On Friday of the same week, at about 3:45 P.M., the SEC’s Peter Sonnenthal entered Wachtell, Lipton’s reception area and demanded to see Reich or Wachtell. When the receptionist hesitated, he barged into the corridor, looking for the lawyers’ names on office doors. Edward Herlihy, a partner at the firm and a friend of Lynch’s, managed to restrain Sonnenthal. He brought him into his office and got on the phone to Lynch.
“What’s this animal doing in here?” he demanded. Lynch explained that Sonnenthal’s mission was to subpoena Reich. “We own the guy now,” Lynch said.
When Reich arrived at Herlihy’s office, Sonnenthal was waiting to hand him the subpoena. A shiver of fear went down Reich’s spine. Sonnenthal looked at him coldly.
The subpoena listed 102 deals, called for Reich’s phone records, credit-card charges, and brokerage accounts, and asked for information about a number of names. Wilkis was the only one Reich recognized.
From 9 P.M. to midnight Reich dictated his answers to the subpoena. He drew some confidence from the fact that he could answer 95% of the questions truthfully. He said he’d known Levine socially for a number of years and had run into him working on several deals. But he denied giving Levine any confidential information.
At 11 A.M. Monday, Reich was sitting idly with his feet propped up on his nearly empty desk, having just overseen the release of an NL press release. Pedowitz, the former prosecutor and a friend of Reich’s, called the young partner to his office and suggested they go to a conference room. Three other partners were waiting: Bernard Nussbaum, Wachtell, and Allan Martin, all former prosecutors. As soon as Reich saw them, he thought to himself: “Here comes the truth squad.”
Reich disregarded their advice that he get his own lawyer though he realized they wouldn’t protect him under the attorney-client privilege. He was hurt by the lack of support. He said he wanted to hear the facts as they knew them. As his partners began to summarize Levine’s allegations, Reich doodled furiously on a legal pad. He denied that he’d given Levine any confidential information, even unwittingly. Levine’s trades, he insisted, had to be sheer coincidence. Then they told Reich that another of Levine’s conspirators had told the government he knew Levine had a source at Wachtell, Lipton.
Reich was stunned. Levine had sworn that his identity would never be revealed. He’d promised. How could Levine have betrayed him? For the first time, Reich began to feel his world caving in around him. He looked stricken, flustered, then began sobbing. The Wachtell lawyers again urged him to get his own lawyer.
When he refused, they ordered sandwiches. Reich ate nothing. Now his interrogators changed tack. Reich’s partners reminded him that they had staunchly stood by him for the past week. Their reputations were at stake if Reich were lying. Would he betray them—even his mentor, Lipton himself? Reich again began to sob. When he collected himself, he began rambling about his troubled adolescence, his difficulty at making friends. These partners were his friends. Finally he pulled himself together and said he wanted five minutes to think. On his pad, he tried to write down the pros and cons of telling the truth. He couldn’t list any cons. Suddenly he couldn’t bear the thought of lying to his partners any longer.
At about 2:30 P.M., after over three hours of interrogation and discussion, the story came pouring out. When he was through, his partners asked sadly why he’d done it. Reich mentioned friendship, loneliness, the money, but his voice drifted off. He didn’t really have an answer.
Reich finally hired a criminal lawyer, Robert Morvillo, who’d also represented Carlo Florentino, the Wachtell, Lipton partner who had insider-traded years before. He resigned his partnership in the firm he’d come to love. If Wilkis had limited bargaining power, Reich had even less. He had no one else to implicate. He offered to explain “the deal world,” as he put it, but the government’s response was “So what?” No one seemed impressed by the fact that Reich had taken no money and had quit the scheme in 1984.
Alone among the conspirators, Reich testified before the grand jury and was indicted on two felony counts. A week after the indictment, on October 9, he pleaded guilty. To settle the SEC’s charges, he agreed to pay $485,000. He was left with his West Side brownstone, an Oldsmobile, and $10,000. Like Wilkis, he was sentenced to a year and a day in prison and five years’ probation. He and Wilkis entered Danbury federal prison together.
