The arraignment spurred even more rumors, speculation, and paranoia when the government identified the source of the charges against the three arbitrageurs as “CS-1.” The designation stood for “confidential source one,” implying there might also be a CS-2. The government said CS-1 had been a Kidder, Peabody official at the time of the events cited in the complaint. It refused to be more specific, saying only that CS-1’s “reliability and trustworthiness” have been “amply established.”
According to the charges made public, CS-1 had passed information about the KKR bid for Storer to Freeman, who, already having established a position in the stock, used the inside information to “determine an appropriate price at which to sell call options.” The charges also alleged that Freeman had disclosed key information about a Unocal maneuver to defend itself against the bid by Boone Pickens in a telephone call to CS-1. CS-1, in turn, had passed the information on to Wigton and Tabor, who executed a sophisticated trading strategy involving Unocal put options to profit unlawfully on the information. The allegation involving Unocal was especially embarrassing for Goldman, Sachs, which had highlighted its Unocal defense strategy in its recently released 1986 annual report. The government added that the scheme had lasted from about June 1984 through January 1986, and involved “many specific significant corporate events in which such trading of material, non-public information occurred.”
U.S. Attorney Rudolph Giuliani held a press conference shortly after the court proceeding. The arrests, he said, were just the beginning of “a very long and substantial investigation.” In comments obviously aimed at Milken, Drexel, Freeman, Wigton, and Tabor, as well as others as yet unnamed who knew they were implicated, Giuliani said, “If they had common sense, and some sense of morality, what they would do is cooperate and try to help the U.S. government clean up this mess.”
After the arraignment, Freeman returned to Goldman, Sachs for an emotional meeting with Robert Rubin, a former head of arbitrage himself, the same person who had shared the 1974 takeover panel with Siegel so many years before. Rubin hadn’t been concerned by the subpoenas coming out of the Boesky case, but the arrests had changed things.
“This is all a lie,” Freeman said.
Rubin, one of the heirs apparent to John Weinberg, the firm’s chairman, had championed Freeman within the firm. He decided to take charge of the investigation, working closely with Pedowitz. When Rubin read the government’s arrest warrant, the notion of a wide-ranging conspiracy didn’t ring true to him. If Freeman and Siegel had been conspiring, then why had Goldman, Sachs actually lost money trading on some other Kidder, Peabody deals not mentioned in the government’s charges? Rubin knew Freeman very well, and this simply wasn’t the Bob Freeman he knew. Rubin was furious at Giuliani’s public humiliation of Freeman and Goldman, Sachs. As a Democratic fund-raiser, Rubin didn’t intend to allow the Republican Giuliani to gain politically at the expense of Goldman, Sachs.
There was an even more potent factor. When Rubin and Pedowitz had a chance to examine the charges more closely, they quickly concluded that the government was way off base. The Doonan affidavit describing the Unocal situation contained an error: it said the Unocal information had been passed by Freeman to CS-1. in April, rather than May, the date of the suspect trading.
Doonan, transcribing Paschall’s notes, had simply made a mistake. The government might later argue, as it did, that it had made some purely technical mistakes with regard to timing, innocent mistakes caused by haste. But to minds disposed to believe in Freeman’s innocence, and to suspect the worst of the government, such disclaimers understandably fell on deaf ears. In hardening attitudes at Goldman, Sachs, the errors damaged the government’s case all out of proportion to the degree of the inaccuracy.
The Goldman, Sachs management committee met informally that afternoon, and decided unanimously to support Freeman. Meanwhile, Rubin told Pedowitz to continue his investigation, and said he wanted to get to the bottom of the question of whether Freeman had, in fact, done anything wrong. Nonetheless, the questions tended to focus on whether the government could “prove” a case beyond a reasonable doubt, not whether Freeman had done anything wrong. The investigation showed more interest in finding plausible alternative excuses for the trading in question rather than in determining whether Siegel actually tipped Freeman. This approach, too, was probably an inevitable by-product of the strong Goldman-versus-the-government mentality that took hold in the wake of Freeman’s arrest.
