Pitt himself hadn’t had a chance to review the bank’s documents supporting the story, and he wasn’t about to sign an agreement providing for Meier’s testimony without having seen them. Pitt also realized that this was possibly the bank’s last chance to set the record straight, if its officials were lying. Given Pitt’s representations to the SEC, it might already be too late.
At Bank Leu, Pletscher was wavering. He’d never been as closely involved with Levine as Meier, and his own piggyback trading had been modest. He’d earned only about $46,000 in total trading profits from Levine’s information. Unlike Meier, he wasn’t Levine’s “number three.” After the bank received the SEC’s written demand for information, Pletscher had told Levine to stop his trading. Now Levine was badgering Pletscher to let him resume. “I could easily be earning 100% returns trading,” Levine complained. “I hate sitting around and earning bank interest rates.” He argued that a sudden suspension of trading looked suspicious. If Meier was such a good stock-picker, why wouldn’t he continue to score? But Pletscher did not relent. Levine was causing them enough trouble.
On one visit, Levine brought a shopping bag bulging with Drexel research reports and other materials on the suspicious stocks. Meier and he set about preparing ex post facto research justifications for all of the trades. Levine also asked to review his account files at the bank. He was horrified to discover a photocopy of his passport, complete with his picture, and the signature card he’d filled out when he opened his first “Diamond” trading account at Bank Leu. There were also withdrawal slips that Levine had signed with his own name on the numerous occasions he’d made cash withdrawals. “Make sure you destroy these,” Levine ordered the two bankers.
Evidently unaware that their actions could constitute obstruction of justice under U.S. law, the two bankers shredded Levine’s passport copy and the original account signature card. They believed that all were obsolete anyway; Levine had shifted his account to his Panamanian corporation, Diamond Holdings. But Pletscher, without telling Levine, refused to destroy the withdrawal slips. He believed they were necessary to protect the bank in the event Levine ever claimed he hadn’t received the cash. The cautious Swiss banker wasn’t about to destroy withdrawal slips.
Finally, there remained the thorny issue of the “managed accounts,” the linchpin of their explanation for the trades. If, as he was claiming, Meier had made all the investment decisions for the bank’s managed accounts, it stood to reason that records would show the trades in numerous client accounts. Yet all the suspicious trades had occurred in just one account, Diamond Holdings. Even if the name of that account were withheld, the managed account alibi would lose credibility, and suspicion would focus on the single account and the identity of its owner. Levine was confident that the bank would never have to break down its trading into accounts for the SEC, but now Pitt and Rauch, the bank’s own lawyers, were demanding individual account records to support Meier’s story. Levine and Meier urged Pletscher to alter the computer records to create 10 fictitious accounts that would appear to have traded in the same stocks as Levine. Meier assured Levine they’d take care of the matter.
Again, however, Pletscher balked. Hans Knopfli, the chairman of Bank Leu’s management board, had recently visited the Bahamas branch and had spoken with Meier and Pletscher about the SEC investigation. Meier told the high-ranking official that he’d reluctantly concluded he’d have to lie before the SEC.
“Mr. Meier, under no circumstances can you go to an authority and lie,” the startled Knopfli had said. “This is a critical situation. I want you to do what is best for the bank. However, do not go and lie.”
When it came to actually creating the false accounts, Pletscher couldn’t bring himself to do it. He did make one alteration, however. Meier insisted that Pletscher expunge an entry from Meier’s own account statement. The mysterious item was a $5,000 wire transfer from Meier’s Bank Leu account to the Delaware National Bank in the tiny Catskill mountain town of Delhi, N.Y.
Pitt and his colleagues also pressed forward. They flew to Nassau to see the managed account records supporting Meier’s story. The lawyers expected about 40 to 50 accounts, all indicating trading in the 28 stocks that figured in the SEC investigation. Accompanied by several paralegals, the lawyers checked into the Cable Beach Hotel.
