Eagle on the Street

  Boesky, his lawyers and aides, and the SEC staff attorneys settled in chairs around a small table in the enclosed conference room. Boesky pulled a cigar out of his suitcoat pocket. Before he could light it, one of the SEC lawyers told him to put it away.

  I have a right to smoke my cigar, Boesky said.

  We’d appreciate it if you didn’t, the lawyer answered. This is a small conference room and some of us are allergic to smoke.

  I have a right to smoke if I want to, Boesky declared imperiously.

  Please, as a courtesy, we ask you not to smoke.

  I ask, as a courtesy, that you allow me to smoke.

  Counsel, Boesky continued, turning to Henry King, I ask that you demand my right to smoke.

  King appeared to be embarrassed.

  My client would like to smoke, King said, repeating the obvious.

  And so Ivan Boesky lit his cigar and began to fill the room with blue gray smoke, even before the first question was asked of him.

  Ivan Boesky was an unusual man, and for the SEC, he presented an unusual challenge.

  By that morning in 1984, when he appeared at the commission to testify in the confidential Dr Pepper investigation, Boesky was already famous on Wall Street, a symbol of a new era of takeovers and speculation and extravagant, sudden wealth. Indeed, he seemed to embody the forces that were changing the financial world’s cultural mores and business practices: energy, speed, greed, and deal-making. When Jack Shad came to Washington in 1981, on the heels of Ronald Reagan’s electoral triumph, Boesky was a little-known stock trader struggling in an arcane profession. By 1984, he had thrust himself to center stage on Wall Street, accumulated a personal fortune approaching $50 million, and helped to transform the corporate takeover game. Since at least August 1982, when he met the dashing, younger merger specialist Martin Siegel at the Harvard Club in Manhattan, and arranged to bribe Siegel for inside information about upcoming takeover events, Boesky had been systematically and audaciously violating the federal securities laws enforced by the SEC.

  Siegel wasn’t the most important financier who had a special relationship with Boesky. There was an alliance, too, between Boesky and Michael Milken. They had started doing business in a big way in the fall of 1983, when Milken sold $100 million of junk bonds for a hotel company Boesky controlled. A few months later, Milken, his brother, and some of the traders on the Drexel Beverly Hills junk bond trading floor bought a stake in one of Boesky’s arbitrage firms. The investment gave Milken a direct financial interest in Boesky’s trading of takeover stocks at the same time Milken was helping to finance the very takeover bids on whose outcome Boesky wagered.

  So obvious was Milken’s conflict of interest, and so great was the potential for leaks of illegal inside information from Milken to Boesky, that the freewheeling Drexel firm was probably the only major brokerage on the Street that knowingly would have permitted its employees to make such an investment. The Milkens’ investment, and the $175 million in junk bonds Drexel sold for Boesky during 1984, provided Boesky the cash he coveted to play the risk arbitrage game.

  Through these deals, Boesky and Milken became private partners, and by 1984, they had fallen into the habit of providing each other with favors when the need arose. If Milken needed Boesky to help rig the market so that a Drexel-financed takeover would succeed, all he had to do was ask, as he did in 1984 when Boesky helped Milken rig the outcome of a hostile takeover bid by amassing shares in the electrical giant Fischbach Corporation. If Boesky, for tax reasons, or to comply with SEC capital rules, needed temporarily to shift some of his stock and then buy it back later, he called Milken. In either case, the person doing the favor was protected against financial loss by the other—a promise was made that any losses would be made up in the future. A secret, off-the-books, illegal trading arrangement evolved to keep track of the favors and to tally who owed how much to whom. Boesky and Milken each enlisted a trusted accountant and stock trader to help carry out the arrangement and maintain its secret records; the paper trail they created to ensure that no one cheated would later come back to hurt them both.

  Following orders from his superiors, Jack Hewitt had dropped his pursuit of Milken before learning anything about his ties to Boesky. And nobody in authority at the SEC knew of or even suspected the scale and extent of Boesky’s illegal dealings. Many SEC lawyers and officials saw Boesky the same way most people in the financial world did—as an aggressive, hugely successful, personally idiosyncratic stock market tycoon.

  There was a reason for that. Despite his far-flung criminal activities, Boesky worked hard, desperately hard, to cultivate an honest public image. To the press and in increasingly frequent public speeches, he described himself as a kind of Renaissance financier, an intellectual and philanthropist at heart who managed to profit through hard work and exceptional mental faculty. Boesky’s risk arbitrage business essentially involved betting millions of dollars each day on the outcome of corporate takeovers. The truth was that Boesky rigged his bets by bribing Wall Street professionals to obtain inside information about takeover deals. In public, though, he claimed that his success was a result of exceptional acuity and skill. He authored a book titled Merger Mania, so that, as he wrote, investors large and small could employ technical analysis to profit at arbitrage and “be inspired to believe that confidence in one’s self and determination can allow one to become whatever one may dream.”