On February 20, 1987, hundreds of reporters, television crew members, and curiosity seekers packed the street outside the federal courthouse in White Plains, a New York suburb where Levine’s sentencing judge, Gerard Goettel, had been temporarily assigned. Police on horseback kept the crowd under control and cleared a path for the dark blue car bringing Levine, his lawyers, and his family to the sentencing. The courthouse was too small to accommodate the surge of public interest, and many reporters had to stand outside in the biting cold.
Liman appealed for mercy. “He is an outcast,” Liman said of Levine, “a leper like I’ve never seen. Dennis Levine’s name will always be remembered, Your Honor, as a synonym for this offense.” Levine himself, wearing a conservative gray pin-striped suit, read a statement in flat tones: “I will never violate the law again”; “I have learned my lesson”; “I’m truly sorry and ashamed.” There was also a tribute to his family. “It’s been their love and support that has sustained me through this very difficult period,” he said.
The lawyer appointed by the court to supervise Levine’s assets, however, had his doubts. Sheldon Goldfarb had examined Levine’s sources of income and assets acquired over the past six years, and several hundred thousand dollars couldn’t be accounted for. Levine told him he’d lost the money gambling in the Bahamas. But Goldfarb was dubious. Levine’s brother Robert, who had supposedly accompanied Levine on many of the trips, had no recollection of Levine losing any money, and was evasive. Levine himself had refused to answer questions about gambling losses under oath. In his final report to the court, Goldfarb expressed his suspicions that Levine had managed to conceal a substantial sum.
Prosecutors were now aiming higher than Levine, however, and Judge Goettel was more impressed by Levine’s cooperation. “He pled guilty and he has cooperated and . . . his cooperation has been truly extraordinary,” the judge said at Levine’s sentencing. “Through the information he has provided, an entire nest of vipers on Wall Street has been exposed.” The judge sentenced Levine to two years in prison and fined him $362,000 on top of the $11.6 million he was paying the SEC.
The “game” was over.
In late July 1986, a little more than two months after Levine’s arrest, Boesky had flown to Los Angeles for a meeting with Milken. The two men sat beside Milken’s pool. Levine’s arrest had come as a shock to both of them; it suggested a level of securities enforcement that neither had previously believed existed. Milken warned Boesky that, given the media attention and government resources being focused on the markets, they had better limit their dealings. Boesky readily agreed.
They also talked about the $5.3 million payment that had been disguised as a consulting fee—the one piece of evidence that could cause them trouble. They agreed that they’d have to find a way to substantiate their phony explanation. Drexel could work up more documentation, showing the research it had done on Santa Barbara, Scott & Fetzer, and other deals that had never gone anywhere. But what about their accountants’ records—the sheets Thurnher and Mooradian had worked up to reconcile their positions? Those would have to be destroyed.
Boesky, back in New York the first week in August, had called Mooradian at his lower Manhattan office.
“It’s Ivan,” he began in an uncharacteristically hushed tone. “You’ve got to come uptown and talk.”
Mooradian wondered what this was all about. He talked to Boesky two or three times a day on the phone; they rarely needed to meet face to face. Even more peculiar, Boesky insisted that Mooradian meet him in the Pastrami’n Things on West 52nd Street. It was the same place where Boesky and Siegel had often conspired.
; Although the coffee shop was nearly deserted, Boesky led Mooradian to the downstairs level and chose a secluded booth. Speaking in a barely audible whisper, he told Mooradian that what he was about to say had to be kept in the strictest confidence. He was to tell no one. Mooradian nodded in agreement.
“Do you have the Drexel documents?” Boesky whispered. Mooradian thought the whispering was absurd, since no one else was in the room.
“Yes,” he said in a normal tone.
“At home or in the office?” Boesky asked, continuing to whisper.
“At my office,” Mooradian replied.
Boesky leaned over the table, his face close to Mooradian’s. “Destroy them,” he said.
