Den of Thieves

by James B. Stewart

  There was no sentimentality about the outcome at GE. Bossidy had achieved his overriding goal, which was to avoid indictment. Kidder, Peabody had survived, which was more than could be said for E. F. Hutton. From GE’s vantage point, there was less a sense of loss than one of bewilderment: How had an investment bank like Kidder, Peabody, with its long and impeccable reputation, ever gotten so far out of control? What remained of the firm was now free to resume its business, out from under the prosecutorial cloud that had shrouded it since the arrests in February.

  But what remained? For many at the firm, Kidder, Peabody had been transformed beyond recognition, into little more than a boutique subsidiary to the giant GE Credit Corporation, itself only a subsidiary of GE. The ouster of Wigton and GE’s treatment of him had shattered any lingering notion of collegiality. No one thought of Kidder, Peabody as “family” anymore. Among those leaving in a personnel exodus that began almost immediately were Hal Ritch and, finally, even John Gordon. They felt lost and alienated in an organization they no longer recognized. In more reflective moments, however, they realized that the Kidder, Peabody they’d known and loved had died long before. The arrival of the big-money “star” system in the eighties had made national celebrities out of Michael Milken, Ivan Boesky, and Martin Siegel, even as it doomed the old-fashioned investment bankers like themselves.

  12.

  Looking a bit stiff in dark suits and formal gowns, scores of assistant U.S. attorneys and Southern District alumni arrived at the massive crenellated towers of the 19th-century Park Avenue Armory, site of the 1987 Paul Curran dinner. An annual dinner reuniting lawyers who worked during a given U.S. attorney’s tenure, in this case that of Paul Curran, is a long-standing tradition in the Manhattan U.S. attorney’s office. The dinners help maintain the informal alumni network.

  The 1987 Curran dinner was held on May 13, the day the government asked for the dismissal of its indictment against Curran’s client Robert Freeman. The armory’s large dining room buzzed with comments almost uniformly critical of the actions of their own office. Some laid blame on Goldman, Sachs, arguing that if the defendant were anyone less wealthy and powerful, there wouldn’t be the uproar, and certainly not the media attention. But that was a distinctly minority view. The dismissal was at least an acute embarrassment; at worst, it reflected incompetence and damaged the office’s reputation.

  At one point during the evening, Jed Rakoff ran into Howard Wilson. “This is one of the great cases of all time, and you’re fucking it up,” Rakoff told him, only half in jest.

  Wilson was quick to come to the defense of Giuliani. “What are you talking about? It’s your guy’s fault we have to get so much corroboration,” he said, referring to Siegel.

  Rakoff had hoped to keep the discussion friendly, but this angered him. “That’s not fair,” he retorted. “I always said, this is what he’ll say. He’s been totally honest. You made the decision to shoot first.”

  Within the U.S. attorney’s office, it was Carberry who seemed to take the setback the hardest. He was, as usual, inscrutable, but he seemed to lose a certain enthusiasm. The bad publicity was painful. Carberry was fundamentally so shy that he didn’t even enjoy good publicity.

  Not long after the Curran dinner, with Cartusciello and McEnany struggling to regain momentum and morale at a low ebb, Carberry stunned his colleagues by announcing his own resignation. Publicly, Carberry would say only that the two major investigations, Drexel and Freeman, were likely to drag on for years. Also, the Freeman investigation held little intellectual challenge for him. Unlike Milken’s, it was a comparatively simple exchange of inside information; all it needed was routine corroboration. There were other reasons, too. Carberry felt he had already overstayed the office’s usual tenure of three to four years when he accepted the position of chief of the fraud unit in 1986. He’d been in the U.S. attorney’s office for eight years. His closest friends had already left. It was time for him to move on.

  All of this was true, yet many of his colleagues didn’t believe it to be the full explanation. It was clear to them that Giuliani had lost confidence in Carberry, even though Giuliani denied it. This loss of faith would have made the job untenable for anyone of Carberry’s pride and professionalism.

