The government lawyers could hardly believe it. They’d been suspicious of Sullivan & Cromwell and Kidder, Peabody ever since the Winans affair, which had shown Kidder’s obvious lack of controls and poor internal enforcement. Now Siegel, the firm’s former star, had confessed to major criminal activity while representing the firm. And Kidder thought the government should apologize?
Krantz’s aw-shucks manner didn’t help. “What’s the issue here? Help me,” he said, looking around at the government lawyers, who were rendered speechless. “I just don’t see what the violation is.”
Giuliani remained calm. “Here’s what our thinking is,” he began. “You’ve got a problem. The sooner you resolve it, the better. And you’re going to have to take some medicine.” Then Carberry took over. He proceeded to review Kidder, Peabody’s potential criminal liability for Siegel’s acts and reminded them of their poor performance in the Winans affair, including some irregularities that had surfaced in a book written by Winans. Then Carberry dropped a bombshell: Kidder, Peabody’s problems were by no means confined to Siegel’s crimes. The government had other information of a stock parking scheme that involved Donald Little, Boesky’s Kidder, Peabody broker in Boston; Kidder’s co-head of equity trading; and, most astoundingly, Kidder’s president, Jack Roche.
“We’re going to indict you,” Carberry said bluntly. Schwartz seemed flabbergasted. Giuliani lectured him on corporate liability for officers’ crimes, and Schwartz lectured him on common sense. The talks quickly collapsed amidst further mutual recriminations. Schwartz angrily left the room, followed by the Kidder team, leaving Giuliani and his assistants enraged.
When Bossidy heard a report of the meeting from Handros, he was appalled. Sullivan & Cromwell, in his view, couldn’t have adopted a worse stance. Something had to be done, fast. Bossidy had seen the devastating impact of an indictment on E. F. Hutton, and he believed that an indictment would destroy Kidder, Peabody’s reputation even in the unlikely event that the firm ultimately prevailed.
The GE auditors stepped up their pace, reporting back to Handros and Bossidy. Their findings weren’t encouraging. Some of the transactions under investigation, such as the General Foods trading, might be defended based on publicly available information. But what about Continental Group? Kidder’s arbitrage department had displayed perfect timing in buying stock in that Goldman client just before the emergence of a white knight. And there were other, similar “coincidences.” “One or two examples like this we could live with,” Naftalis advised Handros. “But not five or six.”
Nor were interviews with Kidder, Peabody’s top officials all that reassuring. GE was willing to believe that DeNunzio didn’t know about Siegel’s scheme with Freeman—but DeNunzio had encouraged Siegel to advise Wigton and Tabor. He hadn’t maintained even the pretense of a Chinese wall. He had abdicated control. His management of the firm, GE officials thought, had been abysmal; and if anything, they concluded, Roche, now under investigation himself, and Krantz were even less competent.
Two weeks after the Kidder, Peabody team’s meeting with Giuliani and Carberry, Naftalis called Carberry. “GE wants to meet you,” he told the prosecutor, “without anyone from Kidder or Sullivan & Cromwell.” GE had decided to take control of the firm, and not just of the criminal investigation. Sullivan & Cromwell was dismissed from the case, replaced by Naftalis and his firm, Kramer, Levin, Nessen, Kamin, & Frankel. On March 7, Bossidy himself met with Giuliani and Carberry. He launched into a 15-minute presentation, in a tone dramatically different from that taken by Schwartz at their prior meeting.
Stopping just short of conceding that Kidder, Peabody was guilty of crime, Bossidy described GE’s thorough examination—a sharp contrast to the whitewash the prosecutors believed the Goldman, Sachs investigation had been—and acknowledged that “serious problems” had been uncovered. He emphasized that GE had only recently purchased the firm, and had known nothing of the incidents that figured in the investigation. An indictment of the firm could put it out of business, costing the jobs of 7,000 innocent employees.
Then he offered concrete remedial steps: Kidder’s top management, including DeNunzio, Roche, and Krantz, would be swept out, fired if necessary. Kidder, Peabody would abandon arbitrage entirely: Bossidy had concluded that an investment bank had no business being in arbitrage, and that no Chinese wall could guarantee against the improper use of confidential information. And the firm would work out an appropriate settlement with the SEC.