By the middle of August, the annual exodus from Wall Street was nearly complete, with investment bankers headed in droves to the Hamptons, rural Connecticut, or Europe. Only skeleton trading and support staffs were left in the city. Both Lynch and Carberry felt that if there was a safe time for them to take vacations, this was it. Nothing important, they assumed, would happen in August. Carberry and his wife left for a long-planned trip to the English Lake District, where they were planning to stay in modest bed-and-break-fasts. Lynch packed up his family and drove to Friendship, Maine, a town on Penobscot Bay where they’d rented a small cabin for several previous summer holidays.
Lynch tried to unwind after the intense, tumultuous events that had begun even before Levine’s arrest in May, but it was hard not to think about a potential case against Ivan Boesky. Boesky could become a bigger and more important case than Lynch had ever imagined. Like everyone else even remotely connected to the stock market, he knew the Boesky legend. Now he had learned a lot more. He and Carberry had been in contact by phone nearly every day since Levine had agreed to plead. They had read Boesky’s book, Merger Mania, and they had done computerized searches and compiled every article that had been written about the arbitrageur, including the L.A. Times and Fortune magazine pieces that had caused Siegel such consternation. They had all Boesky’s voluminous 13-D filings. The inquiries had been shrouded in secrecy, even within the U.S. attorney’s office and the SEC.
Even with Levine’s cooperation, Lynch knew that any case against Boesky would be difficult. Lynch had always thought arbitrageurs would be hard to convict on insider trading. Their business was trading on rumors and market intelligence. Boesky would be expected to have large positions in most takeover stocks. He would have masses of legitimate information that he could claim had motivated his purchases. Nonetheless, Lynch’s instinct was to press forward with the investigation, even to try the case despite a likelihood of losing.
The commission members had approved going ahead with an investigation of Boesky. As a first step, earlier that month the staff had prepared and delivered a lengthy subpoena directed at Boesky and the various entities he controlled. It called for testimony and voluminous numbers of documents and trading records, and it was crafted with enough specificity that Boesky would know that Levine had implicated him. Boesky’s response to the subpoena was due the week Lynch returned from vacation; perhaps something interesting would turn up. Lynch foresaw a long, drawn-out, expensive battle, however, probably unlike any the enforcement unit had ever undertaken.
On Tuesday, August 26, Lynch returned to his family’s cabin and found a phone message from Harvey Pitt, Bank Leu’s lawyer. He wondered, with some annoyance, how Pitt had managed to track him down in Maine, but he called Pitt back at his office in Washington.
Pitt apologized for bothering Lynch in Maine, but said, “We need to get together. It’s important.” This time, Pitt wasn’t calling about Bank Leu. He was representing Boesky.
“Are you calling to negotiate the subpoenas?” Lynch asked. “Because if you are, I don’t see why this can’t wait. I’m on vacation.”
But Pitt insisted. “We must get together now,” he said. “We can’t wait.”
Lynch agreed to meet Pitt halfway, in Boston. “This had better be good,” he said.
“I wouldn’t waste your time,” Pitt answered.
Pitt, in fact, had already interrupted his own vacation, stranding his family at the beach in Virginia for three weeks without telling them why. The matter was simply too explosive to confide in anyone—even his own wife—who didn’t have an absolute need to know. At first Pitt had called his wife each day, saying he’d be away for another day, but perhaps would join her the day after. Finally she cut him off. “Please just tell me you’re not coming at all. It’s easier,” she said.
Boesky had called Pitt the day he received the SEC subpoenas, saying they should talk. Pitt wasn’t shocked; Boesky had been subpoenaed from time to time over the years, as had almost everyone who traded in such volume and filed so many disclosure reports. But something in Boesky’s voice suggested that this was going to be different.
Pitt soon understood why: the subpoenas called for practically every scrap of paper Boesky’s operations had ever produced, and the government was demanding a response in only a few weeks. This was no routine inquiry.
Pitt knew that the SEC had to have approved a formal order of investigation. He called the enforcement staff, and asked for a copy of the formal order. Much to his surprise, the staff refused. Never in his 18 years of practice had the SEC failed to produce a copy of a formal order of investigation. This, too, suggested something unusually serious.
