Den of Thieves

by James B. Stewart

  The next day Mulheren called to tell Boesky he’d gotten the tickets and Boesky could pick them up. “That’s great,” Boesky said. “But my kids would really like to meet Springsteen. You could just fly Springsteen up to Mt. Kisco in your helicopter, and we could have dinner. Just you, me, the kids, and Springsteen. Then you could fly back. It’d just be for one evening.”

  Mulheren was appalled. “For God’s sake, Ivan,” he said. “He’s not a trained chimpanzee.”

  It was a bleak Friday morning in early January 1985. As they gathered in the conference room for the daily morning meeting, many of Boesky’s employees were looking forward to a quiet weekend after the previous week’s round of New Year’s parties. The meetings typically began at 9 A.M. and continued until 9:45, with Boesky issuing the day’s trading instructions and research requests. The traders usually left before 9:30 to be ready for the market opening.

  Boesky arrived promptly at 9 A.M., nodded curtly to his staff, and took a seat at the head of the oval table, a phone within easy reach. He began dispensing orders. Then, after about 20 minutes, Boesky’s secretary, Ianthe Peters, appeared in the doorway behind Boesky, looking anxious. She knew Boesky hated to be interrupted. Intrusions were normally met with rage. “Mike’s on the phone,” she said. Boesky broke off his orders. “I’ll take it,” he said immediately.

  Everyone in the room knew that “Mike” was Milken. The traders referred to him as “the Coast,” but Boesky’s secretary always called him simply by his first name. He was the only person who always got through to Boesky.

  Boesky put his fingers to his lips and looked around the table, ordering silence. Then he picked up the phone. There were no pleasantries. Boesky said little, mostly indicating agreement with whatever Milken was saying. When he hung up, his eyes were gleaming with excitement.

  “We’re putting all engines on max,” Boesky exclaimed, and everyone realized their hopes for a quiet day were gone. Boesky ordered Lessman to generate research on both Diamond Shamrock and Occidental. He ordered Davidoff and the traders to buy immediately as much Diamond Shamrock stock as possible while simultaneously selling short Occidental Petroleum. Davidoff plunged into action, eventually snapping up a whopping 3.5 million shares of Diamond Shamrock. He had more trouble shorting Occidental, managing to sell short only 19,000 shares.

  Lessman wondered what was going on. What had Milken said to Boesky? Neither stock had been on their research or trading lists before that morning. Something, he thought, was fishy. Before he could make much research headway, trading was halted in the securities of both companies at their request. Then they announced jointly that they were discussing a “possible business combination,” and trading in the stocks opened. There was little market reaction; the announcement was too vague. Often, the shares of the company being acquired soar in price, while those of the company making the offer decline. But no one knew from the press release whether Occidental was talking about acquiring Diamond Shamrock, or vice versa. And sometimes “business combination” meant a stock swap, in which case, depending on the exchange ratio, the shares of both companies might stay the same. That didn’t stop Boesky, who showed remarkable confidence in his strategy.

  The day before, Ray Irani, Occidental’s president and a Milken client, had interrupted a dinner meeting at which a merger of Diamond Shamrock and Occidental was in fact being discussed. He had called Peter Ackerman at Drexel, one of Milken’s top aides. Other investment bankers were working on the deal, but Occidental had hired Drexel to examine the transaction and issue a “fairness opinion” assuring Occidental’s board that the transaction was fair for shareholders.

  Irani quickly briefed Drexel on the terms of the proposed deal, and a Drexel team arrived at Occidental’s offices in Los Angeles the next morning to begin work on the opinion. The plan was for Occidental and Diamond Shamrock to merge through a one-for-one stock swap, meaning Occidental would exchange one share of its stock for each Diamond Shamrock share. Since, as of January 3, Occidental was trading at $26.75 and Diamond Shamrock at $17.75, the deal would be a windfall of $9 a share to Diamond Shamrock holders. Because of the dilution caused by issuing so many new shares, Occidental’s share price would almost certainly drop.

  Given the terms of the deal, it made perfect sense for Boesky to buy Diamond Shamrock and sell Occidental short. James Dahl, Milken’s top salesman, who was sitting next to Milken at the trading desk in Beverly Hills, overheard Milken—before the deal’s terms were announced publicly—tell Boesky to short Occidental and go long on Diamond Shamrock. Then he listened while Milken refined the strategy.