  Carberry didn’t yet have a job offer. He dreaded the prospect of trying to sell himself to virtual strangers. Most important, however, his friends found it hard to believe that Carberry would abandon the Milken investigation. He was engaged in an enforcement action that had the prospect of reshaping fundamental attitudes on Wall Street and in the nation’s financial markets for generations. Milken was the top of the investigative pyramid, the likely culmination of everything Carberry had set in motion when he first gained the cooperation of Levine. How could he step aside now?

  Having made his decision, Carberry wasted no time. In August he was approached by Jones, Day, Reavis & Pogue, a large national law firm based in Cleveland, about launching a white-collar defense practice in the firm’s New York office. Carberry didn’t even know Jones, Day had a New York office. He flew to Cleveland, met his prospective partners, and, eager to end the search, accepted their offer without entertaining any other prospects. He left in October. What should have been a triumphal exit seemed more like a retreat.

  Giuliani moved swiftly to try to shore up momentum and regain the initiative by naming Bruce Baird, one of his top lieutenants, to the securities fraud post. Baird had worked with Giuliani years before at the Justice Department, and, after joining the U.S. attorney’s office in 1980, had successfully handled organized crime cases, including the Columbo investigation. He headed first the narcotics division and then became chief of the criminal division. He knew something about securities law from his days as an associate at Davis Polk & Wardwell, the prestigious firm representing Freeman along with Kaye, Scholer.

  Whereas Carberry was fat with a wry sense of humor, Baird was tall, thin, serious, and soft-spoken. He’d grown up in the Midwest and graduated from the University of Wisconsin. If anything, Baird took an even harder line than Carberry. Given his background in some of the toughest areas of law enforcement, he wasn’t troubled that Freeman, Wigton, and Tabor had been arrested and handcuffed. His clear-cut view of right and wrong was closely akin to Giuliani’s.

  Baird accepted Giuliani’s offer of the securities fraud job without hesitation. He knew that he would be presiding over the two most important cases in the office, those of Freeman and Milken, in the blaze of publicity. He saw that Giuliani’s political future, as well as the credibility of the U.S. attorney’s office, might turn on the outcome. There was no higher-stakes assignment in the Justice Department. He had to win.

  Yet, as he set to work, the possibility of victory seemed remote. The Drexel investigation, headed by Carroll and Fardella, seemed stalled. The Freeman investigation was in shambles. Wall Street had closed ranks around its own.

  Baird was immediately struck by the similarities between the insider-trading investigations and the Mafia cases he’d worked on. Like organized crime, the Wall Street suspects prized silence and loyalty over any duty to tell the truth and root out corruption. He assumed that a Goldman, Sachs partner, for example, would go to jail rather than implicate another partner at the firm. Also, as in organized crime investigations, there were numerous interlocking cases, and not enough investigators to pursue all the leads. Baird constructed a chart. He wrote down the names of suspects and drew boxes around them, then connected them based on interlocking relationships. When he was done, he had nearly 20 boxes, arranged roughly in a circle. Not all seemed to lead anywhere. Milken was at the top, Drexel near the center.

  In December, Baird and his colleagues stumbled upon some valuable evidence against Milken. In a painstaking review of all the documents collected from Boesky’s operations, investigators had discovered a folder from Boesky’s personal files marked “DBL arrangement.” In the folder, apparently kept by Boesky’s secretary, were what looked like the very spreadsheets prepar
ed by Mooradian, Boesky’s recordkeeper, and then destroyed at Boesky’s orders. Carroll immediately called in Mooradian to review them.

  “That’s it!” Mooradian exclaimed when he saw them. “That’s what I did in Florida.” Boesky had apparently forgotten that he had ordered his secretary to copy the Drexel positions before returning the originals to Mooradian.

  Now Mooradian’s effort to reconstruct the papers could be dropped. The government not only had an actual copy of the original—vastly more valuable as evidence—but the figures corroborated everything Mooradian had been telling them from memory.