Finally, the SEC staff told Pitt he could come over and read the order if he promised to make no copies. He went over to the SEC offices with three colleagues. Each memorized a page, then ran out and copied it from memory, giving Pitt a reasonably good facsimile of the original order. He drew two fast conclusions: Levine figured prominently in the allegations against Boesky, and this was going to be a massive investigation. Pitt thought it was prudent to bring in another firm to help. He called Theodore Levine, whom he had worked with years before at the SEC and who had shared the podium with Siegel at the early seminar on takeovers. Levine, now a partner at Wilmer, Cutler & Pickering in Washington, was also on vacation.
“Oh my God,” Ted Levine said when told that Boesky was a target. He, too, interrupted his vacation and returned to Washington.
Within a week, Boesky called Reid Nagle, his chief financial officer, into his office to discuss several pending Northview deals, two of which were scheduled to close in little more than a week. “I’ve got some bad news,” Boesky said. “We’re canceling those transactions.” Nagle had been working on some of these deals for more than a year; he couldn’t believe it. When he pressed Boesky for an explanation, Boesky said, “It’s a difficult time. We’re being investigated even though there’s no wrongdoing.”
The following Sunday, Pitt, Ted Levine, and another Wilmer, Cutler partner, Robert McCaw, flew to New York and checked into the Grand Hyatt Hotel on 42nd Street. They were joined by Michael Rauch, Pitt’s partner from the Bank Leu case. An American Bar Association convention was in progress at the hotel, so the presence of the lawyers wouldn’t attract any attention. Boesky showed up the next morning.
He seemed thinner than ever, hesitant, nervous. Pitt introduced him to the Wilmer, Cutler lawyers, then got down to business.
“I can tell you what I think the government has got,” Pitt began, “but only you know the truth. If what you tell us isn’t truthful and complete, the advice we give you will be defective.” He also warned Boesky that once he told his lawyers the truth, he couldn’t change his story in the future on the witness stand. They would withdraw from representing him rather than let Boesky take the stand and lie.
Boesky needed little coaxing. Slowly, with some hesitation, he began to recount the dark side of his success. It was as if he were facing, for the first time, the often complex truth about himself.
Pitt felt a deep sadness. He knew he was watching the disintegration of one of the great careers in American finance. Pitt had known Boesky in his heyday, and he believed him to be tremendously talented.
Boesky’s complete debriefing took two full weeks.
Pitt moved their operations from the Grand Hyatt to the Helmsley Palace, and took over an entire floor of the expensive luxury hotel. Computers, copying machines, paralegals, and messengers were brought in. Masses of information, all potential evidence, had to be assembled and catalogued—all without attracting the attention of even the other lawyers at Fried, Frank.
As Boesky painstakingly took the lawyers through his dealings with Levine, Siegel, Milken, Mulheren, West Coast broker Boyd Jefferies, and many others, Pitt reached two broad conclusions: the government’s insider-trading case, drawn from what Levine could tell them, was weak. Boesky could probably prevail. But there were worse things in Boesky’s recital than insider trading.
Boesky was obviously terrified of Milken; he recounted his Milken dealings with an almost palpable sense of trepidation, as if he feared Milken were listening. Yet Boesky seemed to have little sense of the magnitude of what he was revealing. Pitt was stunned. Besides insider trading, Milken and Boesky were involved in a wide array of other crimes: 13-D violations, parking violations, and a broad conspiracy affecting the control of corporations. Boesky had done what Milken ordered him to do; even Boesky didn’t know sometimes how his actions fit into Milken’s grander schemes. These were historic revelations of criminal misconduct broader than anything Pitt had ever believed possible.
Pitt recognized almost immediately that Boesky would have to try to cut a deal with the government. The two most important variables in plea bargaining—the strength of the government’s case and the target’s ability to implicate others—were both working in Boesky’s favor. Pitt knew he could “sell” Boesky and have the government lawyers salivating in anticipation. The information on Milken alone would have been enough.
“You have to understand the risks,” Pitt told Boesky. “If you start the settlement process, you have risks. You’re admitting to the government that they have a case, for one thing.”
Den of Thieves Page 36