GE’s candor and bold proposals made a favorable impression on the prosecutors. Giuliani told Bossidy that GE’s approach was “a breath of fresh air” compared to what he was hearing from other firms implicated in the scandal, obviously referring to Drexel and Goldman. For the first time since the arrests, Bossidy and Naftalis saw a glimmer of hope that Kidder, Peabody wouldn’t be indicted.
Just as events were taking a favorable turn with Kidder, Peabody, the government scored another victory. Boyd Jefferies, chairman of Jefferies Group, the big Los Angeles brokerage firm that pioneered off-market trading, pleaded guilty to two felonies in April 1987 and agreed to cooperate. Jefferies had “parked” stock for Boesky, much as Mulheren allegedly had, and the government had evidence of an incriminating $3 million payment from Boesky to Jefferies. The payment, described in the original invoice as being for “investment advisory services and corporate financial services,” was in fact a reconciliation of parked stock positions—confirmation that Boesky had made use of phony invoices akin to that used in the $5.3 million Drexel payment.
More startling was Jefferies’s revelation of a scheme that had nothing to do with Boesky. Jefferies admitted that, at the request of an unnamed co-conspirator, he had manipulated the price in a secondary offering of Fireman’s Fund stock by American Express. The scheme had also involved the preparation of phony invoices when the conspirator reimbursed Jefferies for his losses incurred in driving up the price by buying large blocks of the stock. More than any others implicated, Jefferies was pleading guilty to acts that were all too routine on Wall Street. As Jefferies’s lawyer told the government, “Boyd was accommodating customers. He grew up in the business accommodating customers. The rules are changing.”
The conspirator who had asked Jefferies to manipulate the price of Fireman’s Fund stock was none other than Sandy Lewis, the arbitrageur who had introduced Mulheren to Boesky at the Café des Artistes before falling out with Boesky. Eager for revenge, Lewis had virtually hounded Gary Lynch throughout the summer, urging him to pursue the investigation of Boesky. Now he had gotten his wish, and Boesky was ruined—but it was Boesky who had the last laugh. Lewis, who had always postured as Wall Street’s high priest of ethical behavior, hotly denied that he was guilty. Few believed him. He was increasingly ridiculed for his hypocrisy. For all practical purposes, his career on Wall Street would soon be over.
But the euphoria at the U.S. attorney’s office over these successes was short-lived. In the high-profile Freeman, Wigton, and Tabor investigation, the government seemed to be floundering. After moving to Florida, Siegel had finally seen the arrest warrants based on his debriefings, and he was immediately upset. In Unocal and Storer, the two deals the government had chosen to publicize in its charges, the government had staked out two of the most complicated transactions Siegel had described. Doonan had only interviewed Siegel once about both deals, while Paschall took notes. Siegel was dismayed when he read the Doonan affidavit. The gist of it was accurate, but, as Goldman, Sachs had already recognized, the details were garbled.
In Doonan’s version, all the communications regarding the Unocal share buyback took place in the April phone conversation Siegel had had with Freeman in the Tulsa airport. That was, in fact, only part of the story. The affidavit had mistakenly telescoped into those phone conversations events that unfolded over days and weeks. Siegel knew that the actual trading records wouldn’t support that version of events, and they didn’t. The government also disclosed that Freeman had kept phony research f
iles to cover his purchases, and Siegel was equally dismayed. He had told them that Boesky—not Freeman—kept such files. Rakoff knew that good defense lawyers would capitalize on the errors, embarrassing the government and raising doubts about the strength of the case. Siegel could see that he would undoubtedly—and unfairly—be blamed and accused of lying. Rakoff wished the government had asked him and Siegel to review the Freeman, Wigton, and Tabor charges before arresting them, but the prosecutors had been so concerned about preserving secrecy that they hadn’t. It was too late now.
Rakoff called Carberry, with Strauss listening in. He wanted to make perfectly clear that Siegel wasn’t to blame for the errors. Carberry acknowledged the mistakes and said the government would find an occasion to correct them. Rakoff was relieved that Carberry made no attempt to blame Siegel. Carberry didn’t seem unduly concerned.
Freeman, Wigton, and Tabor were indicted on April 9, about seven weeks after their arrests. Without elaborating, the government did correct its mistakes, alleging that the Unocal trading by Kidder, Peabody had happened on May 15 and 17, 1985, not in April, and that the Storer trading had happened in April, not December, as previously alleged. But the government kept the indictments to the same two deals, charging each defendant with four felony counts.
