announced, and even before he had approached Gleacher about landing Criton as a client, Levine had bought 27,000 shares of Criton. His trading profit was his largest yet, $212,628.

  Levine was quick to grasp the implications of his Criton score. The beauty of “the game,” he told Wilkis, was that it could be played two ways. He could trade on the information, and he could also use it to land clients for Lehman.

  Stardom, however, depended on keeping his ring of informants together, and there were problems. Reich had been the first to waver. He was torn between the thrill and the remorse.

  Then Reich got a jolt at his firm. On a Wednesday morning in early September 1981, every partner, associate, paralegal, and secretary in Wachtell’s offices was called into a meeting to be briefed on the shocking news that a 37-year-old Wachtell partner, Carlo Florentino, had been arrested, charged with insider trading, and dismissed by the firm. Florentino had amassed $600,000 in an E. F. Hutton account using his own name, trading in deals he had learned about at the firm.

  Reich knew his arrangement with Levine was far more sophisticated, but the news was still terrifying. He decided to stop passing information to Levine. He even went so far as to mislead Levine about two deals, hoping Levine would lose so much that he’d stop. “This may be risk-free, but it’s also return-free,” Reich said sarcastically to Levine at one of their lunches. But Levine couldn’t be stopped. He assured Reich that they’d learned from their mistakes and would do better. Reich tried not returning his phone calls. Finally, in August 1982, Reich broke the news that he wanted out of the arrangement. He didn’t want any of the money that Levine tried to press on him. But, he assured him, he wanted to remain friends.

  “Can you believe it?” Levine complained to Wilkis, “Wally wants out!”

  “Don’t push him,” Wilkis advised. Reich and Levine continued their lunches, but the flow of inside information dried up.

  Soon after, Wilkis got a bad scare of his own. That summer, Jean-Pierre Fraysse at Bank Leu had mentioned to Levine that the bank’s brokers had received an SEC inquiry about trading in some of the same stocks that “Mr. Diamond” had bought and sold in his account. Levine dismissed the SEC inquiries as routine monitoring. Fraysse was well aware of the uncanny timing of many of Mr. Diamond’s purchases, but had done nothing to discourage him. He now suggested that Mr. Diamond might want to slow down his trading, and spread his buying out more, at least temporarily. Levine ignored those suggestions, confident of the secrecy of his account; soon thereafter, he bought his huge stake in Criton.

  Wilkis’s bank, Crédit Suisse, had also heard from its brokers about the SEC’s interest, and had notified Wilkis. Wilkis took the news to Levine, who told him, “Just tell them to lie. It’s routine.” But Crédit Suisse was not so blasé, nor nearly so amenable as Bank Leu had been. The bank’s Bahamas chairman, Dr. Joseph Morger, called Wilkis and told him he wanted Wilkis to waive his rights to bank secrecy. The suggestion chilled Wilkis. He said he’d come to the Bahamas to meet with bank officials.

  Morger was tall and stern, an old-style Swiss banker. He was the dean of the Bahamas banking establishment. He had Wilkis’s trading records on the desk in front of him when Wilkis arrived.

  “You work at Lehman Brothers?” he began sharply. The correlation between Wilkis’s stocks and Lehman was obvious.

  “No,” Wilkis replied uncomfortably.

  “That’s curious.” Morger paused. “For all this trading, you certainly haven’t done very well, have you?” Indeed, Wilkis had showed an almost uncanny ability to trade on the tips that ended up losing money and investing only small amounts in the winners. Morger folded the papers and looked at Wilkis. “Take your business elsewhere.”

  Wilkis was terrified. He withdrew $40,000 in cash and had the bank wire the rest to his law firm in New York. He wanted nothing more to do with Swiss banks. The whole scheme was crazy. Here he was risking his career, his reputation, and he could have been making as much money investing in bonds at the 16% interest rates that were available. He had a wife and two children. He couldn’t live with the anxiety. He resolved to confront Levine.