  This wasn’t just a friendly tip from Milken. He wanted to participate in the trading himself, despite the fact that Drexel, now working for Occidental, was obviously barred from trading. Milken and Boesky agreed that Boesky’s Diamond Shamrock and Occidental positions would secretly be half-owned by Milken. This was the conversation that, unbeknownst to Milken, was being overheard on Boesky’s end by everyone sitting in the conference room.

  The deal, which appears to have been Milken’s and Boesky’s first overt collaboration in insider trading, proved star-crossed. What had seemed a slam-dunk profit opportunity soured the following Monday, when Diamond Shamrock’s board voted down the deal. Soon after the secret board decision, Dahl noticed that Milken looked upset. Milken again picked up the phone and called Boesky. This time he practically screamed: “The deal didn’t go through. We’ve got to get out of the position.”

  Boesky was apoplectic and frantically ordered Davidoff to dump the position. But it was too late in the day; the market closed at 4, and news that the deal had fallen apart was released at 4:18 P.M. Now every arbitrageur was trying to dump Diamond Shamrock.

  That afternoon and the next day, Milken called constantly, complaining bitterly that Boesky was taking too long to get out. People in the office heard Boesky yelling back that it was Milken who’d gotten them into the mess. Davidoff finally talked to the frantic Milken himself, saying he was doing his best and giving him estimates of the losses they were suffering as Diamond Shamrock’s stock dropped throughout the day.

  Dahl heard Milken slam down the phone and complain that the department had lost more money on the Diamond Shamrock/ Occidental transaction than it had made all month. Dahl was baffled; how could the high-yield operation have been hurt by the proposed Occidental merger? Milken explained angrily that the department held a position “off line” with Boesky, and that as a result, the department now owed Boesky another $10 million. Milken was in such a bad mood that Dahl knew better than to push the issue, but he was still confused. He went to Lowell Milken to find out what was going on, but Lowell brushed him aside. Milken brooded for the rest of the afternoon.

  Increasingly, Dahl and others in the office were worrying about Milken, the stress in the office, and the effects it was having on them and their lives. Business was frantic; corporate finance in New York called constantly to see whether Beverly Hills could finance their deals. Milken seemed incapable of turning deals down; he always worried that Drexel might lose its dominance of the high-yield market. Already, they were embroiled in Pickens’s foray at Phillips Petroleum, for which Milken had raised an extraordinary $2 billion in financing over a single weekend.

  The atmosphere was tense. Milken was spending 14 hours a day on the trading desk. He developed dark rings under his eyes. For a six-month period, he actually called Jim Dahl “Tom”; Dahl was afraid to correct him. Dahl told Lowell that “Mike looks like shit,” and Lowell said, “I’m worried about him, too.”

  One of Milken’s problems was Boesky. Milken was now far more deeply in Boesky’s debt than he’d even hinted to Dahl. Boesky and Milken had taken the exchange of “favors” to dangerous, previously unheard-of lengths.

  During the spring of 1984, one of Milken’s earliest and most important clients, Golden Nugget, the casino company headed by Milken’s friend Stephen Wynn, secretly had begun accumulating shares of MCA Inc., the owner of Univers
al Studios. The goal was a possible takeover. By the end of July, Golden Nugget had acquired well over two million shares, and MCA’s shares rose from about $38 to $43. By August, however, Wynn and Milken had decided the deal wasn’t feasible. Golden Nugget wanted out of its huge position at the highest possible price, but if word leaked out, the share price would quickly plunge. Nevertheless, Wynn told The Wall Street Journal in October that Golden Nugget owned just under 5% of MCA and intended to hold the stock “for now.”

  It had been a tricky situation, and Milken had again called on Boesky for help. Boesky bought huge chunks of Golden Nugget’s position at the high market price, and Milken promised to guarantee him against loss. Because of Boesky’s interest, the continued high volume of trading, and the fact that Drexel was handling the accumulation, an MCA takeover seemed more likely than ever to close observers.

  As other buyers stepped in in anticipation of a takeover, Boesky began selling his position in smaller trades so as not to attract attention. Boesky did sustain losses, but Golden Nugget got out at a high price, guaranteeing its continued loyalty to Milken. The scheme to mislead the marketplace worked like a charm.