  The Mooradian papers were soon followed by what appeared to be another breakthrough—in both the Milken and Freeman cases. Soon after taking the post, Baird had sat down with Cartusciello and McEnany to discuss Freeman, who, Giuliani had made clear, was a top priority, given all the bad publicity. They were under pressure to live up to their vows that the withdrawn indictment was only the tip of an iceberg. But where could they get corroboration, additional evidence?

  In the course of the Siegel debriefings, Cartusciello had made a mental note of a conversation Siegel remembered having with Freeman during the Storer deal. Freeman had assured Siegel that he knew Coniston Partners was accumulating the stock and was “serious” about forcing a major transaction. Siegel had asked Freeman how he knew. “I’m very close to the people buying the stock for Coniston,” Freeman had replied.

  Cartusciello had seized on Siegel’s memory of the remark, which suggested that Freeman had a source of inside information apart from Siegel. But Siegel had remembered no name, and doubted that Freeman had even mentioned one to him. Some fast investigative work, however, had solved the mystery. Coniston had accumulated the Storer stock through a firm called Oakley-Sutton, whose officers happened to be the same people who ran Princeton-Newport Partners. The head of the operation, James Regan, had been Freeman’s roommate at Dartmouth. Surely this was the person. Regan and Princeton-Newport had been subpoenaed about two weeks after the Freeman arrest and Siegel plea. Records revealed the expected trading in Storer stock, and phone records showed that, at the time of the deal, Regan and Freeman spoke often on the phone.

  Baird thought that Princeton-Newport was likely to be a promising target for further investigation. Perhaps the firm’s principals had conspired with Freeman; they might warrant prosecution themselves, or be candidates for a plea bargain or immunity grant in return for evidence and testimony against Freeman. Baird needed more information, however, and he didn’t want to tip off the firm that it had become a target of the government’s interest. So Baird turned to a classic investigative technique: Look for a disgruntled current or, more likely, former employee. He soon had a candidate.

  Amid all the pressures of the Freeman investigation, Cartusciello had gathered the trading records of employees at Princeton-Newport, and had spent hours poring over them. The tedious work paid off: The records of one employee, William Hale, showed some suspicious pre-announcement trading in one of the stocks that figured in the investigation. When the prosecutors tried to locate the employee—another Dartmouth alumnus—they learned that he was no longer working at Princeton-Newport. He had been fired.

  The prosecutors began by issuing Hale a subpoena, but the tactic was a failure. Hale retained a lawyer, and said he wouldn’t come in voluntarily to talk with the government. With his lawyer, the prosecutors angled for some kind of deal, hinting that they’d be receptive to a proffer, especially if Hale could implicate anyone at Princeton-Newport. The answer came back: Hale refused to make any kind of proffer. Almost as a last resort, the prosecutors decided to call Hale before the grand jury, forcing him to testify with a grant of immunity. It was a risk. They knew that they might want to prosecute Hale later, but felt they had no alternative.

  Hale arrived for his testimony in November 1987. He was young, tall and gangly, with sharp features and dark blond hair. He didn’t seem nervous. Baird handled the questioning. As he had expected, the exercise seemed almost pointless, with Hale evasive and reluctant. Then Baird shifted to a seemingly innocuous question, asking Hale why he’d left Princeton-Newport. Hale hesitated only slightly before answering matter-of-factly, “I didn’t leave. I was fired.”

  “Why?” Baird asked, instinctively following up on this sudden burst of candor. But nothing in his career as a prosecutor had prepared him for the startling answer.

  “I couldn’t stand all the crimes they were committing,” Hale said.

  Baird could hardly contain his mounting excitement as Hale plunged into an account of wrongdoing at Princeton-Newport. It went beyond anything the prosecutors had imagined. Not only did it appear that the government would now have a case against Princeton-Newport and its top officials, but, according to Hale, the firm’s principal co-conspirator was none other than the Beverly Hills office of Drexel. Suddenly the obscure New Jersey operation looked like the previously missing link between the fraud unit’s two biggest cases.