Significantly, Kidder, Peabody itself wasn’t charged, reflecting the understanding that GE officials had reached with Giuliani. In keeping with its vow to support the government, Kidder, Peabody promptly suspended Wigton without pay, stopped paying his lawyer’s attorney’s fees, and stopped paying for Tabor’s lawyer. Unknown to most at Kidder, Peabody, GE had gone even further. GE lawyers met with Stanley Arkin, Wigton’s lawyer, and told him bluntly that Wigton should fight the charges only if he were, in fact, innocent. If not, he should plead guilty and cooperate. Adding teeth to this recommendation, GE said that if Wigton fought the charges and was convicted, GE would sue Wigton to recover the $3 million it had already paid him for his Kidder, Peabody stock and would withhold the $3 million still owed him.
In contrast, Goldman, Sachs maintained its staunch support of Freeman, though it issued a statement taking a more moderate approach than it had earlier. “We know him and trust him,” the firm said of Freeman. “Based on all we know now, we continue to believe he did not act illegally.”
GE justified its measures as being consistent with a company policy to suspend employees who are indicted. The suspension also reflected the view of GE officials, who didn’t really know Wigton or Tabor, that the government was probably correct in assuming that they had to have known Siegel was receiving inside information. The firm’s withdrawal of support for Wigton enraged many at Kidder, Peabody, however, especially those still sensitive to the firm’s loss of autonomy to a giant industrial corporation like GE. And the tactics made little impact on the unflappable Wigton. He held firm, hurt by the loss of the firm’s support, but insisting on his innocence.
The grumbling at Kidder, Peabody over this turn of events was mild compared to the uproar that ensued a month later. On May 12, the two prosecutors handling the case, Cartusciello, looking exhausted, and another assistant U.S. attorney, John McEnany, appeared before the judge assigned to the case, Louis L. Stanton, and said they needed more time to prepare for trial. McEnany acknowledged that, “with the benefit of hindsight,” the government might have waited to launch the highly publicized arrests, and admitted “we can be faulted for trying to proceed too fast.”
It was a startling confession of bad judgment at a critical juncture, not only in the immediate case, but in other ongoing investigations, including the Milken case. Usually it is the defense that requests delays; but in this case, sensing that speed was on their side, the defense lawyers objected to any delay. The day after the government’s motion, Judge Stanton sided with the defendants, citing the Sixth Amendment right to a speedy trial as he denied the government’s motion. A spokesman for Giuliani told The Wall Street Journal, “I wouldn’t characterize it as a defeat.” But plainly, the defendants and their supporters had reason to be jubilant.
Now the onus was on the government. Should it go ahead and try the cases? Or should it consider what many believed to be nearly unthinkable, and walk away from the case, seeking to have the indictments dismissed? The debate raged within St. Andrews Plaza. Cartusciello and McEnany hadn’t made the decision to launch the arrests, but they believed adamantly that the government had an obligation to go forward with the trial. Cartusciello, in particular, had been in the office for years, and had been trained in the traditions of Giuliani’s predecessors. That tradition hardly sanctioned hasty arrests, but once the defendants had been subjected to that humiliation, Cartusciello took seriously their right to a speedy resolution of the cloud hanging over their reputations.
And both he and McEnany believed they had a case they could try without embarrassment, and with a good chance of success. They believed Siegel would be an excellent witness, highly credible. They had ample support for his claims in the voluminous trading records they’d gathered from Kidder, Peabody and Goldman, Sachs. But they lacked a good corroborating witness. No prosecutor was thrilled at the prospect of trying a case with only one major witness, let alone one who had just admitted felonies.
The head of the criminal division, Howard Wilson, opposed their view. He argued that the government shouldn’t compound its earlier mistake by rushing forward now. He may have had other considerations as well: Part of Wilson’s job was to protect his boss, Giuliani, and Giuliani’s political future. Giuliani had had a remarkable string of highly publicized successes, including the conviction of Bronx Democratic leader Stanley Friedman, the case that had preoccupied him at the time of the Boesky agreement; he had tried the Friedman case himself, to considerable acclaim. He had reaped further praise for the Boesky plea agreement and his crackdown on Wall Street. Giuliani was on a roll, one that could easily propel him into New York City’s mayoral mansion, or the state governor’s mansion. His press had been almost uniformly laudatory. But what would now be worse? Dismissal of the case until a distant reindictment, when Giuliani might not even be in office, or a potentially embarrassing loss at trial that very summer, for which Giuliani would be blamed?
