Eagle on the Street

  There had been no real reason to think that the meeting with Harvey Pitt that December morning would offer any relief, though Pitt had asked that the enforcement chief be present. The Bank Leu insider trading case was a significant but routine investigation handled by enforcement division attorneys beneath Lynch, and he had not been intimately involved once it got off the ground. It had been opened the previous June, when Robert Romano, the former SEC trial lawyer now employed on Wall Street by Merrill Lynch, telephoned Lynch in Washington. “I think we’ve got an offshore bank that’s hitting on every recent takeover,” Romano had told him. (One of the commission’s biggest assets may have been that its alumni in private practice still thought of themselves at times as commission enforcement lawyers.) Romano explained that Merrill Lynch had conducted an internal investigation of Bank Leu’s stock trading after an anonymous person sent in a roughly typed, one-page letter from Caracas, Venezuela, accusing two brokers in its Caracas office of trading on inside information about major takeovers in the United States. After looking into it, Romano told Lynch, Merrill Lynch found that the employees trading in takeover stocks were copying massive trades by the Nassau, Bahamas, branch of Bank Leu. Intrigued, Gary Lynch had passed Romano’s tip down through the enforcement bureaucracy and asked Shad and the other commissioners for a formal SEC investigative order. Subpoenas were issued and negotiations with Pitt to obtain Bank Leu’s records had begun.

  Pitt’s presentation to Lynch and the other enforcement attorneys that December morning seemed confusing because he considered himself to be in an ethical bind. Just the week before, during an exasperating trip to the Bahamas, Pitt and his law partner, Michael Rauch, had discovered that Bank Leu officials had systematically lied to them about the stock trading under investigation by the SEC. Pitt had persuaded the bank executive in charge that telling the truth to the commission was now the best course. But in doing so, Pitt didn’t want to reveal all of what he knew about insider trading at Bank Leu before he secured a settlement deal with Lynch that was favorable to his client.

  When he got around to it at last, Pitt proposed that Bank Leu and the SEC make an even trade: The bank would defy the traditions of Swiss and Bahamian bank secrecy and reveal the name of the customer orchestrating the illegal stock trades, but the commission would agree not to file fraud charges against the bank or its employees.

  They went around the table for a while, arguing about whether the trade was fair. The obvious advantage to the commission was that Pitt had offered to help the SEC leapfrog over the arduous Swiss treaty process negotiated by John Fedders three years earlier—rather than waiting months or years by going through formal channels, the commission would have the name of the culprits trading through Bank Leu within weeks. The question, though, was whether the person or persons Pitt was prepared to hand over for prosecution were significant enough players on Wall Street to justify immunity for the bank and its employees, at least some of whom obviously had tried to cover up the illegal scheme. Lynch and his colleagues pressed Pitt for the identity of Bank Leu’s customer, or at least some clue about his background, but Pitt gave little ground. At one point, Pitt called the customer a “status player” on Wall Street. Lynch, taciturn as always, asked Pitt and Rauch to leave the room for a minute. When they came back, Lynch said the deal was acceptable, so long as the details could be worked out over the next few weeks.

  “Obviously, I can’t commit the commission to this,” Lynch told Pitt. “I’ll have to talk to them. But I’ll recommend we go for it.”

  The enforcement staff lawyers tried to press Pitt and Rauch again for the name of Bank Leu’s customer, but all one of them would say was that the customer was a “big fish.”

  “For what you’re asking,” said John Sturc, the SEC’s associate enforcement director who had supervised the Bank Leu investigation, “he’d damn well better be Moby Dick.”

  Three days later, in a cool interior conference room at Bank Leu’s Nassau, Bahamas, branch, “Mr. Diamond,” as he was known to the bank’s employees, dramatically unfolded a piece of paper pulled from his pocket and displayed it to Richard Coulson and Bruno Pletscher, two of the bank’s executives.

  “It was sent to me,” Dennis B. Levine said in his usual conspiratorial tone. “You must understand that for obvious reasons I have cut off my name. But it should give you comfort. The SEC doesn’t have any suspicion I’m involved in this investigation. It has nothing to do with me. They haven’t the slightest clue, or they wouldn’t have sent me this letter.”

  Coulson and Pletscher looked the paper over. It was indeed a letter, written on Securities and Exchange Commission stationery and signed by SEC Chairman John Shad. Although “Mr. Diamond” had covered over his name, the letter thanked him warmly for accepting Shad’s invitation and participating in the commission’s November 26, 1985, roundtable discussion on whether takeovers should be more closely regulated by the SEC.

