In January 1985, Siegel and Boesky settled down again at Pastrami ’n Things. As he had vowed, Siegel upped his request to cover the anticipated skimming. He asked for $400,000, expecting to realize about $350,000. With that cash, he could pay off all the building contractors on the apartment. Boesky readily agreed; the value of the Carnation tip didn’t even have to be discussed. But this time Boesky had a new plan for the cash drop-off. He didn’t want to risk another transfer in the Plaza lobby.
Boesky instructed Siegel to be at a pay phone booth at 55th Street and First Avenue precisely at 9 A.M. Siegel would pick up the receiver and pretend to be making a call. While he was on the phone, the courier would stand behind him as though he were waiting to make a call. He would place a briefcase by Siegel’s left leg, then disappear. Siegel thought this scheme sounded even more ridiculous than the Plaza plan, like something out of a bad spy novel, but Boesky was insistent.
Siegel arrived at the pay phone early on the appointed date. To kill time, he sat down at a table in the window of a coffee shop across the street. As he sipped his coffee, he spotted someone who had to be the courier: a swarthy man with a briefcase milling about the small plaza where the pay phone was located. He was wearing a black pea coat.
Then Siegel saw someone else. About a half block up the street, he spotted another dark-skinned man walking back and forth on the sidewalk, keeping an eye on the man Siegel suspected was the courier. Siegel started to feel panicky. What was going on? Was someone else involved? Suddenly all of Siegel’s fears about Boesky and his reputed CIA involvement surged to the fore. “They’re going to kill me,” Siegel thought. That was the reason for the bizarre plan to have the courier come up behind him: he was going to be murdered. Siegel finished his coffee, paid the check, and fled, stranding the courier with the briefcase filled with cash.
The same day, soon after Siegel arrived at his office, Boesky called. “How did it go?” he asked.
“Nothing went,” Siegel answered.
“Why not?” Boesky sounded disturbed.
“There was more than one person there,” Siegel explained. “Someone was watching.”
“Of course,” Boesky exclaimed. “There always is. I want to make sure they deliver.”
Siegel was astounded. Boesky didn’t trust his own courier.
Boesky insisted that Siegel repeat the exercise at the phone booth. “I’ve gone to all the trouble to get this cash, you might as well take it,” Boesky argued. Siegel was wary, but he couldn’t bring himself to disengage. After holding Boesky off for several weeks, he gave in. This time the hand-off went without a hitch. As usual, some of the money had vanished, but Siegel didn’t even bother mentioning it to Boesky. “This is the last time,” Siegel vowed to himself. He didn’t intend to keep living in fear.
In Siegel’s mind, the scheme was over, the last payment made. Siegel stopped calling Boesky entirely, and when Boesky called, he was evasive, busy, eager to get off the line. It didn’t take Boesky long to realize what was happening.
One afternoon, as Siegel took Boesky’s call but then tried quickly to end the conversation, he sensed a softening in Boesky’s tone, a genuine sadness. “What’s the matter, Marty?” Boesky asked quietly. “You never want to talk to me. You never call anymore. I never see you.
“Don’t you love me anymore?”
His relationship with Boesky was not the only reason for Siegel to panic at the appearance of the Fortune article. Even as he was trying to disengage from Boesky, Siegel was trading insider information with his other telephone friend, Freeman—even as Freeman was warning Siegel about rumors of impropriety in Siegel’s relations with Boesky. The Freeman relationship was motivated not by Siegel’s need for cash, but by Kidder, Peabody’s.
Despite appearances, Kidder, Peabody was a firm in trouble, heavily dependent on Siegel for its profits. Even as its traditional sources of revenues, like brokerage and underwriting commissions, dried up, the firm disdained new profit opportunities. Kidder, Peabody had no arbitrage department of its own. Unlike virtually every other Wall Street firm, it didn’t trade for its own account. Al Gordon, and after him DeNunzio, believed that trading for a firm account blurred a firm’s duty to its clients’ interests. Firms without such scruples were also generating some of the biggest profits—firms like Goldman, Sachs, which had always had a major arbitrage operation, and even Morgan Stanley, which had more recently embraced such market opportunities.
