Den of Thieves

by James B. Stewart

  Boesky, his trademark black three-piece suit and watch chain concealed under cap and gown, looked out of sorts as he waited impatiently in the wings of Berkeley’s Greek Theater, the outdoor amphitheater that serves as an open-air setting for the University of California’s commencement ceremonies.

  Rows of students filed into their seats, eagerly anticipating Boesky’s address. The students of the university’s business school, Milken’s own alma mater, had chosen Boesky, by popular vote, to be their 1986 commencement speaker. The famous arbitrageur, lacking even a college degree, had flown to California that day, May 18, 1986, in a private jet. He was typically late, arriving halfway through the traditional dean’s banquet that precedes the ceremony.

  Before the speech, in a brief interview with the local paper, Boesky said he “didn’t give a damn” what the students wanted to hear. What he planned to tell them, he said, was that “they must take the role that nobility played in ancient times, by becoming involved in the arts, politics, science and culture for the betterment of mankind.”

  After welcoming remarks by the dean, Boesky stepped to the podium, greeted by enthusiastic applause. He quickly demonstrated that he could be an excruciatingly dull speaker. He dwelled on platitudes about America as a land of opportunity and told of his own rise, a highly edited story of how the Detroit-raised son of immigrant parents had conquered Wall Street. Then, when it seemed as though he would lose his audience permanently, he galvanized the crowd with just a few sentences.

  “Greed is all right, by the way,” he said, raising his eyes from his text and continuing with what seemed like genuinely extemporaneous remarks. “I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.” The crowd burst into spontaneous applause as students laughed and looked at each other knowingly.

  Boesky finished his talk and left the stage. He didn’t stay for the rest of the ceremony. Nor did he attend the reception under the university’s campanile, where the commencement speaker traditionally mingles with students, their families, and faculty. Boesky departed without conversing with a single student.

  Back in New York, he seemed more irritable and moody than ever. His staff was struck by the fact that, despite the fresh infusion of nearly $1 billion, Boesky was doing practically nothing with the huge amounts of cash. The level of the firm’s stock positions hadn’t changed appreciably since the recapitalization and launching of the new partnership. Mooradian told others in the back office that he was worried about the high cash levels. “This isn’t like Ivan,” he said, but others did not share his alarm.

  Boesky stayed in touch with Milken and others in Drexel’s Beverly Hills operation, but he didn’t seem to be pursuing any of the big “merchant banking” undertakings that he could now afford. With the final reconciliation of the $5.3 million payment, the pace of dealings between Milken and Boesky had tapered off. During April, Boesky did undertake two “favors” for Milken’s high-yield department, manipulating the prices of Stone Container Corporation and Wickes Companies. In both cases, his actions enabled Drexel to go forward with lucrative deals. Boesky entered into these schemes with little enthusiasm and, apparently, little expectation of being reimbursed. He was simply obeying orders now. He too had become a captive of Drexel.

  That summer, Lessman became concerned about Boesky’s attitude and behavior. Boesky was hardly ever in the office, and when he was he seemed preoccupied. Mulheren owned a helicopter that he rented out, and Boesky was frequently taking it somewhere; no one knew its destination. He was often in Europe; he and Wekili had bought a house together in Théoule-sur-Mer, France, a village on the Côte d’Azur. Sometimes they were there together; other times Boesky called in from London or Paris, where he had paid $1.2 million for an apartment, or Hawaii, where he had purchased a condominium. He also spent long stretches in Los Angeles, presumably overseeing the Beverly Hills Hotel operation. But who really knew?

  Though he maintained his tan, Boesky looked thinner than ever. He seemed to eat almost nothing, and obvious gaps appeared between his shirt collars and his neck. During the increasingly rare afternoons when he was in the office, he’d leave for the Harvard Club. Instead of the informal meetings be had always held there, he’d go to the locker room, don a heavy sweatsuit, wrap a towel around his neck, and sit alone in the sauna with the heat turned on high, sweat pouring off of him.