  According to Hale, Princeton-Newport routinely “parked” securities with Drexel as well as Merrill Lynch, creating phony losses with which to cheat the Internal Revenue Service. The usual contact at Drexel was Bruce Newberg, the Beverly Hills trader who had once chewed his way through the phone cord. To generate the phony tax loss, Princeton-Newport would “sell” securities to Drexel’s high-yield department at a loss, then “buy” them back soon after at the same or slightly higher price. Hale said the transactions were really a sham, because Drexel didn’t bear any risk of ownership. Drexel was doing Princeton-Newport the kind of favor designed to make it a captive client, one willing, even eager, to buy junk bonds when Drexel salesmen came calling.

  Hale explained that Paul Berkman, his boss at Princeton-Newport, had assigned him to handle what were known as the “tax parks,” which had worried him because of the obvious potential legal problems. But Berkman hadn’t shared Hale’s concern. At a meeting attended by other Princeton-Newport officials, Berkman had blithely said that the IRS “didn’t have the manpower to sort out these types of trades and didn’t have the intelligence” to figure them out, either. Berkman instructed Hale to “camouflage” the scheme by repurchasing the securities at slightly different prices from those at which they were sold, and told Hale to keep track of the positions and the prices on a list he referred to as “the parking lot.”

  When Hale had balked at carrying out this scheme, he was fired, he told Baird.

  Although Hale couldn’t enlighten prosecutors on Regan’s relationship with Freeman, he was suddenly shaping up to be the most serendipitous witness in the investigation. And he had even more leads for the prosecutors to pursue. At Drexel, he said, there couldn’t be any doubt that Newberg was a knowing participant. He also had an assistant, Lisa Ann Jones, who could probably corroborate much of Hale’s account, since she often handled transactions for Newberg. Moreover, Hale revealed, there was a good chance that conversations about the parking scheme had been unwittingly recorded. Hale explained that Princeton-Newport maintained a recording system that routinely recorded the firm’s traders, though not its top officials. Such systems are common at many firms, usually kept in order to resolve any disputes with customers about orders and their execution.

  Baird and Cartusciello decided that it was important to move swiftly on Hale’s information, before word leaked that he’d been granted immunity and had testified. Fortunately, his firing had left Hale estranged from his former colleagues, so there was little risk that Hale himself would describe his cooperation. Information, however, had a way of spreading among defense counsel. The prosecutors were especially concerned about the tapes. Hale thought they were routinely destroyed after six months; that process might be accelerated if the firm knew of Hale’s disclosures.

  Despite the bad publicity over the government’s handling of the Freeman, Wigton, and Tabor arrests, the prosecutors weren’t deterred by the prospect of another show of force. Using Hale’s disclosures, they quickly obtained a search warrant for Prin
ceton-Newport’s offices, citing suspected tax evasion but making no mention of Drexel or Freeman. In a telling measure of Baird’s approach to law enforcement, the prosecutors acted as though the problem with the earlier arrests of the arbitrageurs had not been that the government had acted too harshly, but rather that the government hadn’t been forceful enough to intimidate the suspects into pleading guilty and cooperating. As a mafia and drug prosecutor, Baird had learned that his targets understood the language of force. With Giuliani’s approval, he planned a search that would make the Freeman, Wigton, and Tabor arrests look tame.

  Several weeks after Hale’s grand jury appearance, in mid-December, several vans pulled up to the inconspicuous, vaguely colonial-style office complex in the center of Princeton, New Jersey, that housed Princeton-Newport. Christmas decorations brightened the adjacent shop windows on the street, which led, just a short distance away, to the main entrance of Princeton University’s tranquil campus. Out of the vans poured fifty United States marshals, armed and wearing bulletproof vests.

  The marshals crowded into the elevators, then pushed their way through the glass doors of Princeton-Newport’s offices. After showing their warrant, they swarmed through the offices as terrified employees froze at their desks. No one was allowed to leave until the marshals completed their work. They pulled open filing cabinets and desks, emptying the contents into cardboard boxes. By the end of the afternoon, they had carted off more than 300 boxes containing documents, records, and—most important—all the tape recordings they could find.