DeNunzio was dubbed the “ostrich” by some of the younger bankers at Kidder, Peabody. When new lines of business were proposed, he’d routinely ask whether this was a business that Kidder, Peabody “needed” to be in to serve its clients. The answer was rarely yes. Meanwhile, the firm’s capital stagnated as rivals’ grew by leaps and bounds, enabling them to finance enormous projects from their capital bases. Kidder, Peabody was still relying on its retail brokerage network and distribution capacity, an increasingly cumbersome, archaic, and unprofitable way to raise capital. The retail brokerage network was actually losing about $30 million a year.
If that weren’t bad enough, Kidder’s carefully burnished reputation had been seriously besmirched in March 1984. Peter Brant, a smooth, socially ambitious young stockbroker featured in magazine advertisements touting Kidder, Peabody, admitted to an insider-trading scheme. He became the government’s chief witness in the most sensational insider-trading case in years: the trial of R. Foster Winans, a reporter for The Wall Street Journal, who had written the paper’s influential “Heard On the Street” column and leaked the contents of the column to Brant in advance.
The case attracted enormous publicity; it lifted the lid on a sensational tale of an alcoholic society lawyer, homosexual lovers, and clandestine meetings at chic restaurants and polo clubs. No one else at Kidder, Peabody was implicated, and the firm tried to downplay the matter, but Robert Krantz, the general counsel, proved a hapless figure on the witness stand. Kidder, Peabody’s compliance procedures appeared laughably inept.
The trial and attendant publicity made it even more imperative for Kidder, Peabody to find new sources of revenue. Earlier, DeNunzio and Gordon had met and taken a liking to a tall, boyishly handsome young Rhodes Scholar named Timothy L. Tabor. Tabor had some accounting experience and an Oxford patina that appealed to the two men, and they hired him as a consultant reporting directly to DeNunzio. His title was vice president in charge of planning.
After reviewing the firm’s operations and their profitability, or lack thereof, Tabor concluded that Kidder, Peabody’s very survival depended on its embracing new profit opportunities. He concluded that the firm had no choice but to begin aggressively trading for its own account. It would have to establish an arbitrage department. Tabor volunteered to join the new operation himself. He claimed to have done some options trading for his own account, but otherwise he had no experience whatsoever in arbitrage, and little knowledge of trading.
DeNunzio, still reluctant, followed Tabor’s advice while trying to avoid the appearance of doing so. He assigned the young consultant to a senior trader named Richard Wigton, the nominal head of institutional sales. Wigton was a former credit analyst who had spent most of his career at Kidder, plodding from one job to another, attracting neither attention nor embarrassment. He was portly, kindly, and dull. Everyone at the firm called him “Wiggie.”
As a trader, Wigton had begun “piggybacking” trades of some of the firm’s shrewder clients—simply buying and selling whatever he saw in their trades—and he had eked out some profits. On the basis of that flimsy track record, DeNunzio told him to begin an arbitrage department for Kidder, Peabody. A clerical employee from the firm’s library was sent down to work as an arbitrage clerk. That was it.
DeNunzio called Siegel into his office to explain the arrangement, cautioning him that he wanted no one outside the firm to know of the department’s existence. He said he was worried how their clients would react.
Siegel knew and liked Wigton, but thought he would be almost
hopelessly inept in any arbitrage capacity. He knew almost nothing about Tabor except that he seemed totally inexperienced and had just arrived at the firm. Then DeNunzio dropped a bombshell. He wanted Siegel to be their “advisor,” to be responsible for them. And no one else was to know. Siegel groaned.
