After laying out the substance of his talk with Gage, and briefly reviewing the strengths and weaknesses of the government’s case, Obermaier brought up the possibility of settlement, something Mulheren had thus far stoutly refused to consider. “Why not get this over?” Obermaier asked, trying to keep his tone fairly light, as though this wouldn’t be the end of the world. “Go in and plead. If you don’t they’ll ruin your life.” Mulheren listened in disbelief.
“I didn’t do anything,” Mulheren yelled angrily. He’d maintained consistently that all he’d done was a few favors for Boesky.
“Put your principles in your back pocket,” Obermaier advised, which really drove Mulheren wild.
“I’m not pleading guilty!” Mulheren all but yelled. “I don’t care what they do to me.” The very idea of bowing to government pressure tapped Mulheren’s deep-seated resentment of authority, and his reaction was intensified by his manic condition.
“Going to jail isn’t so bad,” Obermaier continued, evidently heedless of Mulheren’s mounting fury. “You could use a vacation from your kids.”
That did it. Mulheren leapt to his feet, screaming and yelling. He told Obermaier he was firing him and called him names, concluding with, “Otto, why do I need you scumbag lawyers?” Mulheren stormed out of the office.
Shortly after Obermaier left, an agitated Mulheren called Ken Bialkin, the lawyer who had first suggested Mulheren retain a criminal law expert, and who had stayed involved in the case. Bialkin tried to calm him. This further angered Mulheren. “You fucking lawyers are all the same,” Mulheren yelled, saying he was firing Bialkin, too. Then Mulheren slammed down the phone. His lawyers were so upset by Mulheren’s behavior and mood that they tried to reach Mulheren’s psychiatrist that night. But he was vacationing in the Caribbean, and couldn’t be reached.
Mulheren didn’t sleep at all that night, staying up and watching movies on television. He felt he was going over some kind of edge; his life was being ruined. He was a victim.
The next day, February 18, Mulheren’s mental state continued to deteriorate. He became increasingly restless and belligerent, raving about his betrayal by Boesky and Davidoff. He said he wanted to kill them. Finally, his wife Nancy called the local police, saying she was concerned about her husband’s emotional state and his access to firearms, and that he seemed agitated and upset about Boesky. The police dispatched a patrol car, which parked near the entrance to the Mulheren compound on North Ward Avenue.
Soon thereafter, Mulheren emerged from his house, got into his car, and drove toward the entrance. The policeman pulled his car forward, cutting off the entrance gate from the street. He got out of the car and came over to Mulheren, immediately spotting the pistols in the backseat. He seized the weapons, but didn’t arrest Mulheren, since he had a permit and since he hadn’t taken the weapons off his property. Mulheren seemed agitated but drove back to the house.
It was later that afternoon that Mulheren came out of the house and hurried to his car, carrying the gym bag with the assault rifle and the fatigue clothes. This time he gunned his car down the driveway and pulled out into the street before the police could block the entrance. As Mulheren sped off, a second car was called. After a brief pursuit, the police managed to bring Mulheren to a stop.
“Do you want it to start here?” Mulheren yelled as the police converged on his car.
Mulheren knew both of the local police officers, and launched into a rambling denunciation of Boesky and Davidoff, saying that “without Boesky and Davidoff the headhunt would be over.” He ranted that he’d lost faith in the justice system and would “take care of things in my own way.” He claimed he’d staked out Davidoff’s house the previous day, hoping for an opportunity to kill him. Now he was on his way to get Boesky. Questioned by police about his mental state, Mulheren said he was “smart enough” to feign insanity and, once released, he would again try to kill Boesky and Davidoff. The officers arrested him, charging him with carrying the assault rifle off his property without a permit.
Mulheren wasn’t charged with attempted murder. Given his mental state, it’s hard to know just what he did intend. It’s plausible that he wanted to get caught; perhaps he longed for the comparative safety of jail. Mulheren hadn’t hidden the assault rifle, and he acknowledged that he was breaking the law by carrying it off his property. Indeed, Mulheren himself suggested the charge as the police officers tried to figure out what he should be arrested for. Despite his claim that he’d staked out Davidoff’s house the previous day, Mulheren later said he hadn’t; he was just bragging to be provocative, in what he said was a characteristic of his severe manic-depressive episodes. Yet Mulheren’s actions couldn’t be entirely dismissed as the results of a crazed mind. He had been implicated by Boesky and Davidoff, and they were likely to be witnesses against him. Had he set out to kill them, it would have been a crime with ample precedent.