Late that day, when he was finished with the lawyers, Wigton instinctively went back to his office at Kidder, Peabody. When his colleagues saw him come through the door, everyone on the trading floor jumped to their feet, giving him a cheering ovation. Wigton called his wife and reassured her that he would be home on time for dinner after all. At exactly 5:45 P.M., as he did every workday, Wigton met the two other members of his New Jersey car pool. They drove home, discussing that day’s market activity and their plans for the holiday weekend. Out of deference to Wigton, his companions didn’t mention the events that would soon figure prominently in network news programs. Wigton himself didn’t bring the subject up, either. To do so, he thought, would show bad form.
Both Kidder, Peabody and Goldman issued public denials of wrongdoing the same day as the arrests and arraignment. A Kidder spokesman said that “the firm has a long-standing policy against trading on non-public information, and as far as we know, it has been strictly observed.” Goldman was even more emphatic: “Based upon our own internal review, we have no reason to believe there has been any wrongdoing on the part of the head of our arbitrage department or our firm.”
CS-1, of course, was Siegel. Early Thursday morning, Doonan had called him at his apartment. “Don’t go to the office today,” Doonan had ordered. “Go straight to Jed [Rakoff]’s office.” On the ride downtown, Siegel sensed that he was going to be asked to enter his plea. Under his agreement with the government, he knew he would have to plead whenever the government ordered him to; he would not be allowed to “judge shop” by choosing the date of his plea.
When Siegel arrived at Mudge Rose’s offices about 10:30 A.M., Rakoff confirmed that the undercover operation was being terminated and that he would be expected to enter his plea the next day. (“They’ll probably make you plead on Friday the thirteenth,” Rakoff had quipped weeks earlier; now his jocular prediction had proved true.) Siegel called his own number at Drexel to let his secretary, Kathy, know he wouldn’t be in. Once again fated to be the bearer of significant tidings, Kathy was in a state of high excitement. “They’ve arrested Wigton and Tabor and Freeman,” she said. “They handcuffed them.” She had the ticker copy with the news in front of her, and read the account of the arrests. Kathy, of course, knew all three men: Wigton and Tabor from Kidder, Peabody, and Freeman from his frequent phone calls.
Kathy continued her account. “Everyone’s excited here,” she said of Drexel, explaining that people at the firm were practically rejoicing at the news. Siegel was momentarily puzzled, but Kathy quickly explained. After months of bearing the brunt of press reports about the course of the investigation, someone other than Drexel had finally been implicated. And not just anybody—Goldman, Sachs, the very firm that Drexel had most revered and had sought to supplant at the top of the Wall Street status pyramid.
To Siegel’s amazement, Kathy gave no hint that anyone suspected he might be involved. He hung up when they finished talking, saddened that he was about to stun someone so steadfastly loyal.
Rakoff and Strauss walked Siegel through the events that would unfold the next day. Copies of the information to which Siegel would plead guilty and the government’s press release arrived only late that night. It was obvious that the government was barely able to keep up with the rapid pace of events.
In discussing what the government would disclose about Siegel, a bone of contention was the amount of cash Siegel had actually taken from Boesky: Siegel insisted it was only $700,000, but Boesky had told the government it was $800,
000. The prosecutors seemed exasperated by the discrepancy. They didn’t want public speculation that one of their two star witnesses was lying, so they pressured Siegel to accept Boesky’s version, which they wanted to include in the press release. Siegel steadfastly refused. He suspected that the cause of the different amounts was the skimming of the cash by the couriers—but that wasn’t his concern. He had received $700,000 and he wasn’t going to say otherwise, no matter how much pressure was applied. After years of living with a lie, he wasn’t about to start again. The government backed down.
Now it was time for Siegel to begin what he feared would be the most difficult and draining aspect of his cooperation. During the undercover phase, he had been barred from telling anyone except his wife what was going on. Now he had to face the agony of telling the truth to his family, his closest colleagues, and his friends.
