Den of Thieves

by James B. Stewart

  When Romano called, Lynch had been head of enforcement at the SEC for just four months—four difficult months. Morale had been badly damaged when Lynch’s predecessor, John Fedders, resigned in early 1985 after The Wall Street Journal revealed that he had physically abused his wife. To quell the scandal, SEC chairman John Shad had moved quickly to replace him. Lynch, the division’s associate director, a 35-year-old lawyer who’d spent almost his entire career with the SEC, was the somewhat surprising choice. Some better-known outsiders had been considered: New York Senator Alfonse D’Amato lobbied for New York lawyer Otto Obermaier. Jed Rakoff and Robert McCaw, both prominent securities lawyers, were also candidates. But the staff was relieved that Lynch, one of their own, was chosen rather than some Reagan favorite, someone who might be too committed to deregulation to enforce the laws.

  Lynch, by contrast, seemed the consummate civil servant. He kept his political views to himself. His colleagues considered him calm, restrained, decisive when necessary, and at times somewhat distant and aloof. His background was far removed from the high-pressure, big-money world of Wall Street.

  The youngest of five children, Lynch had grown up in the countryside near Middletown, a small city in rural upstate New York near the Pennsylvania border. His father ran a small trucking operation and owned several other small businesses. Lynch was raised a Methodist. He graduated from Syracuse University and Duke University Law School. After graduation, he worked for a Washington, D.C., law firm for a year and then joined the SEC, looking for litigation and investigative work. Eventually he was named associate director of the enforcement division, and worked on the Foster Winans and Thayer insider-trading cases.

  As the merger boom unfolded, Lynch was appalled by the persistent run-ups in stock prices on takeover rumors. Obviously, confidential information was leaking into the market on an unprecedented scale, to the detriment of investors who waited for public announcements. Average investors were becoming alienated and distrustful. Soon after Lynch assumed his new position, in April 1985, Business Week ran a cover story with the headline, THE EPIDEMIC OF INSIDER TRADING: THE SEC IS FIGHTING A LOSING BATTLE TO HALT STOCK-MARKET ABUSES. The article only underscored Lynch’s own concerns. He vowed to step up insider-trading enforcement, to increase the staff assigned to it, and to follow up every lead vigorously. Public confidence in the markets, he felt, was at stake.

  Without such determination, Lynch might very well have allowed Romano’s lead to languish. When he received a copy of the mysterious Caracas letter, he didn’t think that much of it. It seemed to be a routine complaint about brokers. Brokers weren’t “insiders” in the conventional sense, and someone was always complaining to the SEC about their broker. But the Bank Leu angle held some promise. Bank Leu had figured in two other recent SEC inquiries, including the Textron case, neither of which had gone anywhere. So Lynch turned the letter over to John Sturc, his associate director and a dogged investigator and litigator, who put together a team. Among the lawyers assigned was Leo Wang, the same lawyer who had taken Levine’s deposition in Textron.

  What was most intriguing about the case was the large number of stocks involved: about 27 in the case of Bank Leu, about 16 in Campbell’s account. Most insider-trading cases, even the sensational Thayer case, involved only a few stocks, often only one. The illegal trading is done by a company insider or immediate tippee with knowledge of only that company’s transactions. Yet the staff knew that such isolated cases couldn’t account for what seemed to be an epidemic of insider trading on Wall Street. Very few people are privy to as many secrets as seemed to be involved in the Bank Leu trading. Just about the only people with that kind of information are lawyers or investment bankers. Perhaps this case would finally take the SEC into the heart of a conspiracy that the staff had long suspected: a network of professionals with frequent access to the most confidential inside information.

  Lynch, Sturc, and their colleagues concluded there were enough leads worth pursuing, and the SEC commissioners gave their routine approval to begin an investigation. On July 2, 1985, the SEC investigation, identified only by its case number, HO-1743, formally commenced. Armed with the agency’s subpoena power, the lawyers set about looking for evidence.

  Wang subpoenaed Brian Campbell and obtained his trading and phone records. In August, Campbell himself arrived at the SEC’s offices in Washington, accompanied by a lawyer. Campbell—young, blond, self-assured—seemed a little tense, though not abnormally so, given the circumstances. Under oath, he answered questions for three full days.

