Den of Thieves

by James B. Stewart

  “Well, at least let me sleep on it,” Boesky said.

  The next morning, with Merrill Lynch ready to proceed, Boesky called Conway into his office. “Mike isn’t sure it’s a good deal,” he said. Conway was stunned. Milken couldn’t possibly know as much about the company as Conway did. It was now obvious, Conway thought, that Boesky wouldn’t pee without Milken’s consent. “Forget about merchant banking,” Conway said angrily, and stormed out. He submitted his resignation soon after, having never done a deal for Boesky.

  Nagle, hired to help in the merchant banking operation, was pressed into service to help Boesky raise his $220 million share of the big new Milken/Drexel financing. They called on the Belzbergs, Riklis, London investor Gerald Ronson, chairman of Heron International, singer Paul Anka, and real estate developer Peter Kalikow. At each stop, Boesky launched into his standard sales package on the beauties of arbitrage. He touched on its history, invoked the name of Gustave Levy at Goldman, Sachs, how great fortunes had been amassed but never made public. He said the new Drexel financing provided previously unheard-of opportunities. “This is leverage,” he exclaimed in summation. “This is the stratosphere.”

  Discussions usually moved quickly away from the arcane details of arbitrage. Kalikow, for example, had photographs of private jets on his office wall, and he and Boesky launched into a detailed discussion of the features they wanted in their next planes. The Belzbergs, on the other hand, were into boats, and they showed pictures of their favorite yachts.

  By and large, investors reacted enthusiastically. The largest single investor—and in Nagle’s view one of the most mysterious—was Jeffrey Picower, who invested $28 million. Nagle had no idea where Picower’s money came from; he occupied an unmarked office suite in an anonymous Manhattan tower.

  Other investors included Gould Inc., a company Boesky knew through Kidder, Peabody broker Don Little, who had its pension fund invest $5.7 million; the British Water Authority Superannuation Fund; Lincoln National Life Insurance; Interallianz Bank of Switzerland; Northern Trust Co.; Milton and Joseph Dresner, New York investors; and Martin Peretz.

  But the reaction at Drexel to the proposed Boesky financing was distinctly cool. Stephen Weinroth, the investment banker who’d tried to dissuade Milken from backing Posner in Fischbach, now trained his sights on Boesky. Fred Joseph told Weinroth to keep an eye on the financing transaction; it raised some very tricky issues, given that Boesky’s main business was arbitrage.

  Weinroth had an immediate reaction against the deal. Boesky’s financial statements were virtually meaningless; his big stock positions could change in the course of a single trading day. There was no way potential investors could evaluate his holdings. Boesky didn’t even want to provide quarterly reports identifying his positions, which he deemed confidential information. If there was a scandal, investors could be wiped out.

  Drexel hired a private detective to investigate Boesky, but he turned up nothing beyond a few SEC inquiries that had been satisfactorily resolved. Still, Weinroth thought he’d succeeded at persuading Joseph and others at Drexel to turn down the deal. Then, in November 1985 after the CBS and Gulf + Western fiascos, Boesky and Milken began pressing for a closing.

  Opposition to Boesky had also coalesced in Beverly Hills. One of Milken’s top aides, Peter Ackerman, warned that he thought too much money was being put into Boesky’s hands. He couldn’t effectively manage so much; he would be tempted to throw money at deals even before he’d analyzed them, Ackerman argued. Lowell Milken, who was closer to Milken than anyone, also opposed the financing. He didn’t like Boesky and didn’t trust him, he said. Dahl, too, lined up against the financing, arguing that if there was a sudden market drop, Boesky could be wiped out, along with investors in the bonds. When Dahl shared his reservations with Lowell, Lowell replied, “I don’t know why the hell we’re doing it, either. Go ask my brother.”

  Milken rejected all their arguments out of hand. “Drexel backs winners, and Boesky’s a winner,” he insisted once again, and that was the end of the discussion. What Milken didn’t disclose was that he would be gaining a personal equity stake in Boesky’s operation as part of the deal. It would bind Boesky even more closely to Milken.

  Weinroth made an attempt to go over Milken’s head and block the deal. He pleaded with Joseph to overrule Milken. Joseph could have, but didn’t.

