Freeman wasn’t told the scope of the Kidder, Peabody trading. DeNunzio still insisted that Kidder, Peabody’s arbitrage department be kept secret. Siegel told Freeman that he was trading for his own personal account. He was surprised when Freeman told him that he, too, was trading actively in his personal account and in accounts maintained for the benefit of his children.
Arbitrageurs at major firms were usually strictly barred from trading in their own accounts because of the temptation to put their own interests ahead of the firm’s, buying and selling in their own accounts first, in a process known as front-running. He was sure that Goldman must ban such activity. Freeman blithely brushed Siegel’s inquiry aside. “When I stop trading for Goldman, I turn to my own accounts,” Freeman explained.
Not surprisingly, Freeman soon demanded a quid pro quo—one that made Boesky’s payoffs look like a pittance. At the time of the Continental deal, Siegel and Freeman were involved in two other potential big acquisitions: Waste Management, the giant waste disposal concern, was considering a possible bid for SCA Services, a smaller company in the same business and a Siegel client. Goldman, Sachs’s client Rupert Murdoch was eyeing a bid for a large forest products concern, St. Regis Paper Co.
During June, Goldman, Sachs, at Freeman’s behest, had taken a position in SCA after Waste Management sent a letter forcefully proposing a friendly acquisition, a technique known to arbs as a “bear hug.” The letter was made public. SCA was a client of Kidder, Peabody and Siegel, and immediately put up resistance. The first line of defense was potentially deadly: there were antitrust problems that might cause the government to block the proposed acquisition.
Given the size of Goldman, Sachs’s position, word of antitrust problems caused Freeman great anxiety, and he called Siegel at home in Connecticut. “Marty, you’ve got to help me with SCA,” Freeman said. “Is this antitrust threat real?”
Siegel tried to avoid leaking inside information, talking in general terms about the companies’ options, but Freeman pressed, and finally Siegel abandoned the attempt at discretion. He told Freeman details of SCA’s defense plans, and said the antitrust defense was largely a ploy to get a higher offer. “This company is going down,” he reassured his friend, encouraging him to increase his position.
As the SCA deal evolved, Siegel and Freeman gradually developed a kind of code to make the transmission of information less explicit. Just before Browning Ferris, another waste disposal company, entered the fray with its own bid, Siegel told Freeman: “This thing is really going to trade.” Freeman realized, of course, that a price rise was imminent.
On Monday, August 13, SCA announced that it was entertaining offers from companies besides Waste Management, and the stock soared on rumors that Browning Ferris was making a higher bid. The previous Thursday and Friday, Goldman had purchased over 70,000 SCA shares. It bought another 57,000 shares Monday before SCA’s announcement sent the stock price soaring.
After that sudden price rise, Freeman worried that the market had gotten too euphoric about the prospects for a higher bid. He wondered whether he should unload some of Goldman’s position and called Siegel again. “What do you think of the price of the stock?” Freeman asked. Siegel decided to be coy.
“What do you mean?” he asked. But with so much at stake, Freeman was in no mood for games.
“You know what I mean,” he testily replied.
“It looks fine to me,” Siegel obliged, knowing that “fine” would be understood as encouragement to buy more SCA stock. Over the next few days, Goldman bought an additional 123,500 shares. Eventually Waste Management did top Browning Ferris’s bid, the antitrust problems were resolved, and Goldman had made one of its biggest arbitrage scores of the year, earning a profit of many millions.
The ball was now in Freeman’s court; he owed Siegel information, and St. Regis seemed the ideal vehicle for repayment. St. Regis had been in play for most of 1984. Sir James Goldsmith, in his quest for forest products concerns (which would culminate in his bid for Crown Zellerbach), had nibbled early in the year. Alarmed, St. Regis had turned to its investment bankers at Morgan Stanley, who in turn contacted another big paper company, Champion International, a Goldman client, about the possibility of a white knight rescue. St. Regis stock was put on a so-called “gray list” at Goldman. The gray list at Goldman and other firms had been developed as a more confidential version of the firm’s restricted list, which prohibited trading in the stock by the firm’s officials and employees. Restricted lists, circulated widely within the firm, had proven too liable to leaks. So gray lists were distributed only to a handful of top officials.