The police took Mulheren to the Monmouth County jail for the night. They also notified the Manhattan U.S. attorney’s office, where Boesky was being debriefed. Boesky gasped when he was told of the bizarre developments. Already concerned about his safety, he became even more frightened. He asked if he could begin his sentence immediately; he thought he’d be safer in prison.
The next morning Mulheren was led into a makeshift New Jersey courtroom, his left wrist shackled to a line of a dozen other prisoners. Nancy and his parents watched as he was charged on two weapons counts and bail was set at a comparatively modest $17,500. The same day, after the U.S. attorney’s office obtained a warrant charging him with threatening and attempting to threaten a witness in a federal case, Mulheren posted bail in New Jersey and was brought to the Metropolitan Correction Center. Within days of his arrest, his firm, Jamie Securities, whose name had once awed Wall Street and whose investors included the Tisch and Belzberg families, began the formal process of dissolution. Whatever the outcome of the legal proceedings, Mulheren’s meteoric career on Wall Street seemed over.
Unlike Levine and Tabor, Mulheren wasn’t released after just a one-night stay in the MCC. The government argued strenuously against granting bail, claiming that Mulheren remained a danger to Boesky and Davidoff, and he stayed locked up. “This case is as severe a case of an attempt to obstruct justice as could possibly exist,” Gage, the prosecutor, told the judge. The bail hearings dragged on for days. Mulheren was brought in under heavy security, managing occasional waves and wan smiles for his wife and members of his extended family, who packed the courtroom every day.
In the Metropolitan Correction Center, Mulheren was glad he was tall and heavyset, and that he had been working out with Springsteen. He was surrounded by hard-core criminals, including members of New York’s Westies and Monsanto gangs. There wasn’t a cell available for him, so he had to sleep in a cot in the hallway, where he felt especially vulnerable. Each morning except for Sundays he was awakened at 5:30 A.M. for washing up, then placed with other prisoners in the so-called holding pen until he was needed for a court appearance, usually about 9:30 or 10. As Mulheren resumed taking his medication and his depression eased, he became popular with many of the prisoners he met in the holding pen, often playing cards with them and chatting to pass the time. He soon became a favorite of Anthony “Fat Tony” Salerno, the alleged mafia don, and he struck up a relationship with Mushulu Shakur, a self-styled revolutionary and a defendant in the Brinks robbery case. Mulheren listened intently for hours to Shakur’s radical left-wing political theories, and to his claims that he’d used the proceeds from the Brinks theft to feed the poor. Mulheren told him he admired his dedication.
Each day Mulheren remained locked up, the pressure to plead guilty intensified. Obermaier angered him by continuing to recommend that he give in and plead. The government was willing to drop the weapons and witness charges if Mulheren pleaded to parking and cooperated. Mulheren refused; if anything, his mental state made him more adamant against admitting a crime he didn’t believe he committed. Finally, after Mulheren had been
in jail for nearly two weeks, Obermaier worked out an arrangement whereby the government agreed to release him to the maximum-security wing of the Carrier Facility, a private, highly regarded psychiatric institution in New Jersey.
Before Mulheren left the MCC, Salerno came over to him to offer his best wishes. “You’re all right,” Salerno said, patting Mulheren affectionately on the back. “You’re the only guy on Wall Street who’s not a rat.”
“But I don’t know anything. I don’t have anything bad to tell them,” Mulheren protested.
“Oh, yeah,” Salerno said, chuckling and rolling his eyes with exaggerated sarcasm. “Right.”
13.
On March 24, 1988, a scared Ivan Boesky arrived at Southern California’s Lompoc Federal Prison Camp to begin his three-year sentence. The minimum-security facility, though hardly a “country club,” does have its own tennis courts and outdoor patios. It was Boesky’s own choice; his plea bargain allowed him that perk. With Boesky behind bars and Mulheren safely lodged in the Carrier facility, an uneasy calm descended on the investigation.