  Perhaps Dennis Levine genuinely believed, as he refolded Shad’s letter and returned it to his pocket, that he was still beyond the commission’s reach. If he thought so, he had good reason. For more than five years Levine had been illegally trading stocks with ease and impunity, using the confidential information he gleaned as a Wall Street merger specialist to earn about $12 million in profits, nearly all of it still stashed in his secret Bank Leu account in the Bahamas. During that same five years, Levine had risen to the top of his profession. He had found it difficult at first to break into investment banking because he hadn’t attended a top business school. But Smith Barney finally gave him his first job on Wall Street, and in 1985, Levine had finally ended up at the most aggressive firm on the Street, Drexel Burnham Lambert, where he was earning about $1 million annually in salary and bonus as a managing director in the firm’s New York–based merger department. When Levine learned of a new takeover deal that Drexel had in the works, he merely stepped outside of the firm’s towering headquarters at 60 Broad Street in Manhattan, wandered to a pay phone in the financial district, telephoned Bank Leu, identified himself as Mr. Diamond, and placed his order to buy large blocks of the takeover target’s stock. It was astonishingly simple. From time to time, to withdraw cash or attend to the administration of his secret account, Levine excused himself from the office and flew round-trip to the Bahamas in a single day, not even telling his wife where he had gone, or so he later claimed.

  As he piled up his offshore kitty, Levine had little fear of the SEC. During a commission interrogation in late 1984, Levine, then thirty-one, blithely lied to enforcement division lawyers about whether he had brokerage accounts and about his advance knowledge of a takeover bid for the giant Textron Incorporated conglomerate. The SEC was investigating insider trading in Textron stock, but it didn’t know that Levine secretly had pocketed $200,000 trading Textron shares through his offshore account. At the deposition, an enforcement lawyer asked Levine whether he had used inside information to win investment-banking business for his firm. In truth, ever since his arrival on Wall Street, Levine had found that inside information about takeovers helped to attract new merger advisory clients. In the case of Textron, Levine had received a tip about an impending takeover from a coconspirator in his insider trading ring. But when the SEC asked how he learned about the Textron deal in advance, Levine spun an outrageous alibi.

  I was sitting in the reception area at Drexel Burnham, one day in October 1984, when I overheard two men discussing a deal, Levine explained to the enforcement lawyers.

  The men mentioned a wealthy Chicago businessman named Lester Crown and they also mentioned Skadden Arps, the law firm specializing in takeovers, and First Boston, Levine went on. And they said something about “fireworks in Rhode Island.” The men were in their late thirties or early forties, “dressed in pinstripes, gray suits, just like all of us. They both had briefcases.”

  “Fireworks in Rhode Island” was the clue that gave it away, Levine boasted, explaining that he knew the takeover target was Textron because the company
had its headquarters in Providence.

  The interrogation had ended inconsequentially and afterward Levine became convinced the SEC could never catch him. He grew bolder during 1985. Indeed, if there was one moment that defined the audacity and—who could deny the thrill of it?—the sheer, exhilarating success of Levine’s fraud scheme, it was that November morning late that year, just a month before Pitt met with the enforcement staff in Lynch’s office, when Dennis Levine flew down to Washington and strode into SEC headquarters on Fifth Street, possessed of an invitation for a roundtable discussion with Shad and others on how the commission might improve its scrutiny of corporate takeovers. “We do believe that these activities create wealth in the economy,” Levine, who was pale and boyish-looking and overweight, told Shad profoundly. “There is clearly a flow of funds into the hands of shareholders and institutions which by and large is reinvested in the secondary market and many times invested in consumption and thereby stimulates spending and production.”

  Merger lawyer Martin Lipton, a great skeptic about Drexel and the takeovers it sponsored, had also been on the panel that day. At one point he turned to the SEC chairman and said that it would be “worth the commission’s while to look at the trading in some of the more notorious takeovers of the past two years. Look at the trading pattern in the half dozen or so where there were no five percent filings but a series of rumors, very, very high trading in the securities of the company, and then the trading would drop off again and there would be another burst of trading and stories day after day that the company was a target.… Only the commission has the power to get at the facts behind this.”

  Levine had been impressed with Lipton’s analysis, and he decided to contribute some additional advice to Shad. “If you look at some of the other major transactions that took place, Nabisco Brands, for instance, General Foods, both of which had significant run-ups in the stock, raiders presumably were not involved. It’s [suspicious trading] an isolated pattern that develops from time to time with certain transactions not always precipitated by raiders.”

  What Shad didn’t know was that Levine had made nearly $3 million trading Nabisco Brands stock on inside information.

  As a boy growing up on a neatly manicured, middle-class block in Bayside, Queens, New York, they had called him Dennis the Menace, and in so many ways he was still the same—clever, precocious, mischievous, and utterly self-absorbed. He bragged of his ability to sell aluminum siding, his family’s business. To sit in the SEC’s hearing room and advise the chairman on how to improve the commission’s investigations of insider trading was for Levine a seemingly transcendent achievement, proof not only that he was one of the most important investment bankers on Wall Street, but also that he was smarter and faster and more daring than all the rest of them. Later, there were journalists and pundits who wondered what system of values, what failure of family or education or community, could have led Dennis Levine—who obviously possessed certain charms and talents—to so thoroughly and unapologetically pursue a life of crime. Upon close examination, judging by what he actually said and did, it seemed clear that whatever the role of early traumas such as the death of Levine’s sister and the unexpected passing of his mother, the banal, unexciting truth was that Levine was exceedingly greedy, and that during the course of his career as a Wall Street merger expert, he found that it was very easy to steal.

