At Drexel, Fred Joseph was somewhat concerned. He was used to calls from arbitrageurs—they phoned him constantly when he was involved in a transaction—but not arbitrageurs who were also generating fees for Drexel. He warned everyone in corporate finance to make sure they didn’t let anything slip with Boesky, who wasted no time testing Drexel’s “Chinese wall.” He called Joseph almost immediately to pump him for information about a pending deal. Joseph lied, saying, “I don’t know; I’ll check and get back to you.” He made sure he got back to Boesky with the answer only after the information Boesky sought had otherwise been made public. Boesky’s calls to Joseph tapered off, then stopped altogether. But that hardly mattered, once Boesky was talking regularly to Milken himself.
After Boesky got the $100 million Vagabond/Northview financing in mid-1983, the Boesky-Milken financial connections became intertwined at a dizzying pace. Milken agreed to undertake private placements of high-yield notes for Boesky Corporation totaling $110 million; a rights offering for Cambrian & General Securities, an English closed-end fund which Boesky had acquired as a vehicle for European operations and for additional investing in U.S. takeover situations; and a $67 million European issue for Farnsworth & Hastings, an offshore, Bermuda-based investment vehicle Boesky created and named after an intersection in his Detroit boyhood neighborhood. Most of Boesky’s capital was now Milken-generated.
Boesky came out to Beverly Hills regularly, overseeing his interest in the hotel. A measure of his developing closeness with Milken was a rare dinner invitation to the Milken home in Encino. At a later dinner with several Milken colleagues, Lori Milken complained about Boesky, saying she was put off by his cold, arrogant manner. “I never want him in the house again,” she told her husband.
On one of Boesky’s visits to Beverly Hills, Milken was too busy to see him and instructed James Dahl, his top salesman, to talk to him. “Tell him what you know about S&Ls,” Milken said, “because Ivan is interested in buying one.” Instead, Boesky pressed Dahl about whether he knew anyone who’d be interested in buying Gulf stock, in which Boesky was then acquiring a position. Boesky would guarantee them against any losses and share any profits. Dahl was taken aback: it was an open invitation to get into an illegal “parking arrangement,” in which Boesky would conceal his true ownership by having someone else buy and pretend to own the stock. Dahl told Milken of the incident the next day. “Don’t pay any attention to Ivan,” Milken said, blithely dismissing the matter. “He’s a flake.”
Others complained about Boesky, too. Lowell Milken, in particular, developed an almost instant aversion, and warned his brother, who paid no attention. “Drexel backs winners, and Ivan Boesky is a winner,” Milken would say. But Boesky was about to learn the true cost of Milken’s backing.
Another “winner” in Milken’s camp was the eccentric Miami financier, Victor Posner, one of the country’s original corporate raiders. Nothing about him or his tactics did anything to burnish the raider image. He had a reputation for acquiring a controlling stake in a company, plundering it, then letting the minority shareholders worry about the consequences, sometimes as extreme as bankruptcy.
Posner, 64 years old, was the son of a Russian immigrant. He had made his fortune in real estate in the thirties and forties, installing himself and his business interests in Victorian Plaza, a fading Miami Beach resort hotel he decorated in questionable baroque taste. Outside his 17th-floor office were a pool table and pinball machines. Posner never graduated from high school; he speaks with a blue-collar Baltimore accent. His primary vehicle for corporate raiding was Sharon Steel, which he acquired in 1969; other Posner entities in a complicated maze of cross-ownership arrangements included NVF, DWG, Pennsylvania Engineering, APL, and Royal Crown.
Throughout his career, Posner displayed little reverence for regulatory constraints. Soon after its acquisition by Posner, Sharon was directed to invest $800,000 of its cash in securities of Posner’s DWG Corp. The SEC filed suit, charging self-dealing; the charges were settled, with the Posner entities neither admitting nor denying guilt. Other SEC investigations were eventually launched, but no charges were filed.