He reached his mother and father in Florida, where they were traveling in the RV Siegel had bought for them. He had both of them get on the phone. They had been upset a few weeks earlier, when Siegel had told them he wouldn’t be able to make it down for their 40th wedding anniversary; they were hardly prepared now for news of this magnitude. Their son had succeeded beyond their wildest dreams; now this was worse than anything they’d ever imagined. His mother sobbed. Their main concern, however, was for their son’s welfare. They wanted to see him immediately, but he dissuaded them. He tried to explain what would happen over the next few days, and to reassure them that he’d be all right.
Siegel continued down his list. He called his brother and his sister. He called Jane Day’s parents. Shock, disbelief, tears ensued from nearly every call. Then he turned to the clients and colleagues who were closest to him. He tried to call Henry Kravis at KKR, but he couldn’t be reached. He spoke instead to George Roberts, who told him how sorry he was, wishing him well. He reached Sam Heyman, his former neighbor and head of GAF. Heyman tried to be supportive; he said he’d known something was wrong, but hadn’t wanted to press Siegel. He called Gershon Kekst, the corporate public-relations expert, and Stockton Strawbridge, another major client. “Now we’ll find out if there’s steel under there,” Strawbridge told him. “There’d better be,” Siegel grimly replied. And he called Peter Schwartz, a frequent cab driver for Siegel, who’d become a friend. “I’m sorry I let you down,” Siegel said.
Finally he called Martin Lipton, the lawyer-mentor who meant so much to him. He still didn’t know that Lipton and his firm were representing Goldman, Sachs. Siegel repeated his earlier apologies, said he was sorry over and over, and hoped desperately for some sign of compassion or forgiveness.
“I’ll see what I can do for you,” Lipton said finally. Siegel was encouraged by even that small chink in Lipton’s cold façade.
Then Siegel again called Kathy, asking this time that she come over to Rakoff’s office. When she arrived, Siegel led her into a conference room and closed the door. “I’ve made a terrible mistake,” Siegel told her. “I’ve let you down.” He felt as if he were confessing to his own daughter. Kathy still seemed not to understand. He told her that he was guilty of insider trading.
Kathy burst into tears. “Why?” she sobbed. “Why?”
Siegel couldn’t answer her. He felt the anguish and pressure of the day burst within him. The two cried together.
Rakoff, worried still about Siegel’s state of mind, picked him up in his car the next morning and drove him to the courthouse. He didn’t want to risk the possibility that Siegel might have another bout of suicidal thoughts on the way to court. Siegel was brought in through a side door, then led into the large first-floor courtroom where motions and pleas are heard. He wore a dark gray suit, blue shirt, and red tie. Judge Robert Ward put Siegel last on the day’s calendar, which meant he had to wait for nearly three hours.
Word that CS-1 would be identified and would be entering a plea had made its way through the media, and the courtroom—in contrast to the previous day, when Freeman, Wigton, and Tabor were arraigned there—was filled with reporters, including sketch artists who stared intently at Siegel throughout the proceeding. Television crews from all the major networks crowded the broad steps leading up to the main entrance and the imposing pillars of the federal courthouse. Finally Judge Ward called for Siegel to stand before him.
Siegel assured the judge that he wasn’t taking medication and wasn’t under the care of a psychiatrist. Judge Ward asked him what level of schooling he had achieved. Siegel paused momentarily. He was about to name Harvard Business School, his alma mater, but couldn’t. He was too ashamed. “Graduate school,” he finally replied. The judge read the charges in the criminal information, one count of conspiracy to violate the securities laws and another of tax evasion for failing to report the Boesky payments. Siegel hardly heard him. He brushed tears from his eyes.
“How do you plead?” He heard the words echoing in the large courtroom, then silence.
“Guilty, your honor,” he said, softly but firmly. Judge Ward scheduled Siegel’s sentencing for April 2, less than two months away.
Siegel was hustled into the holding pen, where he was fingerprinted along with a group of 27 drug dealers who had been arraigned that morning. He tried to slip out of the courthouse through a basement door, but a film crew from NBC was waiting. The cameras rolled as his lawyers rushed him to a car waiting to take him directly to the airport. He paused only to give Audrey Strauss a kiss on the cheek, then the car door slammed shut.