Eventually, St. Regis bought out Sir James’s stake in another greenmail transaction, and the threat of takeover seemed to dissipate. Talks with Champion ended, and Goldman removed St. Regis from its gray list. Then talks resumed on June 27. The new threat came from Rupert Murdoch. Murdoch and the Bass family (advised again by Freeman’s friend Rainwater) announced publicly that they’d acquired large stakes in St. Regis.
Freeman hadn’t been entirely candid with Siegel when he had told him he always finished trading in Goldman’s account before trading in his own account and those of his children. On July 16, Champion and St. Regis signed a confidentiality agreement as they examined each other’s financial results in anticipation of a merger. At that point, of course, Goldman, Sachs officials couldn’t trade in the stock of either company. Yet the next day, Freeman bought 15,000 St. Regis shares for his own accounts at prices ranging from $43 to $45 a share. The very next day, Murdoch announced a tender offer for St. Regis at $52 a share. The compliance department at Goldman, which should have reviewed such trades by Freeman, proved as somnolent as Kidder, Peabody’s or Drexel’s. The low-prestige compliance officers at Goldman wouldn’t dare challenge the trading of a powerful partner like Freeman. Goldman was hardly unique in that respect.
Several days later, St. Regis formally rejected the Murdoch bid, dashing market hopes for a quick surrender. The next day, however, encouraged by information Freeman leaked, Kidder, Peabody began building its St. Regis stake, continuing with steady purchases until the end of July, when Champion announced a $2 billion bid for St. Regis.
Inside information was only a small part of the alliance between Siegel and Freeman. Their relationship was useful in other ways, too. Earlier in the St. Regis deal, St. Regis’s investment bankers at Morgan Stanley had promised Siegel they wouldn’t “hop” any Champion bid to other potential suitors (meaning they wouldn’t try to leverage the Champion bid to start a bidding war). Siegel, through his market sources, learned that in spite of their promise Morgan Stanley was using Champion to try for a better deal that would, not coincidentally, result in a higher fee for Morgan Stanley. Siegel promptly informed Freeman, who took the information straight to John Weinberg, the head of Goldman, Sachs. Goldman confronted Morgan Stanley, and Champion insisted on signing a definitive agreement to merge that very night. Kidder, Peabody also used the information to add over 100,000 St. Regis shares to its holdings.
News of the Champion/St. Regis agreement to merge appeared on the Dow Jones ticker the next morning. Both Kidder, Peabody and Freeman cashed in their St. Regis shares for enormous profits.
Siegel was feeling euphoric. Wall Street was beginning to boom, and he was at the center of the action. He was even beginning to lose his anxiety that each deal would be his last. America was regaining its confidence and exuberance. Freeman had just been out to Los Angeles for the 1984 Summer Olympics, hailed as an American triumph. He called Siegel one day as the SCA transaction was reaching its lucrative conclusion. “I’ve got to hand it to you,” Freeman said approvingly. “You really know how to trade information.”
Then came the Fortune article. Suddenly Siegel was haunted by Freeman’s words. Just as he vowed to distance himself from Boesky, Siegel determined to stop the flow of inside information between himself and Freeman. He’d continue talking—he liked Freeman, and the relationship was too valuable a
source of legitimate market intelligence to break off altogether—but he wouldn’t give him anything confidential. After all, the Kidder, Peabody arbitrage department had already succeeded beyond anyone’s wildest dreams. With accumulated profits of over $7 million, it was suddenly one of the top profit centers in the firm, less than a year after its creation. He, Wigton, and Tabor didn’t have to do another trade for the rest of the year in order to be hailed as heroes. It was just a sideline to his main business anyway.
Siegel felt a great sense of relief. He’d saved Kidder, Peabody for at least another year. He could stop feeling like a criminal.
Hal Ritch settled into his desk chair in his Kidder, Peabody office and braced for a bad morning. That summer, 1984, he was working closely with Siegel on the same SCA deal that figured so prominently in the Siegel-Freeman relationship. The day before, he had misunderstood something Siegel said and inadvertently passed the error on to someone at Merrill Lynch. Siegel had flown into a rage, storming into Ritch’s office and yelling so loudly he’d had to close the door.