Meier arrived just after lunch, carrying several large ring binders. When the lawyers eagerly opened them, they found only a handful of pages. They were mostly Meier’s travel and entertainment receipts. Pitt was stunned, and angrily told Meier that these weren’t the trading records they’d traveled to the Bahamas to see. Meier, looking uncomfortable, promised to be back the next morning with the account records.
This time he had trading records from 25 of the bank’s accounts, but none of them involved the 28 suspicious stocks; none of them corroborated his story. Pitt struggled to maintain his composure. “We have two possibilities here. Either we have the wrong documents,” Pitt told Meier, pausing for emphasis, “or we have the wrong story.” Meier said nothing and, for the first time, looked crestfallen.
They were at an impasse. Suddenly Meier rose from his seat, went to the telephone, and called Pletscher. Since Meier spoke in Swiss German, the lawyers didn’t understand; Pletscher, it seemed clear, was getting a tongue-lashing. Meier hung up, told the lawyers to wait, and left the room. Efforts to get further information proved fruitless, however. Coulson took over for Meier, and stonewalled.
The lawyers gave up and flew back to the U.S., more skeptical of their clients than ever. It was becoming obvious that one person had traded in 28 stocks in advance of takeover announcements. If so, this was history’s largest insider-trading case.
The lawyers’ suspicions were finally confirmed the following Monday, when Pitt and Rauch returned to the Bahamas and met with Hans Peter Schaad, Bank Leu’s general counsel, who had flown in from Zurich. Meier and Pletscher had finally told Schaad the truth, and he had ruled out the possibility of any further lies.
“It is my understanding that there is one account for all this trading,” Schaad announced to Pitt. “What do we do now?”
Given the degree to which they’d already been misled—not to mention the embarrassing representations they in turn had made to the SEC—Pitt and Rauch gave serious thought to withdrawing from the case. They felt their own reputations were at stake.
They agreed to continue if the bank promised to halt all trading in the account. They couldn’t sanction what might be the ongoing commission of crime. Without unduly arousing suspicions, the bankers also had to agree to freeze the account assets. And they had to give Pitt and Rauch a complete, candid account of everything that had happened with respect to the account. The Bank Leu officials agreed, despite Meier’s obvious discomfort, with one condition: they would not reveal the identity of the account’s owner, referring to him only as “Mr. X.”
Pitt, however, thought the bank’s best hope was to exchange the identity of Mr. X for immunity for the bank and its officers. Whether such a deal would appeal to the SEC, of course, depended almost entirely on who Mr. X was. Schaad, still reluctant, finally agreed to divulge some details: Mr. X was an investment banker, and he worked at Drexel Burnham Lambert. Now Pitt realized the ramifications of the case.
Several days later, Meier invited Pitt to have dinner with him and his wife at the exclusive Lyford Cay Club, where he was a member. On the way, Meier tried to ingratiate himself with Pitt, explaining that the scheme wasn’t his idea alone. “I don’t want you to think the worst of me,” Meier said.
Pitt couldn’t resist taking advantage of Meier’s conciliatory frame of mind. “We’re going to have to know Mr. X’s name eventually,” he said. “Why don’t you tell us?”
“You know the firm,” Meier said.
“That’s right, Drexel,” Pitt replied.
“Do you know anyone at Drexel?” Meier asked. “Who do you know there?”
Suddenly Pitt remembered a dinner he’d attended less
than two months before, in mid-October. Fried, Frank had been interested in doing more work for Drexel, especially in the takeover area, and one of Pitt’s partners, Arthur Fleischer, had invited him and David Kay to dinner at Lutèce, one of New York’s most expensive French restaurants. Kay had brought along his rising M&A star, Dennis Levine. Pitt didn’t remember much about the dinner; it was a typical client-cultivation affair, with too much expensive food and wine and a sense of enforced camaraderie. Levine had made little impression. But he and Kay were practically the only Drexel investment bankers Pitt knew.
“David Kay?” Pitt ventured, and Meier shook his head no.
“Dennis Levine?” Pitt asked. Pitt knew immediately from Meier’s expression that he had the right name.
“That’s it,” Meier said.
