Den of Thieves

by James B. Stewart

  He pointed out that cooperation would be painful. Boesky would likely be vilified publicly, and his penalty was likely to be substantial. Pitt didn’t want to sugarcoat his client’s prospects. On the other hand, he told Boesky, the government clearly wasn’t going to go away if Boesky decided to fight. His case would become the biggest in the country, one to which the government could devote its enormous resources. Boesky would be tried under the glare of publicity, an experience likely to extract a huge emotional toll.

  Pitt emphasized that the clock was ticking. The favorable climate for settlement could evaporate instantly. Milken or Siegel might get to the bargaining table first. Then Boesky would become the big fish targeted for investigation and trial.

  Boesky had three major questions: What would happen to his wife and children? (Their assets and trust funds, including those generated on their behalf by Boesky’s illegal activities, would probably be unaffected since they were innocent bystanders.) What would happen to his employees and investors? (Boesky would probably be barred from the industry, so employees would lose their jobs, but investors probably wouldn’t be hurt.) And, would he have to do jail time? (Probably, but far less than if he went to trial and were convicted. Each of the many securities crimes Boesky had admitted carried a maximum term of five years in jail.)

  After extended discussions, Boesky paused, looking grave, and looked around the room at his lawyers. “I’m of the view we should settle,” he said.

  Pitt felt they hadn’t a moment to lose. As soon as he got a good grasp of what Boesky could offer, he called the SEC and reached Lynch in Maine. On August 27, Sturc and another SEC lawyer flew to Boston from Washington; Pitt, Rauch, Levine, and McCaw flew in from New York. They all met Lynch in the windowless room that served as a library for the cramped regional SEC offices located above the Boston Garden, the home of the Celtics.

  Lynch knew something big was about to happen when Pitt, skipping the usual pleasantries, insisted on an off-the-record conversation. Then he began to read from a prepared script. He told Lynch that Boesky couldn’t respond to the subpoenas in the short time the SEC had allowed. But more important, Pitt argued, it wasn’t in the government’s interest simply to bring a case against Boesky.

  “If we did a deal,” he said, “the government would gain an insight into Wall Street practices that were comparable to the Pecora hearings that led to the passage of the securities laws.” Boesky, he said, would be a “window on Wall Street. Assume Ivan can tell you about things, and not just as a casual observer.”

  Lynch was stunned but remained characteristically pokerfaced, showing no emotion. He did not dare glance at Sturc.

  “We realize the government will have to have certain things,” Pitt continued, and laid out his negotiating parameters. Boesky would voluntarily withdraw from the securities business, he would agree to the payment of a substantial fine, and he would cooperate fully. In return, he wanted immunity from criminal prosecution.

  Lynch told Boesky’s lawyers that he couldn’t speak for the U.S. attorney’s office or Justice Department, and obviously there was no point in negotiating unless a plea agreement could be worked out. He said that he and his colleagues would do everything they could.

  After Pitt and the other Boesky lawyers walked out, the SEC lawyers whooped out loud, slapped each other on the back, and all but got up on the table and danced.

  Lynch couldn’t wait to tell Carberry. He reached the prosecutor, just back from England, at his home over the Labor Day weekend. Lynch was afraid to say too much over the phone, so Carberry agreed to fly to Washington the next morning to meet with the SEC lawyers and Boesky’s lawyers.

  That same weekend, Boesky called Mooradian at home. “Did you destroy them?” Boesky asked. Mooradian knew he was referring to the Drexel documents, which he’d shredded just after the coffee shop meeting. “Yes,” Mooradian said. “What the fuck are you talking about? Of course I did.”

  “Reconstruct them,” Boesky ordered.

  Mooradian was thoroughly confused. “Ivan, I can’t possibly do that,” he protested.

  “You’ve got to,” Boesky replied, and hung up.

  Mooradian swore to himself, chalking this up as another one of Boesky’s unreasonable demands. He didn’t see how he could possibly remember all the stocks involved, let alone the exact positions. Then he remembered Maria Termine, the young woman who’d brought the folder down to Florida and had helped him when Boesky demanded that the amounts be reconciled with Milken’s operation. She still had her worksheets. Mooradian also found a few fragments of underlying documents he’d used in calculating the Drexel numbers. He and Termine began working together, trying to come up with what Mooradian considered a reasonable facsimile of the original ledgers.

