What mattered, therefore, was the price at which Boesky and Freeman would sell. Waters and Levine visited Freeman at his office at Goldman, Sachs, asking him point-blank, “What do we have to do to get you to sell?”
Obviously Clabir was going to have to raise its bid, and the higher the ultimate price, the more Lehman would earn in fees. Clabir chairman Henry Clark lived in Greenwich, Connecticut. One Sunday evening, Levine offered to drive Waters up for a meeting at Clark’s house. Levine pulled up to the curb outside Waters’s apartment building in a sleek new top-of-the-line BMW, which startled Waters. He guessed the car cost nearly $50,000, far more than any car he owned. “It’s a present for my wife,” Levine told him.
At the meeting, Clark was proving obstinate, seemingly indifferent to the sophisticated financial projections Waters was prepared to explain. But Levine startled him. “Come on, Henry,” he said. “Raise your bid. If you change your offer, I’ll kiss you.”
Suddenly Clark had a twinkle in his eye. “Dennis, I’ll change the offer if you don’t kiss me.” And he did raise the bid.
Levine was flush with the success of that minor triumph, and Waters had to admit Levine’s unorthodox approaches struck a chord with some clients. But Levine’s gambit was quickly eclipsed when Kohlberg Kravis Roberts, encouraged by Siegel, entered the bidding for HMW. Clark had to raise his bid repeatedly, ultimately offering $47 a share.
Finally Waters, at Lipton’s and Reich’s behest, called Boesky and Freeman, offering to drop the tender offer and buy out the arbitrageurs’ stakes. Just as they hoped, the prospect of losing a bid for the whole company led HMW into a merger agreement: within five minutes, Siegel called Waters, seeking to negotiate a friendly deal.
Though it looked like a defeat on the surface, the deal was considered another triumph for Siegel. His shrewd handling of the arbs and encouragement of KKR had forced Clabir to raise its price numerous times, ultimately leading to a transaction at a level that was more than three times the price at which HMW had been trading before the bidding contest. Ironically, in what later could be deemed a sign of the times, the only real loser in the process was the ostensible winner. Clabir never successfully absorbed its new acquisition and lost enormous amounts of money. HMW had to be sold, and Clark was ultimately ousted.
Levine considered Clabir a personal triumph, but he hadn’t impressed everyone. Waters was under no illusions about Levine’s analytical capabilities, even though he acknowledged some of his strengths. Siegel was even less impressed. Levine started calling him, sounding him out about going to work at Kidder, Peabody. Siegel interviewed him, but the session only confirmed his distaste for Levine. Levine didn’t get an offer. But Siegel had been impressed by Sokolow and offered him a job.
Sokolow called Gleacher for advice. He said he had offers on the table from Kidder, Peabody and Goldman, Sachs. Gleacher encouraged him to accept the Goldman bid, but for reasons he never explained, Sokolow stayed at Lehman, continuing to feed Levine information about his deals.
In November, participants in the Clabir deal gathered for a lavish closing dinner at the 21 Club, long a favorite with investment bankers and chief executives. The dinner gave Levine an opportunity to work on his shaky relationship with Reich, who, though he had remained reasonably friendly, had cut off the flow of inside information in late 1982.
Levine was still determined to have a source inside Wachtell, Lipton, but he’d followed Wilkis’s advice and hadn’t leaned on Reich. At the dinner, however, he played his card, moving to the table where Reich was sitting with Wachtell colleagues and raving about his old friend’s performance. He went so far as to say the deal couldn’t have been completed without Reich’s innovative ideas. Reich was obviously pleased; later that evening Levine maneuvered him aside and whispered, “We ought to get together again.” Soon the two were having lunch on a regular basis.
Levine had chosen a propitious time to renew his attentions. Despite his brilliance in the Clabir deal, Reich felt underappreciated at Wachtell, Lipton. He was billing about 3,000 hours a year of work to clients, an astounding rate. Yet, at his annual review in late 1983, Reich was stunned by some negative criticism. He’d done little to disguise his contempt for the routine work law-firm associates were expected to perform, but partners thought he’d gone too far when, earlier that year, he’d openly read a newspaper at a meeting with a client he deemed dull. The man had complained to the firm. Reich was warned that he was developing a reputation as a prima donna, unwilling to pull his oar.