  On that morning of December 20, 1985, in Nassau, when Levine showed his letter from Shad to the Bank Leu executives who managed his accounts, he argued that as long as the bank didn’t break the sacred Swiss code of secrecy, there was no reason to believe that he would ever be caught. Coulson and Pletscher, the bank executives, knew that Harvey Pitt had cut a tentative deal in Washington three days before, all but ensuring that Bank Leu would eventually turn Levine over to the U.S. government. But when they examined Levine’s letter, they only nodded their agreement that he was home free. They had been told by Pitt and others that it was essential Levine suspect nothing.

  Levine kept flying down to the Bahamas, pressing to continue his stock trading, grilling the handful of Bank Leu officials with whom he dealt for information about the SEC’s progress. Levine knew the bank had been subpoenaed by the commission—indeed, it was Levine who recommended Harvey Pitt as a skilled and politically connected attorney who could help respond to the government’s demands—but he said that his only worry was that the SEC might inadvertently find a piece of paper that had his true name on it. When Levine returned to Nassau early in January to meet again with Pletscher, he said that he was concerned that somehow the commission would get hold of the handwritten cash withdrawal slips that Levine had signed, over the years, when visiting the bank.

  “Hypothetically, couldn’t the bank lose a file, a whole file, or part of a file?” Levine asked Pletscher.

  “Theoretically, yes, we can lose a file.”

  “The withdrawal slips with my signature—I really feel that we should destroy them or lose them. They are the only remaining documents that could lead to me.”

  It was gray, wet, and cold in the capital on the February morning in 1986 when Ivan Boesky’s limousine turned onto Fifth Street and glided to a halt before the commission’s beige concrete headquarters. Boesky was late again. This time, in contrast to when he testified in the Dr Pepper investigation and argued with the enforcement staff about his inalienable right to smoke cigars, the arbitrager was an honored guest. He had been invited by the SEC chairman to appear at yet another of Shad’s roundtable panels, this one convened to advise the commission on how to solve the problem of swirling takeover rumors in the stock market.

  “Here is Mr. Boesky now,” said Shad delightedly when the skeletal speculator pushed through the doors of the commission meeting room after the discussion had already begun. “Ivan, would you just identify yourself, please?”

  “Ivan Boesky,” he said.

  He sat down at the panelists’ table, alongside John Phelan, chairman of the New York Stock Exchange; William Schreyer, chairman of Merrill Lynch; Arthur Levitt, chairman of the American Stock Exchange; Boyd Jefferies, head of the Jefferies and Company brokerage, and Gary Lynch, director of the commission’s enforcement division. The unacknowledged, unseen web of relationships around the table was as thick as glue: Lynch’s enforcement division had been investigating Boesky for years; Boesky and Jefferies had embarked on a secret, illegal stock-trading agreement similar in some respects to the one between Boesky and Milken; Schreyer’s firm, battered by takeover rumors, had initiated Lynch’s investigation into “Moby Dick”; and Phelan’s New York Stock Exchange had itself investigated Boesky in the past for illegal insider trading. It was as if Shad, oblivious, had invited to the same dinner party acquaintances who had been for years secretly entangled in love affairs and betrayals and revenge plots. Yet the dialogue was polite, mannered.

  Shad asked Lynch to outline some of the legal issues slated for discussion by the experts.

  Lynch understood that these roundtables were important to Shad. To the chairman, they seemed to represent all that was genuinely fun about government and power—the right to call up your friends, or people whom you wanted to be your friends, or people who were just smart and interesting, and have them fly to Washington and advise you and the public on decisive issues of the day. Virtually never did Shad act on the suggestions and ideas bandied about at these meetings, but he cherished them nonetheless. They served a political purpose because they created an impression that the SEC was grappling with issues such as takeovers, junk bonds, and computer-driven program trading. But mainly Shad seemed to like them because they were collegial, open, stimulating, and attended by prestigious experts. It would have been fair to observe that Lynch, anxious among other things about the progress of his Moby Dick investigation, perhaps had better things to do that morning than chat publicly with Wall Street titans about how to stop speculators from spreading false rumors in the stock market. But public appearances such as these shored up Lynch’s relations
hip with Shad, enhancing the enforcement division’s authority before the commission. And Lynch, too, benefited from his role as the commission’s resident expert on securities law—these were the sorts of appearances that gave top SEC enforcement attorneys a public image on Wall Street and made them such hot properties when they moved into private practice.