Until the SEC intervened, Posner had Sharon pay for many of his personal expenses (and those of two of his children), including housing, limousines and drivers, servants, vacations, even groceries—all deemed corporate perquisites. Even when his companies lost money, Posner, his relatives, and members of his entourage lived lavishly. In a year that Sharon lost over $64 million, Posner earned $3.9 million in Sharon salaries and bonuses alone. His son Steven, installed as Sharon’s vice chairman, got more than $500,000. And they had use of the corporate yacht and the corporate jet.
But what many who knew Posner well found most distasteful was his appetite for teenage girls. In the latest, most eyebrow-raising example, his new mistress was the daughter of his former one, who became his public relations spokeswoman.
Posner had come to Drexel through one of Drexel’s main client-getters, a corporate finance holdover from Burnham & Co., Donald “Donny” Engel. Outgoing, affable, Engel had the flair that many stiffer investment bankers lacked. He didn’t pretend to great financial sophistication, but he was street-smart and quick to spot a potential client. He knew that the key to many client relationships was their personal lives, not their business. He came to know virtually everything about the lives of his clients, including their problems with their wives and mistresses. He wasn’t judgmental. On the contrary, he shared many of their appetites. Among Drexel’s important clients, Engel was given credit for landing Ronald Perelman, Nelson Peltz, Jerome Kohlberg, Gerald Tsai, Irwin Jacobs, and the Haft and Pritzker families.
Engel found a kindred spirit in Milken. They referred facetiously to the wealthy establishment as “the white guys.” They didn’t care much about them. For Drexel, they wanted clients like Herb Haft, a man whose blow-dried, cone-shaped snow white hair made him look like a character from “Star Trek.” Scoffed at by most of Wall Street, Haft had been poor, and he was hungry, with “fire in his belly,” as Engel liked to say. Engel liked clients who were short, unhappily married, and insecure. This was his profile of the ideal raider-client.
Engel and Milken knew how to manipulate the egos and insecurities of this particular type, born losers who were always looking to go their rivals one better. They had to be the best, the biggest, the richest. In Engel’s view, there were only two things that motivated these clients: the next deal, and the next sexual conquest. This was simply human nature.
Not everyone at Drexel was as comfortable with this approach as Milken. Engel was praised for bringing in new business, but his nickname was “the Prince of Schlock.” He was known as the “house pimp,” willing to arrange dates for important clients, such as William Farley of Farley Industries. Asked to speak to new Drexel investment banking associates on the topic of generating new business, Engel offered this wisdom: “Corporate America likes women. Find a hooker and you’ll find a client.”
Victor Posner eventually became one of Engel’s biggest clients, and Engel became the go-between for Posner and Milken. In the mid-1970s, even before the move to Beverly Hills, Posner had begun investing in Milken’s junk bonds. By the early eighties he could be counted on to buy whatever Drexel-issued paper Milken steered in his direction.
But Joseph had fundamental reservations about Posner. He asked one of his top corporate finance people, Stephen Weinroth, to do an analysis of the raider’s financial structure. The results were alarming: Posner had stopped holding annual meetings at most of the companies he controlled and was increasingly delinquent in reporting financial results. His own compensation, including what he earned from his private companies, was even more outsized than his public disclosures: a total of $23 million in 1984. And none of the companies was doing well. As Weinroth put it, Posner was turning “gold into dross.” Drexel’s reputation would only suffer if it was marketing issues that went bad.
Posner had big plans to use Sharon to make forays
at other companies. At its peak, Sharon had stakes in over 40 firms. Posner would put them in play and buy them out or acquire them for his empire. He broke them up and sold pieces if necessary. To do this, he needed vast amounts of additional capital, far more than could be generated through earnings, even in a good year for the steel industry.
One frustrating Posner foray was a run at a New York-based construction company, Fischbach Corporation. Posner thought the company could be merged nicely with his Pennsylvania Engineering. In 1980, Posner had acquired over 5% of Fischbach’s stock. He filed a Schedule 13-D with the SEC disclosing his position, and proceeded to threaten Fischbach with a hostile takeover. But Fischbach had fought back, threatening litigation on antitrust and other grounds. Posner had been forced into signing a standstill agreement that he now bitterly regretted. Under the agreement, he promised not to buy more Fischbach stock unless someone else mounted a raid on the company or filed a 13-D disclosure showing ownership of more than 10% of Fischbach’s stock.