  One morning Boesky came up to Lessman’s desk and said, “Lance, I’m getting too old. I’m tired. I’m looking elsewhere. One day I’m going to drop the keys to this office on your desk, walk out of here, and never come back.” Lessman was astonished. Boesky didn’t seem to be joking. He looked grim. Lessman knew what a control freak Boesky was; it was unthinkable that he’d let Lessman run his operation.

  Boesky had filed an application for a zoning ordinance to permit the transformation of his mansion in Westchester into a larger replica of Monticello, Thomas Jefferson’s home in Virginia. The plans called for a 48-foot dome that would conceal a sybaritic new master bedroom suite and a portico with four large columns. Then, he seemed to lose interest.

  One day Boesky had Reid Nagle call his banker at Swiss Bank Corporation in Geneva and arrange a large transfer of cash to Wekili. On April 23, Boesky followed up with a letter. “Pursuant to conversations you have had with myself and Mr. Nagle of my office, I authorize you to transfer 1,785,800 S.F. from my account to your Geneva office in favor of Mr. Hushang Wekili. He will provide your Geneva office with instructions as to where and how these funds should be transferred.” Nagle wondered what was going on.

  On another occasion, Seema called. Boesky was out, and Lessman picked up the phone. Seema said it wasn’t important, but then sounded wistful. “Ivan’s away too much,” she said. “I never see him.” Lessman murmured sympathetically, but then she really surprised him. “We don’t have any sex life.”

  Lessman had thought the Boeskys’ marriage was pretty good. Seema had seemed actively involved in Boesky’s life, though her visits to the office had diminished in the last two years. Lessman suspected Boesky had affairs, but he thought Seema had a healthy attitude about that. She’d once told him that her father told her that no man would ever be faithful. As long as the sexual involvements were just flings, that was all right.

  Mulheren knew a little about Boesky’s activities, too. His helicopter pilot sometimes flew companions to meet Boesky at Kennedy Airport, where they would board the supersonic Concorde for flights to either London or Paris. Boesky installed a mistress in an apartment in the posh Stanhope Hotel on Fifth Avenue opposite the Metropolitan Museum of Art. The arrangement was supposed to be so secret that Boesky hired lawyers at Cravath, Swaine & Moore to handle the apartment transaction rather than his usual lawyers at Fried, Frank. But the apartment’s decorator had told Seema. Boesky himself confided in no one, with the possible exception of Wekili, and neither Lessman nor Mulheren thought his private life was any of their business. It would always, they assumed, be shrouded in mystery.

  The majestic Queen Elizabeth II, flagship of the Cunard line and the world’s most sumptuous floating palace, stretched for what seemed like blocks along the pier at Manhattan’s West Side Passenger Terminal, drawing crowds of curious and admiring onlookers.

  At the gangplank, a string quartet greeted guests with strains of popular standards. Clowns entertained those waiting to board and handed out balloons to children. Overhead billowed a huge banner, MAZEL TOV, JENNIFER, ROBIN AND JASON. For the first time, at a cost approaching $1 million, the QE2—the entire ship, with its crew of 1,000—had been rented by one person, Gerald Guterman, a real estate developer and owner of the Stanhope Hotel, to celebrate the September 1986 bar mitzvah of his 13-year-old son, Jason. His daughters by a previous marriage, Jennifer and Robin, were also, somewhat belatedly, celebrating their bas mitzvahs.

  By the time the great ocean liner pulled out into the Hudson River for its 46-mile, overnight “cruise to nowhere,” one of Guterman’s most im
portant guests, a fellow hotel owner and neighbor in Westchester, was nowhere to be seen. Ivan Boesky had missed the sailing.

  Then, above the welcoming strains of the Peter Duchin orchestra, guests craned their necks on deck as a twin-engine helicopter came into view, hovered over the ship, then descended to the sports deck helipad. With the blades still turning, the cockpit door opened, and Boesky, elegantly dressed in a tuxedo and black tie, stepped onto the deck. He flashed a smile and waved as guests laughed and applauded. The helicopter rose and roared off into the sunset, leaving Boesky to upstage his hosts.