Since Levine had visited him in Key Biscayne, Bob Wilkis had developed insomnia. He was irritable with his wife and daughter, refusing to explain what the problem was. One evening he broke into tears, for no apparent reason. But then he pulled himself together. “I can’t be selfish,” Wilkis told himself. “I have to help Dennis through this.”
Levine called him constantly, sometimes as many as 8 or 10 times a night. “Don’t get upset,” Levine kept saying. “It’s routine. We’re doing fine.” Wilkis was reassured when Levine was invited by the SEC to appear at a roundtable discussion on takeovers.
That discussion turned, almost inevitably, to the topic of insider trading. Takeover lawyer Martin Lipton brought up the subject. “I think it would be worth the commission’s while to look at the trading in some of the more notorious takeovers of the past two years,” he said. “Only the commission has the power to get at the facts behind this, but I think there are enough instances . . . that it is something that ought to be looked at very closely.”
Levine piously agreed. “The other thing is, I don’t think you should limit your analysis of that phenomenon to the corporations’ activities,” he said. He even recommended that the SEC look into trading in Nabisco and General Foods—both stocks in which he himself had traded heavily on inside information.
“We’ve got nothing to worry about,” Levine crowed to Wilkis after the discussion. “The SEC loves me.” Levine received a thank-you letter from the SEC signed by John Shad, a letter he proudly showed off to numerous colleagues and to Meier and Pletscher. He asked Wilkis, “Would they feature me like this if I was in trouble?”
Gary Lynch looked out over the low Washington rooftops from the expansive windows in his corner office. Christmas was just a week away, but his mind was far from family shopping. He sensed that something important was about to unfold in the Bank Leu investigation. Late the previous week, Lynch had gotten a curious phone call from Harvey Pitt, who had insisted on meeting with Lynch personally. Lynch knew Pitt was an SEC veteran; he had worked under him when Pitt was the agency’s general counsel. He knew Pitt wouldn’t insist on the presence of the SEC enforcement director unless he had something important to divulge.
On December 17, Pitt and Rauch arrived at Lynch’s office at 10 A.M. Lynch had invited the SEC lawyers most involved in the matter: Sturc, Wang, Sonnenthal, and Paul Fischer. Lynch shook hands with the Fried, Frank delegation, then seated everyone around a conference table in the office.
“What’s on your mind?” Lynch casually began.
Pitt opened a binder and began to speak from prepared notes. He began by briefly reviewing the status of his negotiations on behalf of Bank Leu. Then he dropped his bombshell.
“I can’t stand by my factual representations to you,” he said.
Fischer practically exploded. “What? Then we’ve wasted a lot of time. You made specific representations . . ”
Pitt let Fischer go on, then unveiled, as delicately as he could, what he had in mind. Speaking hypothetically, Pitt suggested that the SEC lawyers “assume” that the trading in the suspect stocks had been initiated not by Meier, as he had previously represented, but by a single client of the bank, someone he identified as a “status player” on Wall Street. He knew that would whet the SEC staff’s curiosity. If that were the case, he asked, would the SEC agree to prosecute only the bank’s client, and not the bank or any of its officers? And would the SEC consider such an agreement even if it emerged that some of the bank’s officers had piggybacked the customer’s trades, and may have destroyed evidence at the client’s behest? If so, Pitt said the bank would seek the permission of Bahamian authorities to disclose the customer’s identity. Rauch added that any such agreement would have to be contingent on the Justice Department similarly agreeing not to prosecute the bank or its officers under any criminal statutes.
Lynch asked Pitt and his colleagues to step outside the office while he conferred with his SEC colleagues. At first, Lynch needed some convincing; but the SEC wasn’t eager to get into protracted litigation over Swiss and Bahamian secrecy laws. Similar ventures in other cases had turned into legal quagmires.
Ultimately, everyone agreed to Pitt’s deal. They realized that the “status player” had to be an investment banker or a lawyer, someone at the heart of the inside action. This could be the pivotal case the staff had been hoping for, the start of a major crackdown.
