Den of Thieves

by James B. Stewart

  Milken was at his trading desk both days, reassuring Drexel clients that existing junk bonds wouldn’t be affected directly by the proposed legislation, and continuing to make markets. Yet he was indirectly responsible for the market’s tremors—since he, more than anyone else, had shown that takeovers could be financed at prices never before thought possible. More than any other single person, Milken had been behind the massive revaluation of stocks that had carried the Dow Jones average above 2,700.

  Then, on Monday, October 19, the stock market crashed, dropping more than 500 points in the worst one-day loss in its history. A selling frenzy developed as computerized program trading translated investor sentiment into sell orders faster than had ever before been possible. Virtually every stock was caught in the plunge, takeover targets and the most secure blue-chip companies alike. The market itself came close to breakdown, especially on Tuesday, October 20, when it plunged again before rallying in the afternoon. Many market-makers on the New York Stock Exchange lacked the capital to absorb the selling onslaught. The Federal Reserve had to flood the system with cash to stave off disaster.

  Unlike the great crash of 1929, Black Monday 1987 didn’t usher in a nationwide recession. It was a psychological breakdown, rather than an economic one. Corporate earnings remained strong. Main Street America continued spending. And even the shaken market itself began an extended rally from its new lows. Junk bonds, after plunging initially in a widespread flight to safer treasury bonds, recovered even faster, in part because of Milken’s tireless proselytizing that they remained sound investments. Indeed, he told his major clients to step in and buy more, and they did. Milken’s influence over his vast network of bond buyers made him uniquely positioned to restore confidence in the market.

  Yet the market’s plunge left real devastation in its wake. Small investors suffered heavily, and many were so alienated by the experience that they never returned to trading. Already suspicious of the market’s integrity, these investors were now convinced that the stock market was a rigged game for professionals. In time, this attitude would seriously impair the country’s capital-raising structure—just as the drafters of the original securities laws had feared.

  Wall Street was littered with victims. To a profound degree, the mood changed overnight. People no longer made as much money, and they didn’t expect to again. It wasn’t as much fun to come to work.

  The arbitrageurs were the first victims of a decade of leverage. In imitating Boesky, no other group had embraced the notion of leverage with such abandon, and no other paid so heavily for it. In the demise of the arbitrageurs lay one of the great lessons of the crash: that high returns aren’t necessarily market anomalies, but measures of far greater risk. This should have been obvious to junk-bond buyers, who had also enjoyed returns that seemed out of proportion to the risk. Yet most remained dazzled by their sun king in Beverly Hills.

  There were isolated warnings. Warren Buffett, chairman of Berkshire Hathaway in Omaha, who is considered one of the country’s most astute investors, warned repeatedly of the perils of junk bonds. “When you insure substandard drivers, you get paid more than when you insure standard drivers,” he told The Washington Post. “Some have done very well doing that and some have gotten killed.”

  On December 20, with the arbitrage world he had known still in shambles from the crash, a gaunt and uncharacteristically pale Ivan Boesky appeared in Manhattan’s federal court. Police barricades had to be erected to hold back the hundreds of reporters, photographers, television camera crews, and curious onlookers packing the courthouse steps. The courtroom was packed with reporters and lawyers, with access controlled by court marshals. The crowd became hushed, and strained to hear as Boesky himself stood and addressed federal judge Morris Lasker.

  “I am deeply ashamed and do not understand my behavior,” Boesky began, speaking in a soft voice. “I have spent the last year trying to understand how I veered off course,” he continued. “I would like the opportunity as I go forward to redeem myself and leave this Earth with a good name. That is what I want.”

  It was Boesky himself who had begged to be sentenced that day. Ordinarily, cooperating government witnesses, as a guarantee of their continued cooperation, aren’t sentenced until they have completed their testimony for the government; Boesky was slated to be the star witness in the government’s Milken case. Yet prosecutors allowed Boesky to be sentenced; it looked as though a Milken trial might be years away and, if he had to go to prison, Boesky wanted to go soon. He was growing increasingly anxious that his own safety was in danger. He was tired of biding time with charitable work at the Cathedral of St. John the Divine and studies at the Jewish Theological Seminary. These endeavors had had little impact on public opinion.