  Naturally, Boesky was uncomfortable with the accusation that he was a cheater—a charge lodged with increasing frequency by his competitors during the mid-1980s. Yet, partly because the SEC was unable to mount any credible charges against him, Boesky was able to convince most people that he was successful because he was smarter and worked harder than anyone else. There were stories, which Boesky did nothing to discourage, that he employed people at private airports to track the movement of corporate and personal jets to determine the whereabouts of executives involved in takeover deals. (Such research, since it didn’t involve special, inside tips about takeovers from people involved in the deals, would have been legal in most cases.) There were stories, too, about Boesky’s almost inhuman dedication to work. It was said that he rose from bed before dawn at his sprawling country estate north of Manhattan, boarded a limousine to arrive at his office before the market opened, then manned a 160-line telephone bank that wired him to brokers and bankers across Wall Street. He cradled a phone against each of his ears for hours at a time and digested documents until late in the evening. He said that he slept just two or three hours each night. “Whoever has the most when he dies wins” was the slogan emblazoned on one of his T-shirts. On Wall Street, traders liked to tell the story of how Boesky, once walking along a beach in France with his wife, had asked her: What good is the moon, if you can’t buy it or sell it?

  It seemed crucially important to Boesky that he be known and respected for accomplishments outside of finance. He made heavy donations to various philanthropic and educational institutions, ranging from Harvard University to the United Jewish Appeal. Boesky never went to Harvard—he had attended Wayne State University in Detroit and graduated from the Detroit College of Law—but he spent many afternoons at the richly appointed Harvard Club in midtown Manhattan, presiding over business meetings and slipping off occasionally for a game of squash. And though he rose to become chairman of the United Jewish Appeal’s fund-raising arm in New York, he had never set foot in Israel. There were times when Boesky did or said something that belied his social and cultural aspirations, exposing the raw nerves that seemed to twitch inside him. Once during a speech in Washington, pausing to accept a cup of coffee, he said, “This is my plasma. I was thinking, vampires live on blood. Well, I live on coffee. This is vampire’s plasma.” But usually he emphasized his supposed worldliness.

  “I don’t want you to think that I am just a greedy guy,” he once told a college audience, flashing a creepy smile that more nearly resembled a nervous twitch. “I’m not just a greedy guy.”

  D
espite what he implied in his speeches, Boesky was not entirely a self-made man—his wife, Seema, was independently and fabulously rich. When Boesky moved from Michigan to Wall Street in 1966, he was backed in part by Seema’s father, Ben Silberstein, who owned the Beverly Hills Hotel and other real estate properties. There were those who speculated that Boesky’s obvious insecurities about his status and accomplishments traced in part to his relationship with Silberstein, who gave indications that Boesky, the son of Russian Jewish immigrants in the Detroit restaurant business, was unworthy of his daughter at the time of their marriage.

  Silberstein helped him early on, but the rest was Boesky’s doing. He sometimes found it difficult to work for other people, which helped to explain why he changed jobs so frequently after moving to New York. Even in the small and specialized field of risk arbitrage, Boesky was an outsider on Wall Street. Throughout the 1960s and 1970s, arbitrage had been the province of aggressive, well-known stock traders at major, prestigious Wall Street firms, people such as Gus Levy at Goldman, Sachs & Company and Salim B. Lewis at Bear, Stearns & Company. During the 1970s, Boesky traded stocks at several relatively small Wall Street firms, and then finally struck out on his own. His timing was fortuitous. In the early 1980s, spurred in part by the influence of Chicago School economists and the SEC’s deregulatory policies, the corporate takeover market burgeoned. The boom created new opportunities to profit by speculating on the outcome of merger deals.

  Boesky’s edge was his willingness to make larger bets on the outcome of corporate takeover deals than virtually any of his competitors. He felt that arbitrage had too long been dominated by a handful of big Wall Street firms, and he set out to practice the craft in a manner bigger and bolder than any independent player who had come before. Although he sometimes had inside information, arbitrage was still a risky business, especially the way Boesky went about it. He invested millions of dollars in the stocks of companies he thought would become targets of corporate takeovers, and he borrowed heavily. If Boesky’s information about a particular deal was uncertain, he was exposed to potentially enormous losses. If a deal fell apart, he could lose millions of dollars in just a few minutes when the price of a takeover target’s stock tumbled. On the other hand, by borrowing heavily and taking such huge positions, Boesky could make Himalayan profits when a deal went his way. In his speeches and interviews, Boesky liked to argue that takeover arbitrage was less risky than picking individual stocks for investment, since the shares he bought and sold were primarily affected by the dynamics of a specific deal, and typically were immune to the sharp swings in investor sentiment that sometimes pounded the rest of the stock market without warning.

  Research—legal and illegal—was at the heart of Boesky’s business. Young analysts and investment advisers and lawyers who worked in his offices high in a Fifth Avenue skyscraper pored over public statements about corporate finances and management. Boesky worked the phones, nudging and badgering investment bankers, lawyers, and corporate executives for information about pending and upcoming takeovers. While it was illegal in most instances to acquire and then trade on inside information, such as the precise price of a secret takeover bid to be announced publicly at a future date, there was much information that fell into a legal gray area. To his colleagues and competitors on Wall Street, it often seemed that Boesky didn’t care what was gray and what was black and white—he wanted to learn everything he could about takeover deals.