  Boesky joined other guests at the champagne reception and six-course dinner, including roast lamb, beef Wellington with truffle sauce, and Cornish hen with foie gras and wild rice, all prepared in the ship’s kosher kitchen. Masses of calla lilies and huge ice sculptures decorated tables. Each of the three children cut into his or her own towering, three-foot-high cake topped with sprays of fresh flowers as the crowd sang “Happy Birthday.” The next day, in addition to the QE2’s luxurious amenities, guests were entertained by a 51-member troupe of mimes, musicians, and roving entertainers. Hair and makeup stylists from the chic Manhattan salon La Coupe tended to the beauty needs of Guterman’s wife, Linda, and women guests. At the ceremony itself, Rabbi Arthur Schneier praised Jason’s parents. “In a home that has everything, Linda and Gerry also stress to their children that which gives us purpose in life.”

  The next day, on Sunday, Mulheren called Boesky at home. Boesky had rented Mulheren’s helicopter, and the pilot had called Mulheren as soon as he got back. “You’re not going to believe this,” the pilot reported to Mulheren, “but Ivan had me drop him onto the QE2.” Mulheren was irate. “Don’t ever do that kind of thing for him again,” he ordered. Mulheren knew the landing had been no emergency occasioned by Boesky missing the departure. The helicopter had been reserved well in advance. Boesky was seeking attention by flaunting his wealth.

  Ivan got on the phone. “Don’t ever use my helicopter again for a stunt like this,” Mulheren said angrily. “Are you fucking out of your mind? Revolutions are made of this. People get put in gas ovens.”

  Boesky just chuckled. “You’ve got to admit one thing, John,” Boesky said. “When I go, I go first class.”

  The next day, September 17, 1986, Boesky surrendered to federal authorities and became an undercover agent for the Department of Justice.

  9.

  Richard Drew, vice president of the compliance department at Merrill Lynch, was puzzled by the letter on his desk. It had arrived that day, May 25, 1985, forwarded from the international division.

  Dear Sir:

  Please be informed that two of your executives from the Caracas office are trading with inside information. A copie with description of their trades so far has been submitet to the S.E.C. by separate mail. As is mantion on that letter if us customers do not benefit from their knoleg, we wonder who surveils the trades done by account executives. Upon you investigating to the last consequecie we will provide with the names of the insider on their owne hand writing.

  At the bottom of the letter were the names of two Merrill Lynch brokers, Max Hofer and Carlos Zubillaga, their Merrill Lynch account numbers, and a postscript: “mr. frank granados might like to have a copie.”

  The letter was so poorly written that an overworked compliance officer might easily have tossed it aside. Poorly paid, shunned by upper-level managers and partners, compliance officers were kept far from the center of the action. They were paid to maintain an appearance of self-policing in the securities industry—without actually instigating too many investigations.

  Merrill Lynch, however, was more serious about compliance than most firms. Its general counsel, Stephen Hammerman, set the tone, insisting on thorough monitoring of customer and account-executive trading. Hammerman had built the largest compliance department on Wall Street, with a staff of 75.

  Drew, a lawyer who’d spent 14 years monitoring trading at the New York Stock Exchange, had joined Merrill Lynch in 1981. He worked closely with another compliance official, Robert Romano, who had worked as a federal prosecutor and in the SEC’s enforcement division, investigating insider trading.

  Despite the grammar and spelling mistakes, the phrase “inside information” caught Drew’s attention, as did other aspects of the Caracas letter. The writer’s first language wasn’t English, but he or she was reasonably sophisticated. He or she knew of the existence of a compliance department, knew the brokers’ account numbers, and knew that Frank Granados was Merrill Lynch’s regional director for Latin America.

  Merrill Lynch brokers are required to trade through the firm, so Drew was able to access the personal account records for Hofer and Zubillaga. They were, in fact, brokers in Merrill Lynch’s Caracas, Venezuela, office, but their trading activity wasn’t extensive. In four or five instances, however, they had both traded in stocks that had suddenly risen sharply in price. The trades were suspicious. Drew didn’t expect the inquiry to go very far, but he handed the letter and records over to one of his analysts, a young compliance officer named Steven Snyder.

  Snyder scanned the records—Hofer’s and Zubillaga’s Merrill Lynch Cash Management Accounts—as Drew briefed him. “Oh shit,” Snyder said at one point, interrupting Drew.

