The deal also added substantially to Boesky’s riches. He began tracking Pickens’s purchases, checking regularly with Mulheren for news of large trades, and continuing to buy steadily himself as the maneuvering continued into 1984. As he had done before, Boesky was willing to risk a huge percentage of his capital, ultimately acquiring a stake of about 5 million Gulf shares. This time the Gulf splurge had a happy outcome, at least for Boesky. A bidding war broke out, with one bidder being Kohlberg Kravis Roberts, advised by Siegel. Siegel didn’t give Boesky any inside information, even though he knew all the details of KKR’s planning. But when the Socal acquisition went through—after some suspense-filled days while Congress contemplated antitrust action against the combination—Boesky earned an estimated $65 million in profits.
To celebrate, Mulheren, who also profited handsomely on the deal, threw a lavish party for about 25 of his arb friends who’d ridden the Gulf deal to its lucrative conclusion. Mulheren had decorated the tables with centerpieces of Gulf service station products with the familiar orange Gulf Oil trademark. As expensive wines, cocktails, and brandies flowed, Mulheren rose and addressed the group. “I have some good news for you,” he said. “James E. Lee [the defeated chairman of Gulf, whose decision to pull out of Cities Service had enraged so many arbs] has decided to join us and bury the hatchet. He wants to put this whole thing behind him.” With that, Mulheren gestured, and in came a trained monkey dressed in bright blue overalls with the Gulf logo. Boesky roared until he had tears in his eyes. He liked the monkey so much that he later hired the primate for a party of his own.
The fiscal year that ended in March 1984 was a very good one for Boesky. After losing $13.7 million the previous fiscal year because of the earlier Gulf fiasco, he earned an extraordinary $76.5 million. It was surely more than the former Detroit ice cream salesman, having come so close to bankruptcy so many times, had ever expected to earn. Boesky moved his operations to lavish new offices in midtown Manhattan, at 650 Fifth Avenue, that had been occupied by the Pahlevi Foundation, which administered the fortunes of the shah of Iran before he was overthrown. The mysterious Hushang Wekili accompanied Boesky, gaining his own office, salary, and bonus. The bonus reached $1 million a year—despite the fact that no one else who worked with Boesky could figure out what he did. Conway, Lessman, Mooradian, and others learned, however, to confide in Wekili.
In contrast to the spartan conditions in Boesky’s earlier operations, the new offices were lavish, decorated with help from Seema. The corridors were marble, with soft etched-glass panels and sculpture. Boesky’s own office was huge, with snow-white carpeting and white walls, and views of Central Park and midtown’s glittering office towers.
Most amazing was the electronic gadgetry that made his earlier microphone command system seem primitive. In addition to speakers, each researcher and trader now had a desktop television on which Boesky could project his image. At his own desk, Boesky had a large-screen television divided into two sections. On the upper screen he could project any image, including his own. The lower part of the screen was divided into sixteen sections. TV cameras trained at each trader and researcher transmitted their images into those sections. Boesky could hear and see each of his employees at all times. Any unexplained absence, even a trip to the bathroom, would be immediately detected. There were other toys: Boesky’s telephone switchboard contained 160 direct phone lines to Mulheren, Milken, arbs, stockbrokers, researchers at other firms, traders, and the like. Electronic ticker tapes flashed across the walls of his office, and a digital clock displayed times in zones around the globe.
The move to midtown had little effect on Boesky’s relationship with Siegel. When Siegel had information to impart, he still called with the invitation to have coffee. But now they actually did have coffee, at a Pastrami ’n Things delicatessen just across 52nd Street from Boesky’s new address. This humble venue, boasting Formica-topped tables, open containers of ketchup and relishes, and fake plants, was Boesky’s choice: he saw no reason to squander his wealth on expensive coffee. And Siegel thought it unlikely that anyone there would recognize either of them.
In spring 1984, Carnation Co. retained Kidder, Peabody and Siegel to discuss the sale of a large block of Carnation shares. Siegel inferred that Carnation would be sold; management agreed Siegel should try to get the highest price. He arranged a meeting with Boesky and discussed the situation, and Boesky began accumulating a large Carnation position that summer. Predictably, Carnation’s stock price rose.