  Back in New York, he called Levine and made a rare visit to his office. He hurried in, looking agitated, closed the door, and sat down. “It’s over, Dennis. It stinks. Laws are being broken.” He was near tears. “I’m not made for this.”

  Levine was calm. “That’s too bad, Bob,” he said. “The game’s been good to me. I have a million dollars now. I’m where I want to be.” Levine leaned over on the desk. “How are you doing at Lazard? Are they taking care of you?” Levine knew the answer, of course. Wilkis wasn’t doing particularly well. He was stuck in international when the big money was in corporate finance and M&A. His self-esteem had been slipping.

  “The game is fun, Bob, it’s easy,” Levine continued. “The government is stupid. Nobody with any brains is in that operation. They only make thirty grand, if that.” Levine gauged the impact of his words, then leaned back and pulled open a desk drawer. He took a small paperback book and threw it at Wilkis. “Go down to the Cayman Islands.”

  The book was a compact airline flight guide. Wilkis stared at it, then looked at Levine. Something had changed in their relationship. It was Levine who now seemed poised, self-assured, and Wilkis who needed him.

  A week later Wilkis arrived in the Cayman Islands. He deposited $86,000 in cash in his new account, also code-named “Rupearl,” at the Bank of Nova Scotia.

  3.

  West 67th Street between Central Park West and Columbus Avenue is one of Manhattan’s prettiest tree-lined blocks, home to one of the city’s venerable eateries, the Café des Artistes. Ivan Boesky arrived at the restaurant in 1976 to meet, for the first time, a young Wall Street trader named John Mulheren. In keeping with the restaurant’s genteel, old-world character, nearly all of its male patrons wear jacket and tie, as, of course, did Boesky.

  Mulheren showed up in a bright knit polo shirt and khaki trousers. Tall and solidly built, with tousled sandy-colored hair and a friendly Irish countenance, he looked, at age 27, like an overgrown college kid. He’d shown up for his job interview at Merrill Lynch, where he was now helping to develop an arbitrage department, in a variation of the same outfit, and the casual look had become his trademark. Not even arm-twisting by Salim B. “Sandy” Lewis, the Merrill Lynch official who hired him, could get him to wear a suit for a night on the town, not even with Boesky, whom Lewis had deemed a genius. Mulheren and his wife Nancy entered the crowded restaurant, joining Lewis and his wife and Boesky and Seema. There was little in Mulheren’s
own middle-class Catholic background that he felt Boesky could identify with; but Boesky quickly showed an almost obsessive interest in the new techniques Mulheren was applying to arbitrage. Mulheren had become, in only a few years, one of Wall Street’s savviest traders of stock options, a subject Boesky knew much less about. Options trading permits much greater leverage than buying stock on margin. Leverage was like catnip to Boesky, and he was mesmerized by the possibilities inherent in Mulheren’s strategies.

  Mulheren was a whiz at options trading and analysis, even though he’d had an unremarkable academic record as a political science major at Roanoke College, a small liberal arts college in Virginia. Looking for a job after graduation, he had only landed on Wall Street because his wife baby-sat for an official at a now-defunct firm. There he had dazzled his colleagues by developing one of the first computer programs for options analysis. He had been recruited to join Merrill Lynch by Lewis and no less a personage than Merrill Lynch’s chairman, Donald Regan, the future White House chief of staff and secretary of the treasury under President Reagan.

  Mulheren was also intrigued by Boesky. Mulheren had always considered himself to be something of a nonconformist and a renegade, but even he had to concede that Boesky was peculiar in a big way. When the Café des Artistes waiter came to take their order, Boesky said he hadn’t decided and that the others should make their selections. Then Boesky ordered: “I’ll have every entrée.” The waiter’s pen stopped in midair. Boesky repeated his order. “Bring me each one of these entrées.