  The Tuesday after Labor Day, Boesky’s lawyers, the SEC lawyers, and Carberry met at Fried, Frank’s offices on Pennsylvania Avenue. Pitt gave Carberry a presentation similar to the one he’d given Lynch.

  “Can we do a deal?” Pitt asked. Carberry said he had to confer with Giuliani, but he was intrigued.

  Back in New York, Giuliani gave Carberry five minutes. The U.S. attorney was in the midst of the highly publicized political corruption trial of Stanley Friedman, the former Bronx Democratic leader. Giuliani had decided to try the politically charged case personally, and a success was essential for his political ambitions.

  Carberry told Giuliani he was still a year or two away from being able to try Boesky, and that even then he couldn’t guarantee a conviction. In contrast, Boesky’s cooperation, he argued, could lead to “interesting things.”

  With a minimum of discussion, Giuliani told Carberry to negotiate a plea. They agreed that immunity was out of the question: They would demand a guilty plea to at least one felony. And they would want a lot of money in fines and penalties. Carberry had recently noticed that the SEC’s annual budget was $105 million; he picked $100 million as the figure he wanted from Boesky. It was a big, round number, one that would dazzle the public—and he thought the comparison to the SEC budget was impressive; it would demonstrate how worthwhile the agreement was. Carberry knew that any deal that seemed too lenient would generate a firestorm.

  He also knew that secrecy was imperative if Boesky were to be useful as an undercover operative. Carberry trusted Lynch and his top aides, but he didn’t know the SEC commissioners, with their political agendas. When he called Lynch to tell him he’d gotten the go-ahead from Giuliani, he emphasized the need for absolute secrecy. “I would view any leak as an obstruction of justice,” Carberry warned, “and I’d seriously contemplate bringing charges.”

  Lynch restricted knowledge of the negotiations to only three people in his office, and Carberry told only Giuliani and Howard Wilson, head of the criminal division. Later, Carberry confided some especially secret details of the operation to one other person, so that there would be someone to carry on if he were killed or died suddenly. All meetings were scheduled at Fried, Frank’s offices, not at the SEC or U.S. attorney’s office, where the presence of the Fried, Frank and Wilmer, Cutler lawyers might attract attention. To enhance secrecy, Boesky was never referred to by name; his code name was “Igor” at the U.S. attorney’s office, and “Irving” at the SEC.

  The lawyers for Boesky and the government plunged into a frenzied round of negotiations. They were under intense time pressure, because one of Boesky’s companies, Northview, faced a November 15 SEC disclosure filing. Any major development would obviously have to be disclosed then. They were hoping to enlist Boesky as an undercover agent, and this drastically narrowed the time in which he could operate.

  Carberry said flatly at the outset of negotiations that he had to have a guilty plea to one felony count carrying a maximum prison term of five years. Boesky’s lawyers offered little resistance, asking for an offense that carried a three-year maximum. Carberry was adamant, and they gave in. But there were prolonged discussions about which felony would be the subject of Boesky’s plea. There was a wide array o
f five-year felonies from which to choose. Strategically, Carberry wanted something Boesky would likely be called to testify about. And he wanted to send the message that the case was about something bigger than insider trading. Conspiracy to commit securities fraud was settled upon as suitably all-encompassing.

  The money issue was more complicated. Carberry and the SEC lawyers asked for the $100 million; they thought that $50 million was a reasonable ballpark estimate of Boesky’s illegal profits, and an additional $50 million would be an appropriate penalty. They also thought that $100 million was in line with their own estimates of Boesky’s net worth. Boesky’s lawyers argued that $100 million was too much; that their own calculations showed that Boesky had profited by no more than $30 million from Levine’s information, and since the Levine trading was all that the SEC knew about, Boesky shouldn’t be penalized financially for volunteering more evidence of wrongdoing. Again, the government lawyers were adamant, insisting they had to have the $100 million.