That sort of behavior was anathema to Ritch. Though a few years younger than Siegel, Ritch seemed to embody the old Kidder, Peabody. He was blond, a Stanford and Wharton graduate, thoughtful and considerate almost to a fault. At his annual review, Siegel had criticized him for being “too nice.”
Even before coming to work at Kidder, Peabody, Ritch had been good friends with John Gordon, Al Gordon’s son, who shared a secretary with Siegel. When Siegel first tried to recruit Ritch, Gordon warned him to stay away. Not only did Gordon resent the fact that Siegel’s work always took priority; he told Ritch he believed Siegel to be a “dark force.” Siegel’s obvious ambition and sometimes rough edges had alienated Gordon. Then, after Siegel married Jane Day, Gordon changed his mind. He told Ritch he thought Siegel was mellowing, turning into a decent fellow, and that he saw no reason now why Ritch shouldn’t come to work with him at Kidder, Peabody.
The shouting incident upset Ritch. He wondered whether Gordon’s optimistic reassessment of Siegel’s personality hadn’t been premature. But the next day Siegel appeared in his doorway looking almost sheepish. “Are you okay?” he asked Ritch, who said he guessed he was. “I’m sorry,” Siegel said. “I was upset. I shouldn’t have yelled.” Ritch felt better.
But Ritch did worry sometimes about Siegel. Ritch lived in Greenwich, Connecticut, not far from Freeman’s house in Rye, and Ritch and Freeman often shared a ride into the city. Ritch liked Freeman. One morning, as they drove into the city, they discussed the movie Kramer vs. Kramer. Ritch thought Freeman seemed very sensitive to the divorce and family issues raised by the film. Ritch knew Freeman was in arbitrage, but he didn’t seem anything like other arbs, most of whom Ritch regarded with distaste. Freeman was about to get out of the car at 60 Water Street when he turned to Ritch and said quietly, “Tell Marty Siegel, don’t talk to Ivan.” Before Ritch could ask him anything, Freeman was gone.
Ritch wondered what Freeman meant. Why didn’t he tell Siegel himself? Ritch sat close enough to Siegel to know that Freeman called Siegel two or three times a day. “Bobby’s on the phone” was a constant refrain, and he knew Bobby was Freeman. And in any event, why would an arb criticize someone for talking to another arb? Isn’t that what arbs did?
Then Ritch read the Fortune article, which caused quite a stir at Kidder, Peabody. Freeman again told him, “Marty Siegel had better watch himself. This looks bad.” Ritch finally raised the subject with Siegel. “Don’t talk to Ivan, Marty,” he said. “He’s bad news.” Siegel insisted there was nothing to be concerned about. The Fortune article was “horseshit,” he told Ritch.
Ritch believed him. Scrupulously honest himself, he didn’t believe Siegel would cross any lines of impropriety with an Ivan Boesky. Still, he knew something was afoot at Kidder, Peabody. Despite the secrecy with which Wigton and Tabor’s arbitrage operation was shrouded, hints of it were leaking out. For one thing, it wasn’t any secret that their trading profits had soared, and no one believed Wigton and Tabor alone were capable of producing such results. Proximity to Siegel had led Ritch to realize that, at the very least, he was involved, looking over their shoulders, perhaps offering insights drawn from his M&A experience.
Then Siegel confirmed all his suspicions, actually showing him, briefly, a copy of all Kidder, Peabody’s arbitrage positions, and boasting about how well they were doing. Ritch was shocked by the size of the positions and the amount of money at risk. “You can’t have Wigton in charge of this,” he argued. “He’s incompetent. You’ve got to hire a professional arb.” He recommended someone he knew from Dean Witter. Siegel talked to him, but later told Ritch he didn’t want to hire him. “We can’t put Wiggie out to pasture,” Siegel said. “He’s a team player.” Ritch was skeptical that Siegel was that loyal to Wigton. Something else had become clear to him: Siegel was having fun with arbitrage, and he didn’t want anyone else interfering.
This worried Ritch. While he was at Dean Witter, the firm had established an arbitrage department, and he’d been involved in its creation. Before beginning any trading activities, Dean Witter had hired two separate law firms, Shearman & Sterling and Kidder, Peabody’s outside counsel, Sullivan & Cromwell, to prepare directives on how arbitrage could be safely separated from investment banking. Now he’d figured out that Kidder, Peabody was engaging in arbitrage trading, and the firm didn’t even have a Chinese wall, the minimum requirement both law firms had insisted upon.