At the time, March 1984, he was embroiled in the Gulf Oil bidding, representing KKR. When antitrust opposition to Socal’s acquisition of Gulf surfaced in Congress, and arbs and other investors began to get nervous, causing Gulf’s stock price to fall, Siegel decided to test his new arbitrage advisory status. He called Wigton and Tabor and told them to start buying Gulf stock. “The values are there,” he said, based on his study of Gulf’s earnings and assets for KKR. He dismissed the antitrust threats. “This company is going to get taken over by somebody. It’s a no-brainer.” By Kidder, Peabody standards, Wigton and Tabor amassed a huge position—200,000 shares. (By contrast, Boesky had a position of about 4 million.) When the Socal deal finally went through, Siegel was hailed as an arbitrage genius. Kidder, Peabody’s profit was $2.7 million. DeNunzio was thrilled, lavishing praise on Siegel for his insight. Siegel felt terrific. Arbitrage was so easy! He’d suspected he could be good at it. He felt he was making another important contribution to the firm.
No one seemed to recognize how perilously close Siegel had come to breaching the usual notion of a Chinese wall separating arbitrage from other activities at an investment banking firm. Siegel hadn’t used any confidential information gleaned in his role as a financial advisor to KKR in the Gulf deal. But he had come close.
One afternoon, Robert Freeman called Siegel, as he did almost daily, and mentioned that he liked the stock of Walt Disney Co., adding that he owned a position for his own trading account. Corporate raider Saul Steinberg had taken a large position in Disney stock, and there had been speculation in the arbitrage community that Steinberg would make a bid. The Texas Bass family, known for its shrewd investments, also had amassed a huge stake. Freeman strongly implied, without actually saying so, that he was in direct contact with Richard Rainwater, the financier credited with much of the Bass family’s success.
This, Siegel assumed, was how arbitrage in the “club” worked—tips, hints, nods, mutual connections, relationships based on reciprocal favors, all of which stopped just short of the actual passing of inside information. Why bother, when anyone could establish the reliability of a tip without having to say how the information was obtained or where it came from?
Siegel called Wigton and Tabor and told them to load up on Disney stock. Soon after, in June 1984, “greenmail” rumors coursed through the market, suggesting that, instead of bidding for the whole company or keeping it in play, Steinberg was going to be bought out by Disney. Siegel immediately called Freeman, who reassured him. “No way,” Freeman said. So Kidder, Peabody held onto its large stake, and Siegel hurriedly left the office to catch a flight to Cleveland, where he had a meeting scheduled with a client.
As soon as he got to the Cleveland airport, he called his office, and was sickened by the news: Steinberg had, in fact, taken greenmail. His takeover threat was over. Disney stock had plunged. Worse, Wigton and Tabor had been caught totally unawares. Kidder, Peabody’s loss on the Disney position was already bigger than the $2.7 million it had made on Gulf. Siegel was stunned. So much for his being an arbitrage “genius.”
The next morning Siegel got on the phone to Freeman. He was furious, even more so when Freeman told Siegel that he had sold his own position before the news was made public. “Why didn’t you tell me?” Siegel fumed. “You put me in that stock, you had the information, and you didn’t let me know?” Siegel was incredulous; he couldn’t believe Freeman would jerk him around like that.
Freeman seemed genuinely concerned. He said he didn’t realize Siegel had taken such a big position and, besides, he had tried to call Siegel with the information, but Siegel had been on a plane to Cleveland. Siegel was slightly mollified, but the loss still hurt. He didn’t know how he’d explain it to DeNunzio, especially since there had been so many rumors that greenmail was in the offing. Yet Kidder, Peabody, on Siegel’s advice, had held its entire position.
Several days later, a Friday, Siegel spent the day working at his desk in his Connecticut home. He had calmed down sufficiently from the Disney incident to call Freeman, and the two were chatting again about market and M&A developments as though nothing had happened. Siegel, without really giving the topic much thought, steered the conversation to a large Goldman client, Continental Group, a packaging company which was then the subject of a takeover bid from Sir James Goldsmith. Siegel asked Freeman whether he thought Sir James’s bid would hold up.
Siegel expected something helpful but not explicit, given that Goldman, Continental’s investment bank, was actively involved in plotting Continental’s strategy. Perhaps Freeman knew nothing about Continental, since Goldman supposedly had a strict Chinese wall between arbitrage and investment banking. Instead, Freeman said, “It doesn’t matter. They’ll sell the company anyway.”