He was furious after his evaluation. He vowed to “show” them by making partner in 1984, after a mere five years as an associate. He plunged into his work even more vigorously, seething with resentment.
He was also having troubles in his marriage, and was contemplating divorce. Levine, as he had with Wilkis, drew Reich further into his orbit by sharing his own marital woes and underscoring his notion that Wachtell, Lipton didn’t appreciate him and wouldn’t reward him. It wasn’t hard for Levine to lure “Wally” back into the fold as a full-fledged participant in the game. That spring and summer, Reich proved a gold mine of information, tipping Levine, who in turn tipped Wilkis, to six imminent deals, including a proposed transaction involving G. D. Searle, on which Levine reaped over $600,000 in illegal profits.
But by far the most thrilling coup for Levine and Wilkis was a bid by American Stores for Jewel Companies, a large Chicago-area food chain. In March, not long after their relationship revived, Reich had tipped Levine to the fact that American Stores was preparing a bid for Jewel in the neighborhood of $75 a share. Wachtell, Lipton was representing American Stores, so Reich had access to details of the planning. Levine plunged into one of his largest gambles, investing well over $3 million to buy an enormous stake of 75,000 Jewel shares.
Then nothing happened. Despite reassurance from Reich, Levine’s anxiety mounted. He’d never risked so much on a single transaction. He began to talk up the possibility of a bid for Jewel with his arbitrage contacts, hoping that a surge in price and trading volume would put some pressure on American Stores to make an announcement, but no one seemed to be taking the bait. The stock was listless. So Levine and Wilkis hatched a scheme to get news of a possible bid into the press—a time-honored tactic used by investment bankers to try to get companies “in play.” They felt sure they could use the press as a catalyst for speculative trading in Jewel stock.
They chose the Chicago Tribune as their vehicle; any news reported in its well-read business section would quickly be picked up by the rest of the financial press. Chicago was removed from Wall Street; there was little danger of any vigorous inquiry into the leaks. So Wilkis called the Tribune, and asked to speak with an M&A reporter. Without revealing his identity, he passed on the tip that Jewel was in negotiations to be acquired by American Stores. The Tribune reporter promptly checked out the tip with Jewel’s chairman, who scoffed at the idea of a merger. Nothing appeared in the paper.
A few days later, Wilkis called with more specific information that the reporter could check out: the chairmen of the two companies had had a secret meeting to discuss the proposed deal at a Denver hotel. The reporter was able to confirm the information, and the Tribune reported that the talks had taken place and that American Stores was prepared to make an unfriendly bid for Jewel, then trading at about $44 a share, at as high as $75 a share.
The gambit worked just as Levine and Wilkis had planned. The Tribune article set off a flurry of buying on Wall Street, and the two companies announced their merger just a month later. Both Levine and Wilkis made their biggest profits of the game—in Levine’s case, more than $1.2 million. Their leak had proven so effective that they now anonymously sent reporters copies of actual deal memos they’d stolen involving Boise Cascade, another takeover they were trying to help along. Even more exciting than the money was the thrill. The partners felt omniscient. Using information, they could actually take events into their own hands. Levine was going beyond his dream, reading The Wall St
reet Journal the day before it appeared. He was making the news.
Reich, however, was again having doubts and bouts of self-loathing. In August, he leaked details of a Warburg Pincus & Co.–led leveraged buyout of SFN Companies to Levine, who promptly bought stock (reaping profits of more than $100,000). But SFN proved to be a watershed in Reich’s career at Wachtell for unrelated reasons. The family controlling 30% of SFN’s stock was opposing the Warburg Pincus bid. The effort looked doomed. Then Reich discovered an arcane “fair price” provision governing the company: family members were precluded from voting their shares against the bid. Two days after Wachtell, Lipton unveiled Reich’s discovery, the family capitulated.