  Allowing Boesky to begin his sentence was a decision prosecutors would live to regret, but at the time, the loss of some leverage seemed a small price to pay for all that he had given them. At a presentencing hearing, prosecutor John Carroll described Boesky’s cooperation as the “most remarkable in the history of the securities laws.” He added that “the larger crimes in our view are the crimes that Mr. Boesky has engaged in largely at the behest of others. There we are dealing with a very systemic type of problem. A systemic corruption that undermines the financial world, and that is not, unfortunately, an exaggeration.” Given the subsequent defiance of others on Wall Street, Boesky’s honesty had come to seem all the more remarkable.

  Judge Lasker praised Boesky’s cooperation, hailing it, as did the government, as “unprecedented.” He showed some sympathy, noting that “there is no doubt that Boesky has been humiliated, vilified, and cut down to size in a degree rarely heard of in the life of a person who was once regarded favorably as a celebrity.”

  As a result of pleading guilty to only one felony, Boesky faced a maximum term of five years in prison. As suspense mounted in the courtroom, Judge Lasker meted out a term of three years. While immediately attacked by Milken forces as excessively lenient, the sentence was more than half of the maximum he could have received. It was also the most severe sentence imposed so far in the still-developing scandal.

  “The signal must go out,” Judge Lasker concluded, plainly disturbed by what he had learned about the scope of illegal conduct on Wall Street. “The time has come when it is totally unacceptable for courts to act as if prison is unthinkable for white collar defendants. . . . To preserve not only the actual integrity of the financial markets but the appearance of integrity in those markets, criminal behavior such as Mr. Boesky’s cannot go unchecked.”

  Boesky had hoped to elude the press by leaving the courthouse through a rear entrance. As he reached the sidewalk, however, waiting camera crews stampeded, swarming over parked cars, crushing their hoods and roofs. Papers the next day were filled with close-ups of Boesky looking terrified as he slipped into a waiting limousine.

  February 18, 1988, was a cold, gray Thursday with snow threatening in northern New Jersey. John Mulheren’s mood was dark as he emerged from the front door of his sprawling Victorian mansion and placed a gym bag on the back seat of his car. In the bag Mulheren had placed a loaded, .233-caliber Israeli Galil assault rifle, purchased two weeks before, and a set of army fatigues. He also had a chest pack of 300 rounds of ammunition. Already in the car were a 9-millimeter semiautomatic pistol, a .357 Magnum pistol, and a 12-gauge pistol-grip shotgun—a veritable arsenal.

  The pressures of the government’s investigation had been building, and Mulheren had reached the breaking point. He was deeply depressed. He hadn’t slept at all the previous night, staying up to watch a continuous stream of movies on television, movies whose names he didn’t even remember. He had stopped taking his lithium. The day before, his lawyer had told him he was about to be indicted. Even more dispiriting was the fact that his lawyer also told him he should plead guilty.

  Mulheren got behind the wheel, started the car, and began backing it down the long, curving drive toward North Ward Avenue. His mission: to kill the one
man behind all his torment, someone he’d once counted among his closest friends: Ivan Boesky. Then the “headhunt,” as he later called it, would be over.

  Perhaps it was inevitable, even within the confines of a white-collar scandal, that violence would erupt. The money and power at stake were immense; many have killed, and been killed, for less. Siegel had feared Boesky would have him killed; Boesky feared Milken would have him killed; now Mulheren had actually set out to kill Boesky.

  Mulheren’s mental condition had been deteriorating almost steadily since the Boesky plea agreement had shattered his view of human nature. That was even before he learned that Boesky, whom he still considered a friend, might be implicating him—“ratting” on him, as Mulheren put it.

  The previous January, Mulheren had received a Boesky-related subpoena clearly covering the string of alleged parking arrangements, beginning with Unocal, that Mulheren had done for Boesky in 1985. “So what?” had been Mulheren’s reaction. Who cared about a few favors he’d done? Surely that wasn’t a crime.