By August, Boesky’s buying of Carnation had become so heavy, and had attracted so many copycats, that the New York Stock Exchange intervened. Carnation was asked whether it had any explanation for the sudden rise in price and trading volume of its stock. Carnation knew, of course, of the supposedly secret talks about its plans to sell a block of stock, but was genuinely baffled by the stock market activity. In public statements that violated the exchange’s and SEC’s disclosure requirements and typified corporate America’s own willingness to dissemble, Carnation announced that “there is no news from the company and no corporate developments that would account for the stock action.” Several weeks later, Carnation said that it knew of “no corporate reason for the recent surge in its stock price” and said flatly that it was “not negotiating with anyone.”
The announcements panicked many arbitrageurs on Wall Street, but not Boesky. Siegel encouraged him to ignore Carnation’s public statements and keep up the buying pressure. And in any event, Boesky knew from other sources that a takeover was likely. Boesky took advantage of drops in Carnation’s stock price to increase his stake. “This is Getty all over again,” Siegel assured Boesky.
In fact, it was better than Getty: cleaner, shorter, and more profitable. The old-line Carnation, one of America’s most familiar and trusted brand names, succumbed to a friendly merger offer from the giant Swiss food conglomerate Nestlé. For Boesky, the deal was his single biggest score on information from Siegel: $28.3 million, or roughly half of Boesky’s total profits in the deal.
The huge score again left other arbs jealous and incredulous. Wall Street had never before seen a string of arbitrage successes to rival Boesky’s: Natomas, Lenox, Getty, Gulf, and now Carnation. The massive size of his positions had earned Boesky the envious nickname “Piggy.” Increasingly, Mulheren found himself defending Boesky’s reputation when others complained and hinted that Boesky had to be using illegal information. “Come on,” Mulheren would say. “Can’t you just admit that someone’s smarter and better than you are?”
One afternoon Boesky called and asked Mulheren to take charge of a fund-raising dinner. The dinner would honor Boesky himself, and benefit the Jewish Theological Seminary, a prestigious scholarly institution near Columbia University in Manhattan. Mulheren had never detected any genuine interest on Boesky’s part in Judaism, but he knew Boesky gave to the seminary, probably to impress his wealthy Jewish investors. “Ivan, you know I don’t like to run things. Can’t I just give you a check?” Mulheren asked. He always made a point of donating to any charity a friend asked him to support. Boesky paused for a moment; then, sounding dejected, almost like a child, he said, “No one else will.”
Mulheren sighed and agreed to do it. He twisted Carl Icahn’s arm until he agreed to be co-sponsor and between the two of them they managed to sell all the tickets. Given the widespread feeling of hostility and jealousy toward Boesky, it wasn’t easy, but the event raised nearly $500,000 for the seminary. The dinner was a gala black-tie affair; even Mulheren donned a dinner jacket and bow tie. Boesky’s mother came from Detroit. She struck Mulheren as a sweet, dignified lady, showing a Jewish mother’s pride and concern for her son. After Mulheren introduced her, he said to the guests, “I know why you’re really here tonight. You’re here because you can’t believe Ivan Boesky actually has a mother.” The audience roared.
Even within his own staff, there was incredulity over Boesky’s mounting success. Lessman, the head of research, knew that neither his nor a
nyone else’s research had led Boesky into these positions. Yet he didn’t sense any pattern; he didn’t notice Kidder, Peabody’s involvement in a disproportionate share of the deals. In the midst of his boss’s hot streak that year, Lessman learned that Kidder, Peabody and Siegel were representing a target company in a takeover situation they’d taken a position in. He knew Boesky and Siegel spoke on the phone often, so he went to Boesky with the news. “I just learned Kidder’s in the deal,” Lessman said, proud of his intelligence. “Why don’t you call Marty Siegel and see if you can get some help?”
“What do you mean by that?” Boesky asked sharply, looking angry. “Why would Marty Siegel talk to me?”
“I mean, you’re tight with him, aren’t you?” Lessman said. “You could . . ”
Boesky cut him off. “Get one thing straight. There’s no special relationship between this firm and Marty Siegel. Now get out.”