The client was ecstatic, and Reich was a hero within the firm and, more important, in the eyes of Lipton. Suddenly Reich’s vow of making partner seemed attainable. With the decisions only about two weeks away, he went to a top partner, James Fogelson, asking, “Have you heard about SFN? Do people appreciate me?” Fogelson, somewhat cryptically, said he shouldn’t be talking to Reich about his partnership chances, but assured him that he was appreciated. Reich smelled partnership in the air. Moreover, he’d patched up his problems with his wife; she was now pregnant with their second child.
SFN was Reich’s last leak to Levine. As before, he stopped returning Levine’s calls. He wanted out of the relationship, but didn’t want to confront Levine directly, fearful that he might succumb to emotional blackmail. Finally he agreed to meet Levine for lunch at a hamburger place on First Avenue in the upper 40s. Reich briefed Levine in detail on his tactics in SFN, eager to deflect the conversation from the inevitable discussion of the game. Levine went through his ritual complaints about Lehman, but this time Reich didn’t echo them with his own laments about Wachtell. On the contrary, he told Levine he thought he had a good chance of making partner that year.
As they walked back toward their offices after lunch, Reich told Levine he was getting out. “It’s bad, Dennis. It’s wrong,” Reich said. He said he was filled with anxiety and felt sick every time he leaked information.
Levine accepted the decision stoically. He told Reich his “account” was up to $300,000, and offered to pay him. “Don’t you want your money?” Reich didn’t. Levine promised to hold it for him, and Reich said he didn’t ever want it. In Reich’s mind, not taking the money was as close as he could come to expunging the whole experience from his life.
A few weeks later, the Wachtell, Lipton partners convened for their annual meeting and the selection of new partners. Reich was practically paralyzed all day, sitting at his empty desk, turning idly from one task to another but accomplishing nothing. He kept getting up to walk by Lipton’s office, checking to see whether he’d returned from the meeting. Finally his phone rang, and Lipton’s secretary summoned him.
When he walked in, the outcome was obvious from the smile of genuine pleasure on Lipton’s face. “Congratulations,” Lipton said, rising to shake his hand. “You made partner.” Reich, bursting with pride, rushed back to his office to phone relatives and friends. That night he and his wife dined at an elegant French restaurant, Le Cygne. Reich, loath to drink since reading an article suggesting that alcohol killed brain cells, indulged. He was intoxicated from the wine and by his own good fortune.
Reich’s loss was a blow to Levine. That summer, 1984, had been extraordinarily successful, with his insider-trading profits totaling well over $2 million. As Reich left the picture, Wilkis’s determination to provide better information had begun to pay off. That summer, Wilkis had learned of a Lazard-backed bid by the Limited for Carter Hawley Hale Stores, the big California-based department store chain. The deal brought Levine over $200,000 in profits, even though the takeover bid ultimately failed. Afterward, Wilkis took steps to increase the information flow even more.
In 1983, about the time Levine was wrapping up the Clabir deal, Wilkis had finally managed to get transferred out of international and into the corporate finance mainstream at Lazard. He was assigned to a leveraged buyout and some divestitures of parts of companies. That year, Wilkis had gotten to know a young Lazard analyst named Randall Cecola, who, Wilkis noticed, was constantly hanging around a Quotron machine, punching up stock symbols. He must be trading actively, Wilkis thought. Otherwise he wouldn’t be so interested in the stock market. Cecola seemed, on the surface, to have little in common with Wilkis. He was a fresh-faced Midwesterner with little exposure to either high finance or high culture. But Cecola and Wilkis, both Upper West Siders, began walking home together, usually cutting through the southwest corner of Central Park.
Cecola was the oldest of three sons; the youngest was retarded, he told Wilkis. His father had abandoned the family when he and his brothers were young and his mother had worked hard to make ends meet. Cecola spoke often of his need for more money to pay for business school and to help his family. One evening, at La Cantina, a Mexican restaurant on a lively stretch of Columbus Avenue, Wilkis started pouring out his whole story, the way he’d opened a foreign account and traded on Levine’s information. He even told Cecola about his ring of informants. It was a relief to unburden himself to someone other than Levine, and Cecola was not only enthusiastic, he told Wilkis he’d already begun using inside information to trade stocks in an account in his girlfriend’s name. Wilkis said he’d front Cecola $10,000, using it to trade in an account he’d maintain for Cecola’s benefit. He’d learned from Levine’s experience with others in the ring that it would be best to maintain control of Cecola’s trading.