  Milken now owed Boesky for the MCA losses. He also owed the arbitrageur $8 million from the Fischbach deal. Boesky flew to Los Angeles, and the next morning he reminded Milken of their agreement. Milken turned him over to one of his colleagues, Gary Maultasch, who had begun keeping track of the Boesky positions. Milken told them to work out the balance due. In the meantime, Milken embarked on a series of transactions, trying to narrow the difference.

  Because of his extraordinary control over the junk-bond market, Milken could buy back securities at artificially low prices from Drexel clients who had no way of knowing their actual value; sell them to Boesky at a small profit; have Boesky resell the securities to Drexel at a much higher price; and in turn resell them to Drexel clients at still higher prices. This enabled Milken to repay Boesky millions of dollars, even while continuing to earn profits from his trading operation. Drexel clients, of course, were none the wiser.

  Even after these maneuvers, however, Boesky still had a credit. At his request, Milken engineered another series of trades that generated artificial tax losses for Boesky. This time, it was American taxpayers who were cheated.

  By May 1985 the slate was clean. It was a measure of Milken’s extraordinary market power that, in less than six months, he could clandestinely repay Boesky more than $10 million without so much as writing a check. Both Milken and Boesky realized that they could use each other to achieve other ambitions: not only insider-trading profits, but far grander dreams of corporate conquest and control.

  That spring, Milken, like Siegel and Freeman, was heavily involved in KKR’s bid for Storer Communications. Henry Kravis, growing increasingly close to Milken and impressed with his fundraising abilities, had hired Milken to arrange the financing for the bid, while retaining Siegel as his strategic advisor. Siegel never met Milken in the course of the transaction, but it was the first deal in which he worked closely with investment bankers at Drexel. Milken couldn’t trade in Storer himself, of course, so he had Boesky take a position on Drexel’s behalf shortly after he and his colleagues met to discuss financing for an increase in KKR’s bid. This gambit went smoothly, and Boesky credited Milken with a gain of over $1 million when the shares, predictably, went up and were sold on instructions from Milken’s high-yield department.

  But trading on inside information, even a sure bet, yielded profits that were small potatoes compared to what Milken could earn from the takeover transaction itself. For the Storer financing alone, Milken earned a staggering $49.6 million in fees. He also gained equity interests in the future KKR-led Storer, which he dispersed in the myriad private partnerships that benefited himself, his family, and others in the high-yield department. He didn’t tell KKR or Joseph at Drexel where the equity ended up; on the contrary, he told them falsely that it had been used to induce clients to purchase the debt. It seemed to Milken’s colleagues that the Storer deal fueled his almost insatiable lust for more takeovers. If the market faltered, Milken had shown that he had the awesome power to step in and make things happen—his way.

  This was amply apparent to everyone in the Beverly Hills operation just a few months after the Storer deal, when a delegation from Atlanta’s Turner Broadcasting showed up for a visit with Milken. In many ways, Ted Turner was the kind of client Milken liked. The colorful owner of the Atlanta Braves and “superstation” WTBS had recently founded a bold new cable broadcasting venture, Cable News Network. Turner was brash, irreverent, and rocked the establishment. Now he wanted to buy MGM/United Artists, in part for its library of film classics he could draw upon for a cable movie channel. MGM/UA, however, was far larger than Turner’s company and, given Turner’s own weak financial status, the prospect seemed almost laughable.

  Milken assured Turner that Drexel could finance the deal. Both MGM and Turner hired Drexel to represent them—creating an extraordinary potential for conflict of interest, even though Milken promised Turner that he’d respect the confidentiality of any information Turner gave him.

  Despite Milken’s assurances, however, the deal began to look increasingly shaky. Even Milken’s malleable bond-buying clients were balking at the terms, especially since both Turner’s and MGM’s financial conditions were deteriorating during the summer. The press began voicing skepticism: The New York Times reported on August 7, “Wall Street remained skeptical about Turner’s ability to raise the money,” and The Wall Street Journal noted on August 16, “Despite the Drexel [highly confident] letter, it remained unclear” how Turner would be able to support the huge amount of debt.