  Pitt knew it was a number Boesky could live with. The government had no way of knowing just how much money Boesky had made illegally; it wouldn’t find out the full scope of Boesky’s wrongdoing until the penalty was fixed. Nor was it free simply to seize everything Boesky owned. Penalties are supposed to be tailored to the wrongdoing. Later, however, the government did receive an accounting of Boesky’s assets, and it turned out that the SEC’s estimates weren’t too far wrong. The confidential statement disclosed Boesky’s net worth in January 1986 as $130,822,991, including cash ($2.7 million), securities ($115 million), real estate ($6.9 million), two Rolls Royces ($100,000), and art ($2.4 million). It disclosed annual income of $7 million, including a salary as chief executive of the Boesky entities of just $35,000. His estimated annual expenses of $6 million sealed the SEC’s sense that he lived lavishly.

  A crucial aspect of any plea negotiation is the “proffer,” in which the defense formally tries to give the government an estimate of the value of a defendant’s cooperation. At their first meeting in Washington, Pitt gave the government an oral proffer, an outline of Boesky’s value as a witness that was more detailed than his earlier representations, but stopped short of naming names. At their last negotiating session, however, after all other aspects of the settlement had been worked out, Pitt produced a written proffer, which Lynch needed in order to get the commission’s approval of the settlement.

  That meeting, again at Fried, Frank’s offices, seemed to go on forever. Finally, at nearly 4 A.M., Pitt unveiled the long-awaited document, and Lynch, Carberry, and the other government lawyers eagerly pored over it. Carberry felt his heart sink. It was much vaguer than he had expected. There were no names, only references such as “investment banker A,” or “investment bank B.” It was also cryptic about just what crimes Boesky’s lawyers believed had been committed. Carberry looked up from the document, concerned.

  “We can’t tell whether we’re getting Xerox operators or real players. This isn’t good enough,” he said.

  “That’s the best we can do until the SEC signs off,” Pitt insisted, arguing that he couldn’t expose Boesky any further. Lynch and Carberry left the room, convinced that they would have trouble selling the proffer to the commission, given Boesky’s stature. They had to have more proof of what Boesky was giving them. There had to be bigger fish.

  At nearly 6 A.M., Carberry hailed a cab and returned to what he considered a godawful hotel that didn’t even have a desk clerk to let him in. It was all he could afford on his government allowance. He had barely gotten into bed when his phone rang. It was Lynch.

  “They want one more shot at it,” he said excitedly. “Pitt just called.” But Carberry had had it.

  “I don’t care how many shots they want,” he said. “I’m not doing anything before 10 A.M.” He rolled over and fell asleep.

  The next morning, Pitt threw caution to the winds. He offered to reveal orally the identities of everyone mentioned in the proffer, though he wouldn’t put the names in writing. Then, to the amazement of the government lawyers, Pitt ticked off a list of some of the most prominent names in the world of finance: Michael Milken, the junk-bond king; Martin Siegel, Drexel’s star investment banker; Boyd Jefferies, the prominent West Coast broker; and Carl Icahn, the corporate raider. He could have listed even more, but Pitt always liked to promise slightly less than he would ultimately deliver, ensuring that the government wouldn’t claim that the terms of the proffer hadn’t been honored. So he didn’t mention Mulheren, for example.

  There was suddenly no doubt that the SEC would approve the settlement. Boesky was offering a trove beyond the government’s wildest imaginings. Just a few months earlier, the commission had thought it had cracked the insider-trading case of the decade when it nailed Dennis Levine.

  Carberry took the proposed settlement back to Giuliani, who was still absorbed in the Friedman case, and quickly gained his approval. They couldn’t pass up this opportunity. Lynch took the settlement to the commission on September 10. Since approving the formal order of investigation that summer, the commissioners had been told nothing. Even Chairman John Shad had been kept in the dark. They seemed stunned by the scope of the revelations, and the prospect of the reactions they were likely to trigger.