  Mulheren just couldn’t believe that Boesky or Davidoff would say anything bad about him; but he’d heard that Mooradian was cooperating. The inflated invoices Mulheren had used to reimburse Boesky for some of the gains on the allegedly parked stock figured prominently in the subpoenas. Mulheren had guessed that Mooradian was probably pointing those out to the government.

  In February 1987, Mulheren had gotten another subpoena covering the maneuvering in Gulf + Western stock at the time Boesky and Icahn teamed up to threaten the company. That didn’t bother Mulheren either. He couldn’t understand when his lawyer, Kenneth Bialkin, refused to let him testify. “This is a witch hunt,” Bialkin had warned, and insisted that Mulheren consult a criminal lawyer whom Bialkin recommended, Otto Obermaier.

  But not everyone was as nonchalant as Mulheren himself. Some of his investors were worried, and asked bothersome questions about what their “exposure” might be. The lawyers were around constantly, and Mulheren had no great love of lawyers. But the year wore on with no visible progress in the government’s investigation.

  Financially, Mulheren had been having a tremendous year as he headed into October. Boesky’s absence from arbitrage had increased his profit opportunities, because there was less competition. After the first nine months of 1987, Mulheren had gains on paper of $120 million. He was actually doing better than when Boesky had been feeding him tips.

  Then came October 19. Like other arbitrageurs, Mulheren was hard hit, losing $80 million in the crash. Unlike many of his colleagues, he seemed excited by the action, turmoil, and panic around him. As the market plunged, he jumped up and down on the trading floor, laughing and exclaiming, “We’ll make it all back!” He was exulting that the crash gave him a new challenge, a new opportunity to make yet more money and to outperform his rivals. Even to people accustomed to Mulheren’s outbursts, his reaction seemed inappropriate to what was, after all, a loss of $80 million. True to his word, however, Mulheren plunged back into his work with newfound enthusiasm, boldly investing his remaining capital even as rival arbitrageurs were folding the tents. He finished the year up 18%, a remarkable gain.

  Yet even during December, with his business recovering nicely, Mulheren continued to behave in odd ways. One Saturday night during this period, Mulheren had dinner with his friend Bruce Springsteen, who’d just finished work on another album. He and Mulheren excitedly planned Springsteen’s concert tour to accompany the release of the record. Then Mulheren mentioned that he’d seen Panama strongman Manuel Noriega on the cover of Time magazine. “Noriega’s a victim” of U.S. oppression, Mulheren said. Springsteen looked puzzled. Then Mulheren mentioned the Singer case in Utah, in which state police surrounded the home of a suspect in a Mormon church bombing. “The state is oppressive,” Mulheren said. Springsteen chose to ignore these provocative remarks.

  Soon Mulheren began carrying a loaded weapon everywhere. The police, he had now concluded, were in league with the government prosecutors trying to ensnare him in the Boesky scandal. Mulheren felt he should be armed in case a policeman tried to kill him. He became so convinced that all policemen were trying to kill him that he would cross to the other side of the street whenever he saw a policeman approaching.

  One Friday in December, Mulheren failed to show up at his office. When his colleagues checked, they learned that he had left for work on schedule in his helicopter and had been dropped off at the Battery Park helipad in lower Manhattan. Then, apparently, he’d disappeared.

  Mulheren, clad in his usual khakis and T-shirt, without a coat, had spent the day walking from Battery Park, at the southern tip of Manhattan, to Harlem and Washington Heights at the northern tip of the island. Mulheren himself couldn’t explain why he was doing this. Nothing like it had ever happened before. He’d stopped taking his regular dose of lithium because of physical side effects. He felt suicidal. He recognized what might be the onset of the four-year cycle of “black moods” that periodically interrupted his usual manic highs.

  Still, Mulheren seemed to recover from that escapade. Then, in January 1988, the news broke that Davidoff had agreed to cooperate and plead guilty to one felony. Now Mulheren had to face the likelihood that Davidoff was implicating him. And he learned through his lawyer that Boesky had implicated Davidoff, which meant that Boesky had probably turned on him as well. Even worse, the felony to which Davidoff had pleaded guilty was evading net capital requirements through a parking scheme—and parking was the very charge that Mulheren continued to insist couldn’t be deemed a crime.