Posner brought the situation to Milken and Drexel, saying he was determined, nonetheless, to wrest control of Fischbach. He wanted Drexel to underwrite a debt issue for Pennsylvania Engineering; he would use the proceeds to buy Fischbach—once he solved the standstill problem. Milken must have realized that he had the market power to give Posner what he wanted, with millions in fees as his and Drexel’s reward.
Soon after, in December 1983, Executive Life Insurance Co. filed a 13-D with the SEC, conveniently revealing that it had acquired a 13% stake in Fischbach. This was enough to trigger the end of the standstill agreement. Executive Life, it happens, is run by Fred Carr, one of Milken’s earliest backers and the owner of a huge portfolio of Milken-generated junk bonds. Carr depended on Milken to make markets and maintain liquidity in those holdings. He was the kind of Drexel client who generally did what Milken told him to, and, in any event, there was little risk in the Fischbach stake. Milken knew, even if Carr didn’t, that Posner was going to take over the company eventually.
Whatever Posner, Milken, and Carr expected, they apparently made a major miscalculation—albeit a highly technical one. Because Executive Life is an insurance company, it reports stock positions on a Schedule 13-G, and isn’t required to file a 13-D. Fischbach warned Posner that it would sue for a judgment that the standstill remained in effect because Executive Life should have filed a 13-G. The standstill agreement provided for termination only in the event of a 13-D filing. Whatever the merits of that argument, it would at least succeed in throwing the whole matter into court, buying Fischbach needed time. Not even Milken could sell securities with unresolved litigation threatening their investment potential. Posner and Milken were enraged.
Milken evidently decided to take matters into his own hands. He got on the phone to Boesky. As usual, Milken’s call was put straight through. Boesky got on the line immediately. He listened carefully. Milken was asking him—“instructing him” might be a better description—to acquire a large stake in Fischbach. After all, given the recent financings, Boesky owed Milken a favor.
Milken had chosen Boesky as the vehicle for freeing Posner from the standstill agreement. He directed him to begin accumulating Fischbach stock and convertible debentures, slowly, in small blocks so as not to attract undue attention. Milken assured Boesky that he expected an announcement by Posner to boost the share price, giving Boesky a profit. If that didn’t happen, Milken would guarantee Boesky against any losses. It seemed a no-lose proposition, so Boesky started buying on May 4, 1984. He stopped, at the behest of the Milken operation, when he came near the 10% threshold. Then, on July 9, Boesky bought a 145,000-share block of Fischbach directly from Milken’s high-yield department. Boesky crossed the triggering threshold and filed a false 13-D disclosure statement with the SEC, making no mention of Milken’s interest in his position or that he had been guaranteed against loss.
Ordinary observers would have assumed, wrongly, that Boesky had a real interest in Fischbach. They would have suspected an imminent takeover bid, by him or by someone else. A 13-D is intended to protect investors by revealing publicly that a large stake—anything over 5%—has been accumulated in a company. Everyone is put on notice that a takeover bid might be in the offing, and the investor filing the 13-D is required to disclose the purpose of the investment, including whether additional purchases are contemplated. Stock prices often rise on news that a 13-D has been filed, since they often precede a takeover offer. Because 13-Ds are relied on so heavily by investors, lying on a 13-D form is a crime.
This can hardly have caused Boesky much anxiety. There had been few prosecutions for 13-D violations. He was more upset that, despite Milken’s confident prediction, the share price of Fischbach kept going down, dropping from the mid-30s when Boesky began buying, to the mid-20s. Boesky kept getting assurances from Milken’s people in Beverly Hills that he’d recoup his mounting losses.