  Wang could tell from Campbell’s phone records that the young stockbroker was in almost daily contact with a Bank Leu official named Bernhard Meier. The constant contact wasn’t surprising; the bank was far and away Campbell’s largest client. He had taken the Bank Leu business with him when he moved to Smith Barney from Merrill Lynch. “Did it ever occur to you at any time that Mr. Meier had access to inside information?” Wang asked.

  “No, I had no knowledge of that, no,” Campbell replied, adding that he never even had any “suspicion” or “indication” of inside information.

  Wang asked Campbell about the times he bought stocks just before takeover bids. Campbell insisted (while acknowledging that the trades mirrored Bank Leu trading) that he had bought the stocks after doing his own research into the companies, not because of any inside information. Campbell said he told Meier he was copying some of the trades, but added that he had been “evasive” and hadn’t mentioned any specific stocks to Meier.

  Then Wang asked Campbell about a curious $10,000 check deposit that showed up in his bank records. The check had been drawn on Meier’s Morgan Guaranty Trust Co. account in New York. That, Campbell testified, was a “loan” from Meier for a real estate venture. “Have you had any other business dealings with Mr. Meier?” Wang asked.

  “No, I’ve not,” Campbell said.

  Then Wang asked Campbell about another client account that appeared to trade in the same stocks as Campbell and Bank Leu: BCM Capital Management. Campbell seemed increasingly uncomfortable. That, he admitted, was a company formed by a friend, a lawyer named Kevin Barry. Campbell himself had tipped Barry to the Bank Leu stocks. Campbell continued to insist, however, that he had no inkling inside information might be involved. The deposition ended.

  Wang’s instincts told him that Campbell was lying. Reviewing the testimony, Lynch agreed. Campbell was in almost constant contact with Meier at Bank Leu, and, given the pattern of takeover bids, Campbell had at least to suspect Meier had access to inside information. Campbell was also far more involved with Meier than he seemed willing to admit. BCM Capital Management, it seemed obvious, stood for the first initials of Barry, Campbell, and Meier. The three seemed to be copying the Bank Leu trades for BCM.

  Pursuing Campbell and Barry, however, wouldn’t lead the lawyers further “upstream” in what they now suspected was a fairly significant insider-trading scheme, given the number of stocks. Their goal had to be the original source of the intelligence, and for that, they were going to have to assault the formidable obstacle of Bank Leu, shrouded in centuries of Swiss secrecy traditions. The SEC lawyers decided to start simply, with a friendly, low-key phone call to Meier at his office in Nassau.

  The phone call caught Meier by surprise, even though he knew the SEC was interested in the stocks Bank Leu had traded through Campbell, who had told him everything. At that point, Meier had talked to Dennis Levine, since Levine was the customer who’d initiated the trading. Meier anxiously told Levine about the SEC’s interest in Campbell. Levine had not been concerned. He had called the inquiry routine and said it would go nowhere. But now Meier had the SEC on his own phone line, asking about 28 stocks that Levine had told him to trade. Meier stalled for time, saying the SEC would have to request information in writing. He said he’d have to consult counsel before deciding how to respond.

  Meier was consumed with anxiety. He realized now that, despite Levine’s instructions, he had steered too many t
rades through Campbell. He had also traded the same stocks in his own account, as had Campbell, and BCM had traded in the same pattern. Levine had warned them about this, too. No wonder the SEC was suspicious.

  Meier rushed into the office of his colleague, Bruno Pletscher. Neither had any idea of how to handle the SEC. They decided to turn to Levine for advice. They couldn’t call “Mr. Diamond” themselves. By the time Levine called them several days later, they’d received the SEC’s written request for information on the 28 stocks. They described the situation to Levine, and insisted that he come to Nassau for a meeting. Levine agreed.

  On his way to Bank Leu, Levine stopped off in Key Biscayne, Florida, to visit Wilkis, who had rented a house there for most of the summer; Wilkis came down from New York most weekends.

  He’d been looking forward to the long Labor Day weekend. Levine briefed Wilkis on the latest developments. After Meier first told Levine of the SEC’s interest in the Campbell trading, Levine told Wilkis, he’d turned to Boesky for advice. Boesky had recommended a lawyer named Harvey Pitt. “He’s gotten me through hundreds of these,” Boesky had told Levine.

  “So you’re retaining Pitt?” Wilkis asked, feeling queasy.