  Mulheren glanced at his wife, raising his eyebrows slightly. Seema chatted on as though nothing unusual had happened. Mulheren wondered whether this was how rich people ate.

  When the food arrived, the waiter wheeled a table next to them. On it were the eight featured dishes of the day. Boesky looked them over carefully, circled the table, took one bite of each. He selected one, and sent the rest back.

  Boesky only picked at his food. Mulheren was relieved that he didn’t have to pick up the check.

  But the dinner launched a close professional relationship, and a friendship, between Boesky and Mulheren. When Mulheren and Nancy had a belated wedding reception for 500 people a year later at their home in Rumson, N.J., Boesky was present. The Mulherens went to the bar mitzvah of Boesky’s eldest son and the bat mitzvah of his daughter.

  Soon after the dinner, Lewis went to work with Boesky—but less than a year later, he had fallen from favor with the arbitrageur, and Boesky ordered Lewis out of his offices. They argued over $250,000 in disputed earnings. Boesky called Mulheren to ask him what he should do. “Pay him the money, Ivan,” Mulheren said. “What does it matter?”

  Boesky thought for a moment. “I can’t,” he said. “It’s not the money I care about, it’s the principle.”

  “Don’t give me that crap,” Mulheren replied. “The money is your principle.”

  Soon, however, $250,000 would seem a pittance to both Boesky and Mulheren. America was on the eve of the greatest takeover boom in its history, one that would bring both of them riches they’d never dreamed of.

  The causes of the boom were probably as much psychological as financial, though many economic explanations have been offered to explain the sudden, almost frenzied effort to buy existing companies rather than create new ones. Throughout the 1970s, investors had focused on company earnings, and the corresponding price/earnings ratios, as a measure of value. With an economy ravaged by post-Vietnam War and OPEC-induced inflation, high tax rates, and soaring interest rates, profits had been meager. So stock prices stayed low even as inflation pushed the value of income-producing assets ever higher.

  Coupled with low-priced assets was the tax code’s very generous treatment of interest payments on debt. Corporate dividends paid on stock aren’t deductible; interest payments on debt are fully deductible. Buying assets with borrowed funds meant shifting much of the cost to the federal government. The election of Ronald Reagan in 1980 sent a powerful “anything goes” message to the financial markets. One of the first official acts of the Reagan Justice Department was to drop the government’s massive ten-year antitrust case against IBM. Bigness apparently wasn’t going to be a problem in the new era of unbridled capitalism. Suddenly, economies of scale could be realized in already oligopolistic industries such as oil, where mergers wouldn’t even have been considered in the Carter years.

  What really fueled the takeover boom was the sight of other people making money, big money, by buying companies and selling them. When the former secretary of the treasury (under Nixon and Ford) William Simon bought Gibson Greetings in 1982 and then resold it sixteen months later at a profit of $70 million (investors earned 100 times their initial investment), Wall Street couldn’t stop talking. Suddenly “cash flow,” needed to support interest payments or “asset value” in the event of a breakup of a company, became the bywords of valuation, replacing the quaint, dated notion of earnings. Corporate raiders began to emerge, realizing that just about anybody could buy a company, slash expenses or break off pieces ruthlessly, and then unload the assets at a huge gain. The next best thing to buying and selling companies, and much less risky, was to be the investment banker, lawyer, or arbitrageur standing by as the money changed hands.

  In 1981, when Conoco, then America’s ninth-largest oil company, was acquired by du Pont for a staggering $7.8 billion, the takeover frenzy really started to kick in. The deal, the biggest in history by far, involved no less than four competing suitors—Dome Petroleum, Mobil, the Seagram Co., and du Pont. All needed armies of investment bankers and lawyers. Practically every major firm on Wall Street was eventually swept in. It was an arbitrage dream: Conoco’s stock traded at under $50 when the imbroglio began in May with a hostile bid from Dome of $65. It rose steadily before du Pont finally won the bidding in August, offering $98 a share.