After less than a half hour, the Fried, Frank lawyers were invited back to the table. Lynch said that he thought a satisfactory agreement could be worked out. He explained that he had some problems including Meier in any immunity agreement, but Pitt was adamant about protecting all the bank’s officers, and Lynch relented.
Pitt considered the meeting a success. Pletscher and Meier had placed Bank Leu in grave danger. Ironically, Levine’s orders to destroy evidence had robbed the bank—and Levine—of a defense. Without the risk of U.S. prosecution for obstruction of justice, the bank could simply have acknowledged that a single customer had initiated the trading and invoked Bahamian secrecy laws to protect the customer’s identity. The bank would have done nothing wrong, and at the very least, the SEC would have been tied up for years in Bahamian courts trying to force disclosure of the customer’s name. That was no longer a viable option because of the destruction of evidence and the bank’s vulnerability to obstruction charges.
As the lawyers put their papers back into their briefcases, Wang and Fischer couldn’t resist pressing Pitt to identify the bank’s customer. They were beside themselves with curiosity. But Pitt wasn’t about to play his trump card so soon.
“Don’t worry, you’re going to get a big fish,” he assured them.
Suddenly Sturc spoke up. “For what you’re asking, he damn well better be a whale—Moby Dick.”
St. Andrews Plaza is a tiny plot of pavement tucked behind Manhattan’s towering Municipal Building and the federal courthouse on Foley Square. When lawyers in New York speak of St. Andrews Plaza, however, they mean one thing: the U.S. attorney’s office, which has long been viewed as the most prominent, prestigious, and powerful outpost of the Justice Department. This is, in part, because of the office’s jurisdiction (it is responsible for federal cases filed in Manhattan, the Bronx, and parts of southern New York State) and its proximity to the nation’s financial center on Wall Street. Historically, the plaza has played host to a vast majority of the most sophisticated and complex financial cases, as well as to New York’s organized crime and drug-trafficking cases.
Over many years and different U.S. attorneys, the office developed a reputation for caution, quality work, and unshakable integrity. The means were as important as the ends, even if that meant some potentially good cases were never filed. Even the youngest assistant U.S. attorneys were held to high standards. Publicity was shunned. Rudolph Giuliani had inherited this tradition when he was named U.S. attorney in 1983. He had wasted no time in casting off much of it.
Not since Thomas E. Dewey in the 1930s had Manhattan seen a U.S. attorney like Giuliani, one who had already forged a prominent national reputation. As associate attorney general, the number-three official in the Reagan Justice Department, Giuliani had been one of the administ
ration’s most visible spokesmen, appearing tirelessly on news and talk shows to address crime and law enforcement issues. Voluble, energetic, and openly ambitious, he arrived in New York eager to put his own stamp on the office.
He confronted an office badly in need of rejuvenation. Under his immediate predecessor, John Martin, Jr., the office had been largely coasting on its reputation. Its caution bordered on paralysis. The office’s prominence had faded. Giuliani immediately shifted office resources and personnel into two areas guaranteed to attract media coverage—organized crime and drugs—and soon scored major victories. These were trumpeted with Giuliani’s characteristic fanfare; press conferences at St. Andrews Plaza became routine occurrences. Giuliani even went so far as to embark on an “undercover” drug-buying expedition in the Bronx. No arrests resulted, but Giuliani turned the foray into a photo opportunity, posing for cameras clad in a black leather jacket.
Press coverage was almost uniformly positive, bordering on fawning. Giuliani argued that the office’s visibility played an important role in deterring crime. It was hard to argue with success, and his office scored a series of impressive convictions. Its reputation grew stronger.
Giuliani brought to the office what many perceived as a Catholic, even Jesuitical view of the world, one marked by clear divisions between right and wrong, friend and enemy. He seemed to equate crime with sin, punishment with penance, cooperation with repentance. And he showed a willingness to take risks. “I’m not in this job to do the safe thing,” he said in 1986. “If you never try to accomplish anything, you never fail. I’d rather fail.”
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