  Mulheren again plunged into despair, brooding over this latest and most serious betrayal by his former friends. He would never do this himself. He was, in fact, under pressure to testify against friends and former colleagues at Spear Leeds, where he’d once worked, as well as against the Belzbergs. He’d said nothing.

  On Monday, February 15, Mulheren had been in such a dark mood that he didn’t go into the office. On Tuesday, his emotions had swung to the other extreme; he was excited and overanimated. He went to the dentist in the morning, and arrived at the office in ebullient spirits. He told his colleagues that they’d been working hard and deserved a break. Mulheren ordered five helicopters for the following Monday, and told his staff that after the market closed, he’d fly them to Atlantic City, where they could gamble and party as late as they wanted. They’d fly back the next morning in time for the market opening. It would all be at Mulheren’s expense. It was an outsize gesture, even by Mulheren’s standards.

  On Wednesday, February 17, Mulheren was again depressed; he screamed at his dentist that his teeth were hurting and he got a codeine prescription. Unbeknownst to Mulheren, he was about to learn of the most ominous development yet in his troubles with the government.

  After taking over from Carberry, Baird had assigned the Mulheren case to Robert Gage. An experienced prosecutor in the office, Gage had joined the fraud unit the year before as part of the effort to beef up the division. The Mulheren case, unlike Freeman’s or Milken’s, was considered one of the most straightforward cases coming out of the Boesky agreement, and a comparatively easy one to try. The government had two major cooperating witnesses in Boesky and Davidoff. During January, Boesky had given the grand jury an incriminating account of his dealings with Mulheren, including the parking allegations and numerous instances of stock manipulation and of stock tips suggesting insider trading. For example, Boesky had testified that he had told Mulheren to “push up the price” of Gulf + Western, and that Mulheren had replied, “I understand what you’re saying.”

  Most of Boesky’s grand jury testimony stuck closely to the elements of the various crimes for which Mulheren was being investigated; but at one point on January 13, Gage probed Boesky’s motives, asking why he’d embarked on these illegal activities with Mulheren. Boesky’s answer captured the peculiar dynamics of Wall Street during the heyday of the eighties, when criminal activity seemed to have insinuated itself into the very fabric of human relationship
s.

  Boesky had seemed slightly surprised by the question, and answered more slowly than usual. “There had been many, many years of friendship,” Boesky said of himself and Mulheren. “Doing for one another, enriching each other when possible, saving each other when necessary and interested in each other’s families, charities.” He paused thoughtfully, and then summed up quite simply, “We were friends.” In Boesky’s world, money and favors—especially the exchange of information—were the measure of friendship. This was true in his relations with Siegel and Milken, and especially so with Mulheren.

  Late on the afternoon of Wednesday, February 17, while Mulheren was still suffering from a toothache, his criminal lawyer, Obermaier, came down for a meeting in Mulheren’s baronial office. Earlier in the afternoon, Gage had called Obermaier with ominous news: He was close to asking the grand jury for an indictment of Mulheren on parking and market-manipulation charges. The government, he had said, now had ample evidence to support the charges. In addition to Boesky’s grand jury testimony, the government had documentary corroboration, including the damaging evidence of the inflated invoices. Gage had emphasized that, if Mulheren hoped to get any favorable treatment from the government, now was the time to plead, before any indictment was made public. But Gage had made it clear that a plea to at least one felony would be required. Immunity wasn’t an option.

  Obermaier had apparently concluded that, in Mulheren’s own interest, he had to get him to consider seriously pleading guilty. The facts alleged by the government weren’t in serious dispute; trading records confirmed all the stock transactions. Mulheren could testify to his own state of mind—that he believed he bore the risk for the stock allegedly “parked” by Boesky, and that he knew nothing of Boesky’s interest in boosting the price of Gulf + Western—but a jury would have to believe Mulheren over Boesky and Davidoff, and the circumstantial case was strong.