  “What’s the matter?” Drew asked, as Snyder pointed out debits for two CMA checks Zubillaga had written that very month. The amounts were $4,500 and $839.39, hardly startling, and the payee was someone named Brian Campbell. “I know that guy,” Snyder said. “He’s an institutional broker right here at Merrill Lynch.”

  Drew and Snyder were intrigued. Why would a broker in Caracas be writing a check to another broker in New York? Ordinarily in such matters, Snyder would have called Hofer and Zubillaga to ask for an explanation, but such inquiries are often easily deflected. So Drew ordered copies of the personnel files of the two Caracas brokers and Campbell, as well as Campbell’s CMA account statements.

  The next week, after they’d examined all the accounts, the officers realized they had stumbled onto something far more mysterious than they had at first suspected. Campbell was no longer working at Merrill Lynch, although Snyder’s recollection had been correct. Campbell had been an institutional broker in Merrill Lynch’s international division, and had left that February for Smith Barney. Zubillaga had also worked in the international division before moving to Caracas. In fact, Campbell and Zubillaga had been in the same Merrill Lynch training and orientation program in 1982.

  Campbell’s trading records were even more revealing. He had traded in precisely the same handful of takeover situations as Zubillaga and Hofer—one day earlier, in each case, suggesting that the trades were originating with Campbell. Campbell had also traded in several other situations that looked as if they were based on inside information—a total of eight, involving just 100 or 200 shares.

  It looked as though Campbell had some source of information, so Drew and Snyder obtained a list of Campbell’s clients, about 35 in all, and pulled up their trading records. Nothing struck them until they got to Campbell’s biggest client: the Bahamas branch of Switzerland’s oldest bank, Bank Leu International. All eight of Campbell’s suspicious trades showed up in the Bank Leu trading accounts. When they examined them more closely, they found eight other suspicious trades. In only one case had Campbell’s own trading preceded Bank Leu’s; this suggested that Campbell was copying his client’s orders. These were no longer small trades and profits. Bank Leu typically traded heavily, in 10,000-share blocks.

  At each level of inquiry, the trading volume and amounts of money involved had mushroomed. With the addition of Bank Leu, the matter had reached a new level of seriousness. Drew and Snyder took their findings to Romano, who stepped in to pursue the investigation. Having exhausted Merrill Lynch’s own internal records, Romano called Zubillaga and Hofer in Caracas, and ordered them to fly to New York for questioning.

  They were apprehensive but cooperative, confirming much of what the compli
ance officials had already surmised. Zubillaga said that he and Campbell had been friends, and that Campbell would call periodically, suggesting they buy specific stocks. “This looks good,” Campbell would say. “Maybe you should buy it.” In return, Campbell wanted a percentage of Zubillaga’s trading profits, which accounted for Zubillaga’s checks. But Zubillaga hadn’t kept the information to himself; he’d passed it on to Hofer, his office colleague, and to his own brother.

  Merrill Lynch fired Zubillaga and Hofer. Not for insider trading—they appeared to be distant “tippees,” unaware of the quality or source of the information. But Merrill Lynch barred any undisclosed shared ownership in securities positions, and the kickbacks to Campbell were deemed to be violations. The two Caracas brokers didn’t know who wrote the anonymous letter. But they were only its first casualties.

  There was little more that the Merrill Lynch officials could do. They did contact a Smith Barney lawyer, urging him to investigate Campbell and his trading for Bank Leu. The lawyer, however, told Campbell that Merrill Lynch was probing his trading. Merrill Lynch wasn’t in a position to contact Campbell directly. The source of the takeover information must have been a Bank Leu client. Merrill couldn’t pursue Bank Leu, which would protect the identity of its clients at all costs. At an impasse, Romano called the chief of enforcement at the SEC, Gary Lynch.

  “Jesus,” Lynch said, after Romano outlined the details of their investigation.

  That was the last Romano, Drew, or Snyder heard for nearly a year. As far as they knew, the SEC was having no success at finding the mysterious source of the takeover information. As the takeover boom continued, generating ever more work for Merrill Lynch’s compliance division, the curious letter from Caracas was all but forgotten.