  “No, don’t be crazy,” Levine retorted. “I’m getting the bank to retain him. We’ll shut this down fast. I don’t have anything to fight.”

  Wilkis wasn’t reassured. He worried that Pitt would place the bank’s interests ahead of his friend’s. How did Levine know he could manipulate Pitt?

  “You may have the right lawyer,” Wilkis told Levine. “I don’t know about the client.”

  Then Levine broke the more serious news that the SEC had sent the bank a written request for information about trading in 28 takeover-related stocks, all in Levine’s Diamond account. “They want my records!” he exclaimed. “What do I do?”

  Wilkis was petrified, but listened quietly as Levine spun out his strategy: to “keep the bank warm,” and “hold their hands.” He called Meier his “number three,” and said he’d rehearse the nervous Swiss banker until he came across as a convincing stock picker. He’d get Drexel’s research reports on the companies involved. Levine seemed to regain his confidence as he spoke. He left in a cheerful mood.

  Levine arrived in Nassau on Labor Day weekend 1985. Poised and confident, he quickly took charge of the situation, belittling the SEC, calling them incompetent. “You don’t have anything to worry about,” he assured the two bankers—as long as they did what he told them.

  Quickly, Levine briefed them on his cover-up plan. He told Meier to take responsibility for initiating the trades. “If you go to the SEC and tell them that you traded in these stocks on behalf of your managed portfolio,” Levine explained, “you are the smart guys. You have decided to buy these securities and allocate them throughout your portfolio. The SEC can’t prove the opposite.”

  Levine recognized that it might seem implausible to an SEC lawyer that someone of Meier’s background and limited experience with stocks would be so skilled as to repeatedly and accurately identify takeover targets ahead of public announcements. But Meier was to insist that this was the case. Meier would testify that his own research suggested these companies as likely takeover targets. Levine assured Meier he would furnish him with appropriate research materials to back him up. The essential thing was to prevent any suspicion that a Bank Leu client was the actual source of the trading recommendations. Meier, as a bank official, would never be legally considered an insider.

  Levine also recommended that the bankers hire a good lawyer to deflect the SEC. He suggested Pitt, a former SEC general counsel now in private practice with Fried, Frank, Harris, Shriver & Jacobson’s Washington office. By the time Levine left, Meier and Pletscher felt greatly relieved. They briefed the Bahamas branch general manager, Jean-Pierre Fraysse, on the plan to deceive the SEC. “This seems to be the way to go,” Fraysse agreed.

  Harvey Pitt settled his bulging waistline into a banquette of the Polo Lounge in the Westbury Hotel in New York. The bearded, slightly disheveled, 40-year-old lawyer was a contrast with the tall, thin, impeccably groomed Fraysse, who was staying at the hotel and had flown to New York to meet Pitt in person.

  Fraysse had called Pitt for the first time just after the Labor Day weekend meeting with Levine.

  “Why did you call me?” Pitt asked Fraysse.

  “Your reputation has spread,” Fraysse said. “We’ve heard of you.” Fraysse smiled politely, saying no more.

  “Ah, the Swiss,” Pitt thought to himself. It was obvious that Fraysse would say no more about how he had heard of Pitt.

  Fraysse outlined the history of the bank’s contacts with the SEC, and the men talked generally about SEC investigations. Fraysse seemed relaxed, then mentioned that because he was returning to Switzerland, Pitt would soon be dealing with Meier directly.

  “He’s a terrific portfolio manager,” Fraysse said of Meier, setting up the cover story they’d devised with Levine. “He’s very astute. He’s done a terrific job for our clients.”

  Pitt was concerned when Fraysse mentioned the number of stocks on the SEC’s list. Most SEC investigations he’d been familiar with dealt with only a single stock. Pitt thought he ought to come down to the bank in Nassau, but Fraysse said Meier was scheduled to be in New York a few days later, and would meet with Pitt then.

  Pitt met Meier for the first time on September 18 at Fried, Frank’s offices in lower Manhattan. The well-dressed Meier was calm, and seemed charming, worldly, and confident. His wife was an engaging and beautiful woman younger and taller than he was.

  Tutored by Levine, Meier spoke at length about his stock-picking prowess, and his success at managing trading accounts for Bank Leu’s customers. He insisted he’d bought the stocks in question on the “fundamentals,” saying he had the research to back him up. When the meeting ended in midafternoon, the Meiers returned to their room at the Waldorf.