Gary Lynch at the SEC grew restless. He and his staff had been banished from the Freeman investigation and, after the fiasco of the government’s withdrawal of the indictments, were glad they weren’t involved. Even so, they remained under tremendous pressure—from the commission itself, from oversight committees in Congress, from the public, and from Drexel. Still reeling from the bad Boesky publicity, they were eager to demonstrate the value of Boesky’s assistance by moving against their biggest targets by far, Drexel and Milken.
By late spring 1988, however, their investigation had stalled. Drexel’s resistance had been fierce and infuriating. Drexel’s lawyers protested that producing the subpoenaed documents was an overwhelming task, but Lynch thought they were dragging their heels. Subpoena enforcement actions had to be threatened repeatedly. The SEC’s fundamental distrust had been hardened by Drexel’s public-relations barrage. Drexel employees, the SEC staff believed, were primarily interested in protecting Milken. Many invoked the Fifth Amendment, refusing to answer questions. Some, such as Peter Gardiner, were even willing to commit perjury.
Gardiner, red-haired, balding, in his 30s, was a Drexel salesman who had replaced Cary Maultasch when Maultasch moved to New York in 1985. He worked for Alan Rosenthal, one of Milken’s closest allies, on the convertible securities desk.
As a result of an earlier inquiry begun by the SEC’s Chicago enforcement staff, the commission had zeroed in on what appeared to be suspicious trading in securities of Viacom, a large cable and entertainment company based in New York. In 1986, Viacom’s management had decided to retain Milken and Drexel to finance a proposed leveraged buyout; Milken had dealt personally with Viacom’s chief executive. At the time Milken learned that Viacom might launch a leveraged buyout, Drexel had had a short position in Viacom of nearly 300,000 shares—betting that the price of Viacom shares would drop. Almost immediately after Milken’s conversation with Viacom’s chief executive, Drexel had eliminated its short position and established a long one. To the SEC, it was obvious that Drexel, using Milken’s inside information, had bet heavily that Viacom stock would rise. It did—more than $5 a share in a single day—when the leveraged buyout proposal was announced just six days later. It looked like classic insider trading.
Gardiner was the Drexel trader in Beverly Hills who had ostensibly handled the Viacom trading that day, so the SEC was naturally eager to question him. Under oath, Gardiner initially said that he didn’t remember the specific trading in Viacom, dismissing his actions as simply the routine hedging of a position. When the SEC discovered from the trading records that Drexel had actually been covering a short position and establishing a long one, Gardiner changed his testimony. He acknowledged the shift, but said he did it on his own, knew nothing about any proposed LBO, and hadn’t spoken to Milken about it.
Then the SEC learned that Gardiner hadn’t even been in Beverly Hills when the trading took place. He had left for a vacation in England that day. Gardiner said he’d stopped in New York en route to London, and had done the trading there. But he couldn’t produce any travel or expense records from New York, and couldn’t identify anyone at Drexel’s New York office that he’d seen or spoken to. He had no explanation for the sudden decision to switch from a short position to a long one.
The SEC staff thought Gardiner was a brazen liar. The staff was convinced that the Viacom trading was done either by Milken or by someone other than Gardiner, acting on Milken’s orders. Even so, Gardiner was useless. He obviously was doing nothing to further their investigation against the main targets, and there was little the SEC could do. Lacking the power to grant immunity, it could only refer him to the U.S. attorney’s office for a possible perjury prosecution. Even then, any subsequent testimony by Gardiner, even if true, would be so weakened by his apparent perjury as to be worth very little.
Despite such obstacles, Lynch felt that with Boesky’s testimony, the outlines of a solid case against Drexel and Milken were in place. Lynch wanted a complaint filed in a federal court, so that a federal judge would oversee the continuing investigation and could regularly enforce subpoena compliance and threaten contempt if it wasn’t forthcoming. Lynch had begun this process that January 1988, offering the Drexel and Milken lawyers the opportunity to make a so-called “Wells submission,” a formal effort to persuade the SEC not to file charges. The teams had made a voluminous submission, and succeeded in persuading the SEC to drop its investigation into alleged violations in connection with the leveraged buyout of Safeway Stores, a KKR deal financed largely by Drexel. That left numerous other charges, including all those related to Boesky. Drexel continued to infuriate the SEC staff with its insistence that the $5.3 million was an investment banking fee, and that Boesky was a habitual liar.