  At first, the market acted like it would derail the deal even though Drexel wouldn’t. One after another, even some of Drexel’s most loyal bond buyers balked, saying they wouldn’t invest in an arbitrage fund. Dahl, the master salesman, even despaired of being able to place the debt, and feared that Drexel itself would end up owning much of it. Weinroth, Dahl, and others did manage to persuade Milken to change some of the terms of the offering. Some restrictions had to be imposed. Boesky was furious that he was specifically barred from using the proceeds to purchase the Gulf-stream jet he wanted. Boesky wanted unlimited leverage; he was held to three-to-one. He didn’t want any restrictions on equity ratios; the debt required him to liquidate if the value of his assets sank below a designated level. Dahl enhanced his reputation as a legendary salesman by persuading Charles Keating of Lincoln Savings to buy $100 million of the debt. The closing of the $660 million offering, formally known as Hudson Funding, was scheduled for March 21, 1986. At the same time, Ivan F. Boesky Corporation would be liquidated and Ivan F. Boesky Limited Partnership would be born.

  For their efforts on Boesky’s behalf, Milken and Drexel earned $24 million in financing fees. Milken also was granted a $5 million equity interest in Boesky’s operation (setting up the inherently dangerous situation where an investment banker actually owned an interest in an arbitrage operation). No one at Drexel outside the Beverly Hills high-yield department knew about this potentially lucrative provision. Now there was only one sticking point: the payment Boesky owed Milken from their whirlwind of illegal activities. With $660 million in the balance, Milken had all the leverage he needed. He calmly told Boesky there would be no closing until Boesky paid him what he owed.

  In a flurry of phone conversations the morning of March 21, the very day of the closing, Boesky agreed to make the payment. But it was too late to cover it up in securities transactions, as they’d done before. Boesky sold Milken some real estate warrants and United Artists securities at below-market prices. But that still left a large amount outstanding: $5.3 million, according to Mooradian and Thurnher’s calculations. Eager to lay the matter to rest so the closing would go forward, Boesky did something he’d never done in the course of his illegal dealings with Milken: he told Mooradian to issue a check for $5.3 million, and to identify the payment as “trading commissions.”

  And there the matter might have rested, were it not for Boesky’s accountants at OAD. The accounting firm was retained to peruse the books of Ivan F. Boesky Corporation and issue a so-called “comfort letter.” While a comfort letter doesn’t have the scope or stature of a full-blown audit, it is a representation by the accountants that everything appears to be in order and, as its name suggests, is designed to reassure investors in the new partnership. Ivan F. Boesky Corporation formally ceased existing at 4 P.M., when the stock exchange closed, and the accountants were present to take a last look at the final days of the corporation’s existence.

  Peter Testaverde, one of the OAD partners who handled the Boesky organization and was in charge of the Hudson Funding closing, was assigned to meet with Mooradian in a conference room to examine the most recent transactions. Testaverde was an old friend of Mooradian’s and he expected the procedure to be routine. At about ten minutes past four, however, Testaverde spotted a $10,000 account payable. “What’s this?” he asked Mooradian.

  Mooradian looked at the ledger, and was momentarily confused; in the excitement of a $1 billion deal he hadn’t paid much attention to anything so minor as a $10,000 bill. “I don’t really know,” he said.

  “I’ll need some documentation on this,” Testaverde said.

 
; “Oh come on, Pete,” Mooradian replied, arguing that the sum was immaterial.

  “I’ll have to have some kind of backup, Set,” Testaverde insisted. “I’m sorry.”

  Now Mooradian was agitated. “For God’s sake, Pete,” he said. “Why are you busting my balls on this?” Then, without thinking, he plunged ahead, saying what was really on his mind: “Why the fuck do you care about a little $10,000 when I’ve got $5.3 million sitting over here?”

  A stunned silence fell over the room, and Mooradian wished he could pull back his words. After all, he hadn’t actually made the payment yet, and he hadn’t even had time yet to enter it into the books as an account payable. Of course, when he did make the payment later that day or the next, it would have to be accrued, but meanwhile, who was to know? By then, the whole deal would have closed. He prayed that nobody had paid attention, but he could tell from the look on Testaverde’s face that the cat was out of the bag.