Siegel was astounded. Coming from a partner in the firm representing Continental, this sounded like inside information. He hung up the phone and gazed out over the late-spring panorama of the Connecticut coast. He knew that, in his conversation with Freeman, they had just crossed an unspoken line. He also knew that he could easily make it right by simply not acting; insider trading requires trading on the information. But he also thought that, after the embarrassing Disney loss, Freeman owed him a favor. Wasn’t this how the arbitrage network worked?
Siegel picked up the phone and called Wigton and Tabor, suggesting they buy Continental stock. Much to his annoyance, they balked. They were still grumbling about Disney. Siegel raised his voice and told them he’d just gotten off the phone with Freeman. He repeated to them, word for word, exactly what Freeman had told him about the company’s intent to sell. “Now do you understand?” he asked. They did, and dutifully began buying.
About a week later, Siegel again asked Freeman about Continental. Freeman was in high spirits. “I get to play corporate finance,” Freeman said. “I get to do what you do, Marty.” Then Freeman brazenly crossed the line of inside information. He explained that a close friend of his, a sometime corporate raider named David Murdock, was being lined up by Goldman as a white knight for Continental. Freeman spelled out details of the Murdock plan, and said he was advising Murdock. Now Siegel was getting inside information from both the Continental side, to which Freeman was privy at Goldman, and the Murdock side. Siegel called Wigton and Tabor and urged them to buy more Continental stock.
Sir James increased his bid, causing a nice run-up in the stock price, and Siegel again called Freeman. “Don’t worry, we’ll pay more,” Freeman assured Siegel. Kidder, Peabody bought even more stock, eventually amassing a position worth $25 million, its largest holding ever.
Within Kidder, Peabody, only two people other than Siegel, Wigton, and Tabor were allowed to see the arbitrage position sheets: DeNunzio and John T. “Jack” Roche, Kidder, Peabody’s president, a weak manager installed by DeNunzio. After the Disney losses, DeNunzio became increasingly concerned about the size of the firm’s gamble on Continental, and finally called Siegel into his office for an explanation.
DeNunzio looked anxious and was perspiring, as he often did when feeling stress. How could Siegel risk so much of the firm’s capital? How could he be so confident? Finally, Siegel blurted out the truth: “This information is coming from Bob Freeman.” DeNunzio, of course, knew who Freeman was. He paused, looking grave, then said just two words: “Protect yourself.” He had no further comments about the size of the Continental stake.
The Continental deal climaxed on June 29. Murdock made the highest bid, $58.50 a share, topping Sir James at $58, and Tenneco, a large conglomerate, at just over $55. The Murdock bid was accepted at a special, closed meeting of Continental’s board at approximately 4 P.M. The news became public when it appeared on the Dow Jones ticker just before 5:30 P.M.,
but Siegel didn’t have to wait for a public announcement of the good news. Freeman had called more than an hour before the public announcement, less than 20 minutes after the board reached its supposedly confidential decision.
Wigton and Tabor cashed in Kidder, Peabody’s shares for a profit of $3.8 million, more than recouping the Disney losses. Everyone was jubilant. Siegel’s reputation was restored, though DeNunzio now knew, of course, that Siegel’s success wasn’t based on “genius” alone. Roche patted Siegel on the back, saying “You’re keeping the firm alive.”
Siegel realized that Freeman had made sure he would recover the earlier losses, for which he must have felt responsible. Now he felt he could trust Freeman; he was an honorable man. Siegel found he loved the high of the arbitrage gambles. He liked being the recipient of information, not the donor. The process seemed so much safer, the likelihood of detection so remote as to hardly be relevant.
He continued to milk the Freeman connection, but to make sure Kidder, Peabody’s level of trading didn’t attract attention, either by regulators or within the firm, Wigton and Tabor placed their orders through third-party brokers, such as Boyd Jefferies, a Los Angeles broker who had built a business around such private transactions. He was the leading player in what was known as “third-market” or “off-market” trading. The beauty of the arrangement was that no trading records would directly link Freeman’s phone calls to Siegel to any trading by Kidder, Peabody. Wigton liked to refer to the tactics as “hiding our hand.”
Den of Thieves Page 20