To make sure, Boesky called Mooradian, his chief record-keeper. Earlier, Milken had ordered Boesky to take a large position in Columbia Savings and Loan, another of Milken’s reliable buyers and sellers of junk bonds. He hadn’t explained the request, but he’d promised to reimburse any losses—and he wanted credit for any gains. Boesky had obliged. In effect, Milken thereby created a secret ownership interest in one of his major clients. At the time of the Columbia purchases, Boesky had asked Mooradian to create one of his mysterious files, like “chartreuse,” that he wanted no one else to know about. This one Mooradian identified with a red tie and a label, “Special Projects.” Now Boesky told him to keep track of their positions in Fischbach stock, their costs of carrying it, and any trading profits and losses realized. He wanted it all collected in the “Special Projects” file. As the price of Fischbach stock drifted steadily lower, Mooradian’s calculations showed Boesky with growing losses.
An increasingly impatient Boesky finally wrote to Milken on Nov. 28. “Dear Mike,” he began. “Enclosed you will find a self-explanatory list of information through and including Nov. 27, 1984.” The letter continued, cryptically, “I think it will be appropriate to resolve all of the enclosed.” Milken responded by arranging a series of trades that resulted in profits to Boesky, demonstrating anew his awesome power over the junk-bond market. The trades typically involved thinly traded securities where Milken had huge discretion to set the price. But the trades didn’t nearly offset what were now huge losses for Boesky.
Meanwhile, the scheme had achieved Milken’s purposes: the standstill was broken when Boesky crossed the 10% level. Fischbach conceded as much by abandoning the lawsuit over Executive Life’s shares and bowing to what was now inevitable. Posner and Milken were free to go forward.
But the prospect of financing a major Posner acquisition was alarming to Joseph and Weinroth. Joseph sent Weinroth and another corporate finance executive out to Beverly Hills to talk Milken out of doing a Fischbach takeover for Posner, who was now under investigation for tax fraud. At first Milken resisted, arguing a refrain frequently heard at Drexel: “If Drexel doesn’t do this deal, First Boston will.” Gradually, however, he seemed to come around. He praised Weinroth, saying the report on Posner was good work. When he left, Weinroth felt he had killed the Fischbach deal. He had no way of knowing that Milken was already inextricably intertwined in Fischbach. Milken’s attention to Weinroth’s presentation had been little more than a charade.
The very next week, preparations in Beverly Hills for the Fischbach deal went forward as though Weinroth’s trip had never happened. Weinroth, dismayed, went to Joseph, who called Milken. Milken was adamant that the deal proceed. Milken cited the success Posner had had with his earlier acquisitions and told Joseph he also valued Posner’s “information flow.”
Joseph offered only token resistance, despite Fischbach’s declining earnings and stock price. He managed to rationalize the deal on the grounds that Fischbach had a strong market share. Joseph did insist that the proceeds of any offering be used solely for Fischbach stock, not other Posner activities.
He also succeeded in modifying the terms of the offer slightly. But no one at Drexel close to the situation was fooled: Milken, not Joseph, was calling the shots.
Pennsylvania Engineering raised $56 million in February 1985 in a Drexel-led private placement of high-yield notes. Nothing was said about the Milken-Boesky arrangement, of course; no one would have bought the securities had they known they were part of an illegal conspiracy. As it was, not even stalwart Milken clients were willing to buy all the notes. A large position was unloaded on one of the firm’s captive clients, Dort Cameron III, a former Milken employee and protégé who had moved to a Bass family investment partnership where he traded in Milken-backed issues. Drexel itself absorbed most of the rest, adding it to its own inventory of junk bonds. Drexel’s fee for the private placement: $3 million.
The scheme subsequently played out just as Milken had planned, without a hitch. Some months later, Boesky quietly sold his Fischbach stake for the equivalent of $45 a share on the London Stock Exchange—even though Fischbach shares were trading at less than $40 a share in New York. Boesky still suffered a loss, by his calculations, of approximately $5 million on the gambit, but he was assured that would be reconciled at a later date. No buyer, of course, was identified when Boesky disclosed the sale in a routine SEC filing. It would have taken a patient and lucky detective to sift through the thousands of SEC disclosures and discover that Pennsylvania Engineering reported buying precisely the same amount of Fischbach stock and debentures that Boesky sold, at the same price, using proceeds of the Drexel offering. As Milken must have surmised, no one noticed the correlation.
Den of Thieves Page 13