  “What $5.3 million?” Testaverde asked, obviously alarmed.

  “Uh, forget about it,” Mooradian said. “Forget I ever mentioned this. We can’t talk about it now.” Testaverde gathered up his notes, put them in his briefcase, and started to leave. “No,” Mooradian cried out, frantic at the thought that the closing was collapsing around him. “Don’t go! We can work this out.”

  But when Mooradian confirmed that he had, in fact, a $5.3 million account payable for which he had no documentation, no bill, no invoice—nothing but Boesky’s direction to make the payment—Testaverde left for his own office a block away. He said he couldn’t go any further until he’d had a chance to confer with the senior partner on the Boesky account, Steven Oppenheim.

  Mooradian waited in the conference room, chain-smoking, nearly paralyzed with anxiety. After what seemed like hours—but was really little more than 15 minutes—the phone rang.

  “You stupid fucking bastard,” Boesky screamed. “You stupid son of a bitch. What the hell are you doing?” Mooradian had never, in all his years with Boesky, heard him rant like this. Before he could respond, Boesky slammed down the phone. Moments later, it rang again. “You stupid fucking bastard,” Boesky began again. Within the next hour, Boesky called four or five times. He screamed “You stupid fucking bastard” over and over, until it seemed permanently branded into Mooradian’s mind.

  Mooradian was devastated. He figured he wouldn’t get any bonus. Worse, he’d probably be fired. For a guy like himself, with SEC sanctions behind him, finding another job would probably be next to impossible.

  At the OAD offices, Oppenheim told Boesky that, without documentation, the firm wouldn’t sign off on the comfort letter, which meant the deal wouldn’t close. Once he calmed down slightly, Boesky got on the phone to Milken. He and Boesky hastily agreed that the $5.3 million payment could be for “consulting”; after all, Drexel had done a fair amount of research on various Boesky projects. Boesky returned to his accountants and lawyers, suddenly “recalling” that the huge payment had been for research and other unspecified consulting.

  All agreed to go forward on the basis of Boesky’s representation, with the understanding that documentation for the transaction would be promptly forthcoming. In Beverly Hills, Milken had his brother Lowell obtain a letter explaining the payment as a consulting fee. Lowell Milken buttonholed Donald Balser, a low-level operations employee who happened to be nearby, and had him co-sign the letter.

  Despite the highly suspicious maneuverings surrounding the large payment, Boesky’s accountants and lawyers assured him that there wouldn’t be any problems. Boesky visibly calmed down, though he didn’t bother to call Mooradian. Only at about 7:30 P.M. did Nagle call Mooradian to relieve his misery. “Everything’s all right,” he said. “Drexel’s sending a bill for investment advisory services. Ivan is cool.”

  Mooradian was so relieved that he didn’t give the matter much further thought. He’d concluded from all his accounting work with Thurnher that Boesky and Milken were some kind of partners in something, so maybe Drexel had been doing some research. If so, of course, there wouldn’t have been such a brouhaha, but who was he to ask questions? He’d gotten into enough trouble already.

  An invoice from Drexel arrived three days later. It read “For consulting services as agreed upon on March 21, 1986, $5,300,000.00.” The cover letter, from Thurnher, was brief and to the point:

  Mr. Boesky,

  Please send your remittance check for the attached invoice directly to me at the address listed above.

  The address, of course, was in Beverly Hills, not in New York. Mooradian dutifully executed and sent the check.

  Mooradian’s deeper fears never materialized. The nearly $1 billion in proceeds from the sale of the partnership interests and the debt offering flowed in on schedule, making Boesky’s the most heavily capitalized arbitrage operation in history. Mooradian not only wasn’t fired, but he got his bonus: $350,000. He didn’t resent the fact that others got far more that year: Davidoff, the head trader, got $1.5 million; Lessman got over $1 million; Nagle got $1 million, and so did Wekili, even though Mooradian had no idea what Wekili did.

  Mooradian was just happy to have emerged with a job, especially with a firm that was now sitting on close to $1 billion of cash. “We’re going to be rich! Our ship has come in,” he exulted to his wife once he realized the deal would go through. But he never forgot the events of March 21, the pain and humiliation of the browbeating he took from Boesky.

  8.