News of Siegel’s plea and the arrests of Freeman, Wigton, and Tabor rocked Kidder, Peabody and its new owner, General Electric. Kidder’s M&A administrator ran from the floor in tears upon hearing the news. Siegel still had many admirers, especially among the support staff. But sentiment within the firm hardened against him as the facts emerged, especially that he had accepted cash payments from Boesky. There had always been resentment about Siegel’s departure for Drexel. It came quickly to the fore now.
Top GE officials learned the news as they were eating lunch in the company’s Fairfield, Connecticut, headquarters dining room. They were stunned at the realization that their $650 million investment in what they believed was an eminent investment firm had been imperiled. A dinner that night at Manhattan’s exclusive Le Bernardin restaurant, at which GE and Kidder officials were to celebrate the closing of a recent Kidder deal, turned into a wake.
There was some uneasiness between Kidder, Peabody officials and their new bosses, but the arrests drove a wedge between them. As Kidder officials such as Max Chapman came to Wigton’s defense, GE officials took a more jaded view. At GE, they had had experience with criminal charges in the area of government contracting. In their view, the government didn’t launch major investigations, let alone public arrests, without having some reliable evidence of wrongdoing. And with Siegel cooperating, they knew the government would have a strong case against Kidder, Peabody itself. A firm can usually be held criminally liable for the acts of its officials, and Siegel was admitting his crimes.
Since the acquisition, GE had left control of the firm in DeNunzio’s hands and rarely interfered. Recognizing the potential gravity of the situation, however, Lawrence Bossidy, GE’s vice chairman and the chief executive of GE Financial Services, the parent of Kidder, Peabody, took responsibility for the matter and put Joseph Handros, a GE deputy general counsel with criminal experience, in day-to-day charge of the matter. Bossidy, an imposing former professional baseball player of unimpeachable integrity, had no sentimental attachments to the “old” Kidder, Peabody, and was determined to move swiftly to repair any damage.
GE had already sent a team of its own auditors into Kidder, Peabody for a thorough examination of its financial performance and controls. GE immediately diverted the audit team into an investigation of the alleged insider trading. Kidder, Peabody put together its own task force, including John Gordon, Siegel’s friend Peter Goodson, and the hapless in-house lawyer, Robert Krantz. As they began their work, fears, largely unspoken, swept the firm. Might Siegel implic
ate others, particularly DeNunzio? What was the story with arbitrage at Kidder, Peabody? Some officials were stunned to learn that the firm even had an arbitrage department. As it pored over trading records, the audit team would tally the number of trades it labeled “suspicious” and “questionable.” Hal Ritch learned that the “suspicious” category had mounted to over 100 transactions in just a few days.
He and Gordon had other reasons to be worried. As they studied the government’s allegations regarding Freeman, they recalled their own experiences in the SCA deal. Their suspicions at the time now seemed confirmed. They hated to admit it, but the government charges about Freeman rang true.
The day after Siegel’s plea, a Saturday, the Kidder, Peabody team had been summoned to St. Andrews Plaza for a meeting with Giuliani, Carberry, Wilson, head of the criminal division, and Cartusciello, the prosecutor assigned to the Freeman case. Among the others attending had been the SEC’s Lynch and Sturc, since any resolution of the Kidder, Peabody situation would have to include an SEC agreement. Sullivan & Cromwell partner Marvin Schwartz had taken the leading role for Kidder, Peabody; also present had been Krantz, Handros, and Gary Naftalis, Wilkis’s lawyer, whom Handros had retained to represent GE.
“We’ve got you dead to rights,” Giuliani began, but Schwartz immediately seized the offensive. “You should apologize,” he told Giuliani indignantly, proceeding to denounce the office’s handling of the arrests of Freeman, Wigton, and Tabor.
Carberry retorted by accusing Sullivan & Cromwell, Schwartz’s firm, of a conflict of interest, since it had represented both Kidder, Peabody and Goldman, Sachs in other matters. Schwartz practically rose out of his chair, raising his voice, saying, “I don’t need you to lecture me on conflicts. When I need advice on ethics, I assure you I won’t turn to you.”
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