Cecola told Wilkis that he was already at work on a top-secret deal that would be a perfect trading opportunity: Lazard was working for Chicago Pacific Corporation on a bid for Textron, the big conglomerate.
Wilkis called Levine that night. He felt he’d proved himself, landing a new recruit with access to a deal flow, just when the loss of Reich threatened the scheme’s profitability. Levine was elated, and wasted no time taking advantage of the hot new information about Textron. He bought 51,500 shares; Wilkis bought nearly 30,000. Levine also tried to capitalize on the information to enhance his reputation at Lehman.
Once his own purchases were made, Levine went to see Steve Waters, who had some dealings with Textron and knew its president, Beverly Dolan. Levine was in a high state of excitement, telling Waters he knew a hostile bid was in the offing and that Lehman should pitch Textron to get a defense assignment. Levine had visions of duplicating his coup in Criton. Waters was initially skeptical. “How do you know?” Waters asked. Levine was vague, saying only that he had an “anonymous source.” Waters asked to see figures on Textron stock’s price movement and trading volume. The information persuaded him that something might very well be going on.
Waters arranged a call to Dolan, with Levine also on the line. He told Dolan that Levine had information suggesting that Textron was about to become the subject of an unsolicited tender offer, and urged him to consider defensive countermeasures. But Dolan didn’t sound unduly alarmed; he said he hadn’t heard anything like that himself, but would be interested if Waters and Levine came across any more intelligence.
Just two weeks later, Levine’s forecast proved uncannily accurate when Chicago Pacific made its tender offer. Levine was bitterly disappointed when Lehman was snubbed by Textron, which hired Morgan Stanley for its defense. But he was partly consoled by his own trading profits of more than $200,000.
Wilkis earned about $100,000 in profits on his stock. But there was a hidden cost: Levine and Wilkis’s large purchases—a total of nearly 100,000 shares—and the fact that word of the Textron bid had apparently been leaking all over Wall Street, had contributed to inordinate trading volume and price movement in Textron stock before the Chicago Pacific bid was announced. The situation was so extreme that routine monitoring by the stock exchange triggered an investigation into Textron trading by the SEC.
The SEC lawyers, following the usual procedure, interviewed participants in the deal for clues as to how information may have spread. Dolan told them
that his first indication of a bid was the phone call from Waters and Levine. The SEC subpoenaed the two investment bankers shortly after the deal announcement.
Sokolow was worried when he heard that Levine had been subpoenaed, but Levine was unconcerned, brushing aside Sokolow’s warnings. “I’ve never done this sort of thing before,” he told Waters. “What do I say?”
“Tell them what you know,” Waters said, unconcerned. He’d participated in many such interviews over the years.
“Should I tell the truth?” Levine asked casually.
This took Waters aback. “For God’s sake, yes!” he replied. “Of course you do. You’re under oath.”
Levine testified on November 14, 1984, just a few weeks after the deal was announced. He later laughed about it with Wilkis, boasting about how easy it had been to dupe the “pansy” SEC lawyers. Under questioning from SEC lawyer Leonard Wang, Levine lied repeatedly and flamboyantly, seeming to warm to the task as he embarked on a convoluted explanation for his prescience. He denied trading stocks in any brokerage accounts he controlled, and denied having any offshore accounts. As for the Textron bid, he offered this account: He’d been sitting in the reception area of Drexel Burnham Lambert one day, when he overheard a conversation between two men “dressed in pinstripes, gray suits, just like us. They both had briefcases.” The men dropped the names of Lester Crown, a name Levine claimed to recognize as a director of Chicago Pacific, as well as others involved in the bid. “I then overheard what I would consider as garbled,” Levine continued, “where they said something about a 13-D filing, the words Skadden, Arps and First Boston, and also ‘fireworks in Rhode Island,’ which is a direct quote.” Levine claimed to have deduced that Chicago Pacific would make a hostile bid for Textron from the identity of Crown and the fact that Textron happens to be headquartered in Rhode Island—something Levine also claimed to know off the top of his head.
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