  Jim Dahl took a deep breath and walked into the conference room for his annual salary review. This year, 1986, he was prepared to insist on more than Milken offered. He never knew the exact size of the high-yield operation’s bonus pool, but he knew it had to be big. Other employees, such as Ackerman, had succeeded in wheedling large amounts out of Milken. This year, Dahl had been indisputably the top salesman, coming through even in the most difficult situations, as in the $100 million of Boesky debt he sold Charles Keating.

  Milken went right to the point. “You’re going to be paid $10 million this year,” he told the 33-year-old Dahl. This was more than Dahl had ever dreamed of making, but he stuck to his resolution. “I really think I’m entitled to more,” he insisted, ticking off his achievements. Milken listened sympathetically, but quickly disagreed. “Jim, I really can’t pay you any more,” he said in a soft voice, “or you’d be making more than me. Now that wouldn’t be fair, would it?”

  “I guess not,” Dahl said. He was surprised at the low amount, but he guessed that Milken was plowing a larger share of the department’s profits back into the firm than he’d suspected. Dahl now owned nearly 1% of Drexel’s stock, so he admired Milken’s apparent selflessness.

  In New York, Fred Joseph was grappling with the issue of Milken’s pay. That spring, Joseph had been elevated from head of corporate finance to chief executive officer when Robert Linton stepped down. In some ways Joseph hadn’t wanted the promotion. Institutional Investor had just named him the best corporate finance manager on Wall Street, and he was enjoying himself, feeling he was accomplishing something as his department capitalized on the Milken phenomenon. He also liked having some free time to spend with his wife at their working farm in northwestern New Jersey.

  Milken made no secret of his opposition to Joseph’s appointment. He complained about it to Joseph, claiming Joseph was too important to him in corporate finance. Yet Milken, who could have placed anyone he chose in the top position, didn’t offer any alternatives. He first suggested his own nominal boss, Edwin Kantor, but even he had to acknowledge that Kantor’s wasn’t the image the firm wanted to project. The personable Joseph was the nearly inevitable choice.

  Drexel had soared even beyond Joseph’s own ambitious projections. In 1986, Milken’s high-yield department was entitled under Drexel’s compensation formula to approximately $700 million in bonuses. Approximately half was attributable to finder’s fees, allocated to Milken for referring clients to services elsewhere in the firm. By comparison, the corporate finance bonus
pool was about $140 million, reflecting the disproportionate weighting of compensation and underlying power wielded by the Beverly Hills operation.

  Once Joseph approved the overall bonus pool of $700 million, it was up to Milken to divide it up as he saw fit. Milken doled out about $150 million to his colleagues in Beverly Hills, including the $10 million he’d promised Dahl. But Milken didn’t keep just $10 million for himself, as he’d implied. Nor did he plow the remainder into the firm’s capital, as Dahl had surmised. Dahl had no way of knowing this at the time, but Milken bestowed $550 million on himself. That was more than the $522.5 million in profit that Drexel itself—the entire firm—had earned.

  Yet Milken didn’t think $550 million was enough. Milken was actually angry with Joseph about the size of the bonus pool.

  Joseph was responsible, along with Milken, for allocating the finder’s fees that formed such an important part of Drexel’s compensation system. Each year, Joseph and Milken got on the phone to go over the fees, deciding who deserved credit for bringing which clients into the firm. There were usually anywhere from 150 to 200 such matters, and conflicting claims affected less than 20%.

  The previous year, one of the finder’s fees had never been resolved to Milken’s satisfaction. Milken had insisted he was entitled to it. He admitted that another department deserved some of the credit for landing the client, but had argued that his personal contact had been the deciding factor. Joseph disagreed and refused to allocate the sum to the high-yield bonus pool.

  As they neared the end of their review of the 1986 fees, Milken had again raised the issue. Joseph was amazed at the vehemence with which Milken argued the point. He wouldn’t give in. Nor would he let the matter drop. He called Joseph repeatedly and they ended up arguing for hours, reviewing in minute detail the circumstances under which the client had come to the firm. Joseph didn’t know where Milken found the time. Neither Milken nor Joseph ever backed down. Milken wasn’t paid, but he continued to insist that Joseph had cheated him. The amount at stake was $15,000.