  Based on Drexel’s cooperation in the Levine case, Lynch and the commissioners were pretty sure that Drexel would immediately dismiss Milken and agree to cooperate. An institution like Drexel couldn’t survive an SEC enforcement action of the scope outlined by Boesky, they felt. What legitimate businessperson would use Drexel if it tried to protect Milken? With both Boesky and Milken out of the market, they realized, a profound change in the economy would be wrought, one they would have to prepare for carefully. Boesky and Milken were the twin pillars of the takeover wave that had pushed the stock market to such heights.

  Even after approving the settlement, Shad seemed to have trouble believing they had snared Boesky. He badgered Lynch almost daily, and seemed worried that the SEC wouldn’t get its $100 million. “I’m sure Ivan is going to leave the country,” Shad argued. “He could leave anytime. What’s stopping him? What if we don’t get our money? We’ve got to get him to pay now. We could freeze his assets.”

  Lynch tried not to show his impatience. “John, he’s cooperating with us. We’ll get the money. If we start to move against him, everyone will know. We’ve got to keep this buttoned down until the investigation is complete.”

  Lynch realized that secrecy would be increasingly hard to maintain as word of the settlement inevitably spread beyond the handful of people involved in the negotiations. Boesky’s sister-in-law, Muriel Slatkin, co-owner of the Beverly Hills Hotel, had been told of the subpoenas, and the government’s anxiety had soared when a small item appeared in the San Diego paper mentioning that Boesky had received a subpoena. Then Dan Dorfman, in a U.S.A. Today column that ran the first week in September, had also mentioned Boesky subpoenas. Every day, the government lawyers monitored the national press closely for signs of any leaks. Nothing further had appeared, but they knew they had no time to waste.

  Boesky was formally enrolled as a government agent on Monday, September 17, when he signed his settlement agreement with the SEC. He signed his plea agreement with the Justice Department the next day. While he had been mingling with other guests at the Guterman party aboard the QE2 on the evening of September 15, his lawyers had been working nearly around the clock to complete the final agreements. Pitt had had only two hours of sleep Sunday night.

  Besides the provisions for the plea to one count and cooperation, the written agreement contained powerful incentives for Boesky to tell the truth:

  Your client must at all times give complete, truthful, and accurate information and testimony. . . . Your client agrees not to commit any other crimes whatsoever. Should your client commit any further such crimes, or should it be determined by this Office that your client has intentionally failed to give complete, truthful, or accurate information and testimony, or has otherwise violate
d any provision of this agreement, your client shall thereafter be subject to prosecution for any federal criminal violation of which this Office has knowledge, including but not limited to, perjury and obstruction of justice. Any such prosecutions may be premised upon any information provided by your client, and such information may be used against him.

  The government got its first opportunity to test its new witness the following Sunday. Though Boesky had in many ways come to dominate their lives over the past four months, none of the government lawyers had ever met the arbitrageur. Lynch and Sturc flew to New York, as did the Boesky lawyers from Washington. Carberry and Doonan met them at the Westbury Hotel on Madison Avenue, where Boesky had rented a suite.

  Since it was a Sunday, most of the lawyers, including Carberry, had dressed casually. Boesky was dressed in his usual black three-piece suit. He seemed tired. Throughout the session, he rubbed a small metal ball back and forth between his fingers. He was stiff, even rigid.

  After everyone was introduced, Carberry began the session. “Your only obligation, Mr. Boesky,” he said, “is to tell the truth. If you don’t, we’ll kill you at sentencing.” Carberry encouraged Boesky to give the lawyers a narrative account of his crimes, beginning with Levine. He wanted to see how closely Boesky’s version coincided with Levine’s. Carberry was pleased that Boesky didn’t try to downplay his own guilt. Except for a few details, his account closely matched Levine’s.

  Carberry steered Boesky to Siegel next, then to Jefferies, Icahn, and finally Milken. Carberry didn’t interrupt with many questions, and didn’t probe for details. He was content with an overview in Boesky’s own words. His questioning took about an hour and a half. Doonan took notes, alert to opportunities to use Boesky for undercover investigation.

  Lynch and Sturc took over from there. The wider scope of SEC legislation and the lower standard of proof for any civil case gave them a broader base for questioning. They adopted a deal-by-deal approach, walking Boesky through many of the major transactions that had figured in his illegal arrangements, such as Fischbach. They continued for about three hours.