  Arbitrage was for many years a quiet, obscure business. Boesky’s competitors, large and small, abhorred his self-promotion. They dubbed him “Piggy” because of the massive amounts of stock he bought in certain takeover deals, squeezing out his competitors, and because of the aggressive borrowing techniques he used to accumulate ever larger positions. Federal Reserve rules instituted in the 1930s in response to the stock market crash generally restricted investors to borrowing only 50 percent of the purchase price of stocks, but Boesky employed legally questionable techniques to evade that limit and borrow more than 80 percent in certain situations. He also raised millions of dollars from wealthy individuals outside of Wall Street to fund his arbitrage operation, bucking unwritten rules on the Street by purchasing big newspaper ads soliciting investments in his firm.

  Because he rapidly bought and sold huge blocks of stock in companies involved in takeover fights, trading in and out of his shares within hours or days or weeks, Boesky became a powerful player in the hostile takeover game. He was a speculator, the ultimate short-term investor. His primary motive was to facilitate the completion of deals—he wanted to sell his stock to the highest bidder in the shortest possible time, and like the corporate raiders and their junk bond backers at Drexel, Boesky made his biggest profits when a company was sold or restructured. Corporations feared and shunned him. The last thing a stable company wanted was to have a large block of its stock fall into the hands of Ivan Boesky, an arbitrager who would push hard to see a takeover succeed.

  The SEC’s enforcement division questioned Boesky repeatedly as his influence in the stock market grew, but the commission adopted no rules or regulations designed to curb his aggressive, speculative trading techniques. In large part, that was because Jack Shad regarded Ivan Boesky as a legitimate and indeed admirable stock trader who poured buckets and buckets of the economic “liquidity” into the financial markets, cash that would “wash like water through the economy” and help to make it fertile.

  Ever since his days on Wall Street, Shad had believed that risk arbitragers like Boesky provided crucial amounts of capital to make stock market trading efficient, especially during complex corporate-takeover battles. Boesky had millions of dollars of cash, much of it borrowed, to pour into the market, and by doing so, he made it easier for other investors to buy and sell stocks as they wished, Shad believed. Shad’s view of arbitrage reflected the same Chicago School theories that had shaped his approach to the earlier debate over stock futures: some speculation, some gambling, was good for the financial markets and for the country.

  Ignorant of Boesky’s illegal dealings, Shad also thought Boesky’s aggressive trading in the stocks of takeover targets helped small investors by providing them a way to achieve profits without significant risk. In a typical takeover, once a bid was announced, the target company’s stock skyrocketed quickly to a level near the announced price of the merger. Since Boesky was so active buying up shares of the target’s stock during this period, a small investor could sell out his holdings, reap a premium profit, and not worry about whether the takeover deal was completed or rebuffed. The transaction between Boesky and a small investor in that situation reflected the theory of risk transfer that underlay the futures markets in Chicago: The small investor, who was unwilling to speculate on the outcome of a takeover, transferred his risk to Boesky, who was more than willing to gamble on the deal. Without Boesky and other arbs gobbling up shares of the target’s stock, the small investor would not be able to sell at a price close to the takeover offer. It seemed more appropriate to Shad for a market professional like Boesky to assume the risk that the takeover deal would fall through, profiting on his short-term holdings if the deal was consummated and losing money if things fell apart. Shad thought such arbitrage trading, if practiced legally, enhanced not only the efficiency but the essential fairness of the stock market.

  Some of Shad’s more conservative friends from Wall Street, those such as takeover attorney Martin Lipton, who had praised his bold “Leveraging of America” speech, argued to Shad privately that he was missing the point. Arbs such as Boesky, they said, were merely short-term speculators who teamed up with raiders and Wall Street deal makers like Milken to make fast profits by putting companies “into play” in the merger market, forcing them to be sold. There were even some who took their criticism of Shad’s policies public. “In its opposition to any restriction on takeovers, the SEC, founded to protect the investor against the financial wolves, has now become the protector of the wolves,” wrote management consultant Peter F
. Drucker, in a prominent newspaper column in 1984, when Boesky’s influence in the stock market was rising rapidly.

  But Shad held firm. Shad pretty much saw Boesky the way Boesky wanted to be seen: as an intellectual, a stock-trading craftsman who built his business on research and strict adherence to complex, technical, mathematical formulas. As a general matter, Wall Street was an honest place, Shad thought, and he saw no reason to distrust Boesky, though he had some reservations because of the constant rumors that Boesky profited by cheating. Fedders and others among Shad’s enforcement staff became concerned during the mid-1980s about Boesky’s increasing forays into what was called premerger arbitrage, the practice of buying large blocks of stocks in potential takeover targets before any merger bid was announced. Some among the enforcement staff saw Boesky’s consistent pattern of successfully predicting takeover targets as circumstantial evidence of insider trading. But Shad defended the practice. Much of this sort of trading, he argued, mirroring Boesky’s claims, was based on detailed research into corporations and observation of market-trading patterns. And some of it, Shad said, was based on straightforward financial analysis that helped to predict which companies were likely to become takeover targets.