Rather quickly, a more ominous warning shot crossed Boesky’s bow, one that also sent cold shivers down Siegel’s spine. Up to this point, despite his enormous success, Boesky had attracted surprisingly little attention from the nation’s financial press. During the summer of 1984, however, a Fortune magazine reporter, Gwen Kinkead, had begun work on a major feature story. Boesky rarely returned reporters’ phone calls, but he had granted Kinkead an interview, albeit one in which he refused to discuss any of his trading and wasn’t forthcoming even about trivial details of his life.
Siegel knew the article was in the works; the reporter left a message with his secretary. When he returned the call, however, Kinkead was out, and she never got back in touch with him. Siegel assumed she was simply looking for a comment from him on Boesky. During the last week of July, however, Siegel was surprised when Boesky called to warn him of an unfavorable “reference” in the article to Boesky’s relationships with Kidder, Peabody and First Boston.
Siegel was aghast. “This is very bad,” Siegel said angrily. “It’s bad for you and it’s bad for me.”
Boesky seemed unconcerned. “You’re overreacting,” he said, saying there was really nothing new in the article and that it was just a “followup” to a Los Angeles Times article that had also referred to Boesky’s connections to the two investment banks. This agitated Siegel even more. The L.A. Times! He hadn’t even heard about that. Was this turning into an avalanche of bad news reports? He knew how sensitive his business was to the press.
Siegel wanted to break the news to DeNunzio himself, before it came out in the magazine. DeNunzio reacted with concern but wasn’t overly troubled. He certainly didn’t ask Siegel if there might be any truth to the article. They called Peter Goodson, the nominal head of M&A, to assess the potential damage to the firm’s merger practice, and decided it would be minimal. Rumors swirled around Wall Street all the time. But they were greatly relieved that First Boston was also mentioned.
The following Monday, Siegel rushed to the newsstand to buy Fortune’s August 6 issue. Much of the article was innocuous, focusing on Boesky’s great financial success and aspirations, though it did contain some unflattering characterizations and details of his early background. Deep in the story, however, were two paragraphs that horrified Siegel: “Boesky’s competitors whisper darkly about his omniscient timing,” the passage began, “and rumors abound that he looks for deals involving Kidder Peabody and First Boston. Boesky vehemently denies using inside information. . . . ”
Then the article touched on a particularly sensitive matter. Boesky’s “moves—and those of Kidder, Peabody and Forstmann Little—fascinated Wall Street when Pargas, a Maryland liquid gas distributor, was being chased last year by the wealthy Belzberg family of Canada.” The incident involved some of Boesky’s closest relationships: with Siegel, who had talked with Boesky about Pargas, but who hadn’t—he didn’t think—given him any inside information; with Teddy Forstmann, the founder of Forstmann Little, who often talked with Boesky; and with Mulheren, for whom the Belzbergs were a major client and backer. Siegel knew that information about movements of the Belzbergs was routinely passed from Mulheren to Boesky.
“On the day after the Belzbergs told Pargas of their tender offer, but before any public announcement,” the article continued, “Boesky bought 35,000 shares of Pargas. . . . ” The obvious implication, though entirely circumstantial, was that Boesky had inside information on the Belzberg bid—probably through Pargas, which pointed toward Siegel.
The story went on to say that Boesky had unloaded a huge amount of Pargas stock before Forstmann Little’s announcement that it would reduce its own bid for Pargas caused the stock price to plunge. This pointed to the possibility that Forstmann had leaked his plans to Boesky ahead of time; Siegel himself had suspected as much. Boesky’s response, as quoted by Kinkead: “I have no comment on any trading. We buy and sell securities every day, always properly. We have superb counsel always advising us.”
Siegel was panicked. How could this have happened? His worst fear was that his relationship with Boesky might be detected, and now here it was in black and white in a national publication. The message wasn’t lost on Wall Street. Lessman’s friends began referring in jest to Siegel as Boesky’s “executive VP in charge of Kidder, Peabody.”
Later that August, Siegel got a call from Robert Freeman, the powerful head of arbitrage at Goldman, Sachs. For years, Siegel had been talking on the phone to Freeman almost every day. Freeman and Siegel had become close, chatting at first about deals their firms were involved in, then increasingly about sports, philosophy, and their salaries and aspirations. Freeman had moved his family from New Jersey to exclusive Rye, N.Y., and told Siegel all about the large house he had bought near the prestigious Apawamis Country Club. Siegel thought of Freeman as a telephone “pen pal.”