  For an arbitrageur, there was almost no way to lose money on such a deal, but Boesky’s performance, drawing on every bit of intelligence at his disposal, was awesome. He drove his lawyers at Fried, Frank, led by Stephen Fraidin, to produce research on legal questions, including complicated antitrust issues with respect to Mobil. He was on the phone constantly to Mulheren and other arbitrageurs, watching volume and trading patterns in the stock, sniffing out clues for the next, invariably higher bids. And he backed his information with money, throwing everything the young Boesky Corporation had into Conoco stock, using maximum leverage. Had he miscalculated, the firm could have been ruined. As it turned out, Boesky doubled his capital in that single deal, earning profits of nearly $40 million. It was an intoxicating experience for Boesky and his colleagues.

  Mulheren had also thrived in the new environment. He had always dreamed of making a lot of money, and having people say “He made it honestly.” His dream, it seemed, had come true, even before the Conoco windfall.

  At Merrill Lynch, Mulheren had become a multi-millionaire before he was 30. In 1980, he bought a sprawling Victorian house on the waterfront in exclusive Rumson, New Jersey, previously occupied by Francis Cardinal Spellman; it had been bequeathed to the Church by a wealthy parishioner. His mother told Mulheren he was spending too much money. “How do you know I’m spending too much money,” Mulheren said, “if you don’t know how much money I have?”

  “It’s $400,000!” she exclaimed. “That’s too much money!”

  Mulheren moved his operations to Spear Leeds & Kellogg, the largest specialist firm on the New York Stock Exchange, which also had an active trading and arbitrage operation. Spear Leeds occupied the former Lawyers’ Club on lower Broadway in Manhattan, and Mulheren installed his trading desk directly under a huge Gothic stained-glass window.

  He reveled in the pleasures that money brought him. He gave away large amounts, to his alma mater, Roanoke College, to local charities, and to any other charity he was asked to benefit. He made it a policy: If anyone asked him to give, he would, no questions asked. Mulheren and his wife adopted five children, three of them with learning disabilities. H
e bought a local beach club, a 6,000-acre farm in the mountains of Virginia which he stocked with a herd of buffalo, and a winter home in Fort Lauderdale. Sometimes he commuted to Wall Street in his sleek power speedboat, docking at the South Street Seaport. He hunted, he collected antiques, he took up jet-skiing and snow skiing. By the early 1980s, he had reached the point where he couldn’t even say for sure how much money he made; it was all handled by accountants and lawyers. He simply told them to stop him if he was spending too much. They never did.

  Mulheren also delighted in his role as the enfant terrible of the arbitrage and trading communities. He loved to do battle with the arbs, most of whom he considered fat and lazy, and boasted that he usually “ate them for lunch.” One of his favorite pranks was to initiate heavy buying or selling about a half hour before a major market announcement, such as an antitrust court ruling that might make or break a merger deal, was due. In fact, Mulheren would have no idea about the outcome, but the sudden activity coming across the tape would suggest that he had advance knowledge. Arbs would go crazy, especially Boesky. “What did you find out?” he’d ask breathlessly. “What do you know?”

  “Nothing,” Mulheren would calmly reply. “I just did this to fuck people’s minds.”

  “You’re insane!” Boesky would scream. “You’re so juvenile.” Then he would hang up. Mulheren would roar with laughter.

  On days when the market was weak, he loved to start dumping large arbitrage positions, knowing it would drive down the stock prices and torture other arbs sitting on large positions. Other arbs would flood him with calls, seeking information; generally he ignored them. Then, when he began to see some panic selling on their part, he’d step back in and rebuild his position at lower prices.

  Mulheren made it a point never to talk to investment bankers. He thought they were arrogant, pompous, and of little use to him. Either they’d lie to him, which was worthless, or they’d give him inside information, which was illegal. Once he got a message that Siegel had called. He ignored it. He also shunned the press.