Ritch didn’t feel he could go to Siegel. In any event, due to the structure of the firm, Siegel wasn’t even officially in the M&A department, so Ritch’s titular boss was Peter Goodson. Ritch went to Goodson. “I know there’s arbitrage going on, Peter,” he told him. “This is dangerous. Something’s got to be done. I was involved at Dean Witter, I could help. But Siegel can’t be involved. We’ve got to have a Chinese wall.”
Goodson adopted a posture of concern. “You’re right, Hal,” he said. “It’s very troubling. I’m going to write Ralph [DeNunzio] a memo on this.”
But Ritch knew the arrangement continued as before; he frequently overheard Siegel on the phone trying to cajole Wigton and Tabor into various trading positions. So he went to Goodson again, complaining that nothing had changed. Goodson admitted he’d never written a memo to DeNunzio, or put anything in writing about Ritch’s concern. “I talked to Ralph about it, though,” he said, sounding as though that relieved him and Ritch of all further responsibility in the matter. “You know,” Goodson continued, “Marty’s getting a little stale. He’s tired of pitching tender retainers. This arb stuff is good for him to manage.” Ritch felt there was nothing further he could do. After all, Goodson was a director, and so was Siegel. They ought to know what they were doing.
During the SCA deal, Ritch put in especially long hours. Siegel often wanted to be at home in Connecticut with his wife, who was pregnant with twins. Siegel had boasted to Ritch and John Gordon that they were fraternal twins, requiring two separate sperm, as though that suggested that Siegel was unusually potent. Gordon thought the remark showed tremendous insecurity on Siegel’s part.
Because they were involved in the deal, Ritch and Gordon paid unusually close attention to trading in SCA stock, and they were repeatedly amazed by the timeliness of purchases by Goldman. When they saw records of Goldman’s huge purchases just before Browning Ferris’s surprise bid, Gordon said, “Holy shit! How could they be that bright?” They speculated together about the possibility of a leak, though it never occurred to them that Siegel might be exchanging information with Freeman. They simply wouldn’t have believed it. Still, Siegel made Gordon uneasy.
Kidder had decided that Siegel, as the firm’s major star, ought to belong to one of New York’s exclusive clubs, where he could mingle with the corporate chieftains Kidder, Peabody needed to attract as clients. Siegel always professed to loathe such clubs—their homogeneity, snobbishness, and old-fashioned values. But if he had to join one, he wanted one of the best. On some le
vel, he coveted the establishment acceptance that membership would confer.
So he asked John Gordon to intervene on his behalf at the River Club, an extremely exclusive, WASPy dining club located on the ground floor of River House, a cooperative apartment building next to the East River on 52nd Street. The River Club had been founded by members of the Rockefeller family, some of whom lived in River House, and had become a magnet for the East Side social and business establishment. Among the few Jews admitted was Henry Kissinger.
John Gordon’s father, Al, was a pillar of the club, and the two had begun to float the possibility of membership for Siegel. The prospect had met with a distinctly cool reception. The word Jewish was never mentioned, but the Gordons could easily tell that it was a problem, one exacerbated by the publicity Siegel had received as an M&A specialist. “Isn’t he an M&A wheeler-dealer?” asked one member, his tone conveying his contempt. Another mentioned that he understood Siegel to be “a hard-sell artist.” John Gordon backed off, fearful that too enthusiastic an endorsement of Siegel could damage his own reputation. Another member had been roundly criticized for bringing up the name of corporate raider Ronald Perelman, who, it went without saying, was rejected out of hand. Now Gordon himself was beginning to share the doubts of others. After the SCA situation, he would occasionally assure Siegel that he was continuing to press his case. But his effort was, at best, half-hearted.
Siegel finally did join another club, the far less prestigious Union League Club on Park Avenue. His membership was short-lived. He found it unbearably dowdy. When members voted to continue excluding women, despite pressure from the New York State attorney general, Jane Day was outraged. Siegel was only too happy to drop out in protest. DeNunzio’s effort to mold Siegel in the image of the old Kidder, Peabody was doomed.
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