Freeman was urbane, soft-spoken, measured, personable. He had majored in Spanish at Dartmouth College, and gone on to Columbia Business School, then to Goldman. He learned arbitrage at the side of Robert Rubin, who went on to become co-head of the firm. Goldman’s legendary chairman, Gustave Levy, had himself been an arbitrageur, one of the deans of the field on Wall Street. Freeman was named a partner in 1978, and his advice was increasing sought by other partners in the firm as arbitrage assumed a growing role in the outcome of mergers, recapitalizations, and other major corporate transactions.
To protect its reputation, Goldman had established a strict Chinese wall between the arbitrage department and the rest of the firm. It circulated “restricted lists”—confidential lists of clients involved in pending investment banking activities. Arbitrageurs and others in the firm were forbidden to trade in the stocks of these companies. Freeman frequently complained to Siegel about all the deals he couldn’t trade because of Goldman’s role in them.
Like Boesky, Freeman was also indispensable as a source of market intelligence and news of deals outside of Goldman. He had an enviable position in a tightly knit circle of established arbitrageurs. Indeed, Siegel had long suspected “club” members of sharing information. The beauty of such an arrangement was that, even though one arb might be restricted from trading because of his firm’s involvement, the other members wouldn’t be. They were free to trade, on condition that they share similar information with the others.
Somehow, Siegel knew, such information was finding its way into the marketplace in advance of market-moving corporate announcements. Anyone could see the trading volume and price increases, and it wasn’t hard to trace the identity of the purchasers. A whole cottage industry grew up on Wall Street consisting of self-styled arbitrageurs who simply tracked the trading patterns of the club members, blindly buying and selling in copycat fashion.
The Carnation deal was in full swing when Freeman called, reinforcing Siegel’s suspicions about the arbitrage community. Freeman mentioned that he knew Boesky owned a million shares of Carnation. Siegel was doubly astounded, both by the magnitude of Boesky’s position—he had had no idea how heavily Boesky had invested—and by the fact that Freeman knew. Obviously, there were n
o secrets in the Boesky organization, at least when it came to powerful arbs like Freeman. No wonder rumors were appearing in the press. Siegel’s mind raced as Freeman talked on. Then he heard something that gave him another stab of anxiety: “You should be careful,” Freeman said. “There are rumors that you’re too close to Boesky.”
“I’m not talking to him anymore,” Siegel blurted out. “I used to.”
Freeman’s comment was the last straw. Siegel vowed that the Carnation disclosure would be his last. He had to distance himself from Boesky, fast. Otherwise he’d be dogged by rumors forever.
Then, just when he thought the Fortune incident was over, Siegel received a call from reporter Connie Bruck, who was at work on another profile of Boesky, this one for The Atlantic. She had read both the L.A. Times articles and the Fortune piece, and was prepared to mention Siegel by name as the subject of the rumors. Siegel begged her to keep him out of the article, to no avail. He went again to DeNunzio to warn him, saying that something had to be done. Something was. When Bruck turned in her manuscript with the reference to Siegel, she was told by lawyers for the magazine that the article would not be published unless she deleted the material about Siegel. She protested, but they were adamant. The article appeared in the December issue, with no mention of the Siegel rumors. Only later did Siegel learn that Kidder, Peabody’s lawyers had intervened, threatening suit if the offending material wasn’t dropped from the manuscript.
For the rest of the year, Siegel remained determined to sever his ties with Boesky. His almost daily phone contacts with Boesky fell off dramatically. He gave him no new inside information. And yet, as the end of the year approached, and despite all the anxiety, Siegel began to contemplate his year-end “bonus.” Even for Siegel, it was hard to make a rational case that he really needed the money. He had had a terrific year in 1984, and his legitimate salary and bonus at Kidder, Peabody had crossed the $1 million mark; he was paid $1.1 million in cash and Kidder, Peabody stock. Still, the renovations on the apartment were costing more than he expected, approaching $500,000. And he had earned the “bonus,” after all, with the incredibly valuable tips and insights. Why shouldn’t he share in Boesky’s outsize profits?
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