Drexel’s defense continued to puzzle Lynch. The Wells notice is often a signal to begin serious settlement talks. Until charges were filed, Drexel could maintain, as it had, that it was the subject of irresponsible reporting and leaks from an investigation likely to lead nowhere. But the actual filing of charges would show that the investigation was complete and that an important regulatory body had reviewed them and found that the charges had merit. It was a step most firms would go to great lengths to avoid, and yet Drexel and the SEC remained miles apart. In a feisty speech broadcast to the firm, Joseph told Drexel employees, without acknowledging any talks, that Drexel couldn’t settle with the SEC for anything like the amount of money the SEC wanted. To do so would be perceived as admitting guilt. Milken loyalists were cheered.
With few options remaining, Lynch took the SEC’s proposed 160-page complaint to the commission on June 1, and obtained its unanimous approval to file charges. In an unprecedented step, however, the SEC decided not to file the complaint immediately, as it usually does, but to hold off indefinitely. The SEC made no public disclosure of the move, but Drexel reacted predictably, reasserting its innocence and blaming Boesky, a “convicted felon and admitted liar.” The firm waited uneasily for a public filing of charges, a blow that it knew was now all but certain. But speculation flourished that the SEC was trying to give Drexel one last chance to settle and cooperate.
In fact, the unorthodox delay was the result of a serious split between the SEC and the Manhattan U.S. attorney, one that could have had devastating consequences on the course of the investigation. Lynch’s frustrations over the pace of the SEC’s Drexel investigation were mild compared to those brewing in Giuliani’s office in Manhattan. After the euphoria of the discovery of the Princeton-Newport tapes, morale had suffered as one lead after another led to brick walls. Everything became more confusing: investigations that had seemed discrete had become intertwined, and Baird had to keep drawing in new lines on his chart connecting the various cases. Princeton-Newport, it was now clear, led to Freeman through the Storer trading and, more importantly, to Milken and Drexel through James Regan, Bruce Newberg, Lisa Jones, and Cary Maultasch. All these connection
s had been captured on the tapes.
In February, The Wall Street Journal had run a front-page article relating the results of its own investigation into Freeman’s conduct. In a level of detail that startled the prosecutors, the Journal reporters had uncovered many of the same transactions they were investigating and had found information even the prosecutors didn’t know. Deep in the story, the Beatrice transaction was described, with Freeman seeking confirmation from Siegel that terms of the deal were being modified. “In a call from Mr. Freeman to Mr. Siegel,” the story said, “Mr. Siegel told Mr. Freeman, ‘Your bunny has a good nose.’”
Baird was startled as he read and reread the mysterious passage. Despite Siegel’s prodigious memory, he had never mentioned such an incident. At Baird’s behest, Rakoff questioned Siegel. Siegel said he didn’t remember saying those exact words. But it did remind him that he had talked to KKR, which had confirmed Bunny Lasker’s information. Freeman had called shortly thereafter, having also talked to Lasker, and it was then, Siegel thought, that he might have said, “Your bunny has a good nose.”
It seemed yet another example of insider trading. It was too bad Siegel’s memory seemed shaky, but Baird had a hunch the Journal account was true. He would seek confirmation from other potential sources.
Still, the seemingly impregnable walls around Milken and Freeman held fast. James Regan, the head of Princeton-Newport, was brought in by prosecutors to hear the tapes for himself; Baird thought there was a good chance that, when confronted with such damaging evidence, he would capitulate and cooperate. On the contrary, Regan displayed a cavalier attitude. He arrived for the session wearing casual clothes and a baseball cap emblazoned with the words, SHIT HAPPENS. He listened to the tapes and left without showing any reaction. His lawyers told the prosecutors to go ahead and file charges. Baird threatened to indict Princeton-Newport under RICO, the Racketeer Influenced and Corrupt Organizations Act, aimed at organized crime and providing for heavy damages. Regan seemed unfazed, vowing to fight to the end.
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