  In August, Milken began directing Boesky to buy MGM stock, agreeing that they’d divide any profits or losses in half, with Milken’s ownership kept secret. Milken was determined to complete the deal, though its terms did have to be restructured. The Boesky arrangement served at least two purposes: his purchases presented the illusion that an important arbitrageur believed the deal would go through, helping support the stock price. That, in turn, helped persuade Drexel clients that the bonds were a good buy. And, of course, Milken and Boesky made money off of Milken’s knowledge that the deal would be restructured and completed, as it eventually was. The profit on the joint Boesky/Milken position was $3 million.

  As with Storer, the trading profits were almost incidental. Milken and Drexel earned an extraordinary $66.8 million in financing fees for raising the $1.4 billion Turner needed for the transaction.

  The double threat of Milken information and Boesky buying power may have reached its apogee in the takeover of Pacific Lumber Co., the country’s largest owner of redwood forests, by Drexel client Maxxam Group Inc., a real estate developer whose rise had been fueled by Milken’s junk bonds. MGM/UA had at least wanted a merger with Turner. Pacific Lumber, on the other hand, fought vigorously for its independence. Milken demonstrated the futility of its resistance.

  Maxxam announced its bid for Pacific Lumber at the end of September 1985, and on the same day, retained Milken and Drexel to handle the financing. As soon as the bid was announced, Milken directed Boesky to begin massive purchases of Pacific Lumber shares in anticipation of higher offers and as a tactic to pressure Pacific Lumber into accepting the Maxxam bid. As before, Milken retained a 50% interest in Boesky’s Pacific Lumber position. By October 22, when Pacific Lumber finally capitulated, Boesky had bought more than 5% of the company’s shares, helping to drive up the stock price. Maxxam responded by raising its bid twice, on October 2 and 22, ultimately settling on $40 a share.

  The Pacific Lumber trading netted profits of over $1 million. Since Boesky’s buying arguably caused Maxxam to pay a higher price than it would have, it boosted the financing costs as well. Drexel earned a fee of $20.5 million and received 250,000 warrants to buy Pacific Lumber stock, an equity stake whose value was potentially far greater. Boesky’s SEC disclosures in the deal, of course, made no mention of the true owner
ship in the position. Indeed, the perception that it was the feared arbitrageur Boesky who was amassing its shares had been one of the factors that caused Pacific Lumber to capitulate.

  Pacific Lumber, under Maxxam control, soon aroused the ire of conservationists by felling tracts of redwood forest to meet its debt obligations.

  Even as the Pacific Lumber deal was underway, Milken wielded similar tactics to drive Harris Graphics into the arms of an acquirer, a feat all the more profitable because Milken himself was one of the principal shareholders in Harris, and thus reaped enormous profits from the takeover.

  Harris had been created in 1983 when an investor group in which various Milken and Drexel partnerships figured prominently acquired the printing division of Harris Corp., then offered shares to the public. The partnerships held about 1.2 million shares acquired for $1 a share at the time Harris Graphics was formed. Original investors in the Drexel deal also included Fred Carr, the Executive Life official who had played a role in Fischbach, and Saul Steinberg, the important Milken client who headed the Reliance Group. Leon Black, the investment banker in Drexel’s New York office, was a member of the Harris Graphics board.

  In May 1985, Harris Graphics management, needing to raise capital, settled on a secondary offering of stock, which, while in the long-term interests of the company and its shareholders, would have the immediate effect of diluting the holdings of the Drexel/Milken partnerships. Even as Drexel was retained to handle the offering, Milken apparently determined that it would never take place. Instead, Harris Graphics would be sold whether it liked it or not, cashing out the partnerships at huge profits.

  Milken and his colleagues in Beverly Hills immediately started shopping Harris Graphics to clients who might be used to mount a bid for the entire company, including Boesky. On May 22, the eve of the day the secondary offering was supposed to take place, Harris Graphics management learned, much to their surprise, that a takeover bid appeared imminent. That same day, Milken ordered Boesky to start buying Harris Graphics stock and to continue until he’d amassed a stake of more than 5%. Then Boesky could file the required SEC disclosures, revealing to the world that Harris Graphics was “in play.” Boesky immediately did as instructed and, as in their other gambits, Milken retained a half interest in Boesky’s Harris Graphics stake.