That left Carberry. He had suggested the arrests. He believed in the case. He wasn’t a political animal. As a veteran prosecutor, he was reluctant to overrule the assistants with day-to-day responsibility for the case. He cast his lot with Cartusciello and McEnany, recommending that the case go forward.
For Giuliani, it was a difficult dilemma. For him to overrule the chief of his fraud unit would be devastating for Carberry. But Giuliani had backed Carberry on the arrests, and the results had been disastrous. Giuliani agreed with Wilson, and ordered the assistants to prepare a motion seeking the dismissal of the case.
By noon the next day, rumors were already circulating that the government was going to take the extraordinary measure of having the case dismissed. Rakoff called Siegel, and told him about the reports. “Could that be?” Siegel wanted to know.
“It’s impossible,” Rakoff replied, based on his years of experience in the office. He still believed that the arrests would never have happened without the government’s having a corroborating witness. He assumed that the government would simply go to trial, even if it was sooner than the prosecutors wished. That, at least, would have been what happened while he was in the office.
But the “impossible” happened that very day. Cartusciello and McEnany went before Judge Stanton on May 13. In what was rapidly becoming the first major contested case of the insider-trading scandal, the courtroom was packed with reporters, lawyers for other potential defendants, and curious onlookers. Looking visibly pained—though more rested than he had the previous day—Cartusciello said that the government, faced with the choice of going to trial that Wednesday or asking that the charges be dismissed, “has concluded that the indictment must be dismissed.” In an effort to blunt the impact of such an embarrassing step, he added that the indi
ctment was “merely the tip of an iceberg” and vowed that the government would seek a new indictment expanding the insider-trading allegations from two to nine different stocks.
None of the defendants themselves had showed up for the proceeding, but their lawyers could barely contain their glee, even as they seized on the opportunity to blast the government. Arkin, Wigton’s lawyer, called the government’s maneuver a “cynical and transparent evasion of a right to a speedy trial.” Tabor’s lawyer, Lawler, said it “reflects badly on the strength of the government’s case and on the strategy of making the arrests.” Those themes, that the defendants had been badly mistreated and deprived of constitutional rights, were widely replayed in the press. In most pending cases, defense lawyers go out of their way to avoid offending the prosecutors, who retain enormous discretion in deciding the course of a prosecution. But in this war, every battle was fought to be won, as publicly and visibly as possible.
The bizarre turn of events did nothing for morale within Kidder, Peabody. Wigton’s defenders were emboldened, and began clamoring for his reinstatement. There was even more outrage when, the day after the government’s case was dismissed, GE carried out its own commitments to the prosecutors, ousting DeNunzio, Roche, and Krantz, and naming a GE director, Silas Cathcart, former chairman of Illinois Tool Works, as Kidder, Peabody’s new chairman.
“I was thinking just the other day that what we need here is a good tool-and-die man,” said a Kidder, Peabody official, his voice dripping with sarcasm. Speaking for GE, Bossidy said GE’s investigation had revealed “substantial weaknesses” in Kidder, Peabody’s financial, administrative, managerial, and information systems controls.
As a sop to Kidder, Peabody loyalists, Max Chapman, the onetime Siegel rival to become DeNunzio’s successor as chairman, was made chief operating officer. But he was awarded only the title of executive vice president, reporting to Cathcart. “They’ve asked me to run the revenue side of the business, with Cathcart coming in, who is 61 years old,” Chapman told The Wall Street Journal, getting in a dig at the aging Cathcart. There was no doubt that GE would now be exercising the control it had forsworn when it first acquired Kidder, Peabody. It brought in GE loyalists for the top financial and administrative jobs, and installed a group of GE credit officials in the firm’s junk-bond and leveraged buyout areas. GE had a $600 million investment it was trying to protect. Its strategy became evident within a few weeks, when the SEC announced it was settling charges with the firm for $25.3 million. In a rare public affirmation, Giuliani announced simultaneously that Kidder, Peabody would not be prosecuted.
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