  That same day, Peter Sonnenthal, one of the SEC lawyers assigned to the case, entered the cavernous art deco lobby of New York’s Waldorf-Astoria Hotel. Passing quickly through the bustling lobby, he stopped at the registration counter.

  “Could I have the room number of Bernhard Meier,” Sonnenthal asked politely.

  “We don’t provide that information,” the clerk replied.

  “But I’m a government agent,” Sonnenthal said.

  The clerk still refused, so Sonnenthal grabbed a piece of paper and pen and hastily wrote out a makeshift subpoena demanding that the Waldorf-Astoria disclose Meier’s room number. The startled clerk took the paper to a superior, and the hotel complied immediately. Meier was staying in room 2341, in the exclusive Waldorf Towers section.

  Sonnenthal rode up the elevator, walked swiftly to Meier’s room, and knocked. Meier, having arrived at the room only a short time before, opened the door unsuspectingly. Sonnenthal handed the startled banker an official U.S. government envelope containing two subpoenas: one calling for the bank’s records, and another, ominously, calling for all of Meier’s own personal trading records.

  Meier was stunned, as much by the fact that the SEC had found him in New York as by the subpoenas themselves. (The SEC had alerted the U.S. Customs Department to watch for Meier. Customs in turn told the agency that Meier had entered the U.S., and had listed the Waldorf as his address.) At about 5:30 P.M., a frantic Meier called Pitt. His urbane façade was in shreds. Pitt, too, was now alarmed. These weren’t the ordinary tactics of the SEC. The agency was playing hardball.

  Pitt tried to calm Meier, to no avail. Terrified, Meier didn’t leave his hotel room for the next three days.

  After the frantic call from Meier, Pitt wasted no time. Four days later he was on a flight to the Bahamas with a Fried, Frank colleague, Michael Rauch. A team of lawyers from the firm had hastily analyzed the trading and stocks in question, compiling lists of people involved, looking for common denominators. This had turned up nothing. Pitt wondered if a ring of sources might be involved, but he dismissed the
thought. It seemed too farfetched. The absence of any obvious source of the information lent some credence to Meier’s story, though the number of stocks and the consistently prescient timing still looked suspicious.

  Pitt and Rauch met with Meier, Pletscher, and Richard Coulson, an American expatriate and former lawyer at Cravath, Swaine & Moore who was advising the bank. Meier seemed to be in charge, although Coulson often spoke for the bank.

  Pitt was skeptical of Meier’s claims to be a stock-picker, but he hesitated to challenge his new client directly. Instead, he enumerated the perils of lying to one’s own lawyer. “You may be afraid of telling the truth,” Pitt suggested gently. “But we’re very good lawyers. If you tell us the truth, the likelihood is that we can help you.”

  Coulson cut him off. “Bernie did the trading, and that’s all there is to it,” he said. “We’ll take our explanation to the SEC, and that should be the end of this,” he insisted. The bank offered to have Meier and others testify under oath to satisfy the SEC that the whole matter could be explained as shrewd stock-picking, waiving foreign jurisdictional problems.

  The bank officials had no intention of changing their story—but they were worried. The publicity of an SEC enforcement action could be devastating to the bank’s effort to build a business base in the U.S. Bank Leu wanted good relations with the SEC. At the same time, the bank was adamant in its refusal to reveal the identity of its clients or trading in individual client accounts. It was barred by Bahamas banking law from doing so, and such disclosures would violate the bank’s long tradition of secrecy.

  After they returned to Washington, Pitt and Rauch contacted the SEC and began laying the groundwork for Meier to appear. Eventually Pitt met with Wang, Sonnenthal, and other SEC lawyers working on the case.

  The SEC lawyers were eager for some explanation of the trades. Pitt repeated the explanation approved by Coulson, insisting that Meier had made the investment decisions for a variety of the bank’s managed accounts. There was no involvement of the bank’s customers in the trades, so there couldn’t be any insider trading of the kind the SEC obviously suspected, Pitt explained. In support of the bank’s position, Pitt offered to produce bank documents, with the names of customers deleted. Meier would also testify. All Pitt asked was a little more time to gather the materials. The SEC lawyers could barely contain their skepticism, but reluctantly agreed.