Eagle on the Street

by Coll, Steve; Vise, David A. ;

  The talk went round and round. Boesky and Jefferies argued vehemently that corporations regulated by the SEC should be required to disclose all of their secrets to the public. “To me it is a simple issue,” Jefferies declared. “The absolute truth is what the marketplace is looking for.”

  “How do you begin to tear this all apart?” asked Boesky philosophically. “… The question is, what duty does that person have to disclose what is in his mind?” It was as if Boesky was asking that question at least in part about himself.

  Shad joined in with eager questions, drawing from Boesky his opinions about a number of controversial issues. The pair seemed at times of one mind. Arguing against the idea of employing enforced halts to interrupt stock trading when takeover and other rumors in the market spin beyond control, Boesky echoed almost precisely Shad’s oft-repeated thesis about the markets and the economy.

  “Liquidity,” Boesky said, “is something again that is one of the great elements of our stock market versus all other stock markets that I am aware of. The more of that there is, the better it is.”

  After lunch, Shad asked the panel whether it would be a good idea for the SEC, in order to improve its enforcement effort against insider trading and market manipulation, to adopt a bounty program similar to the one at the Internal Revenue Service, where citizen informants were paid in 1985 about $400,000 for tips about tax cheating. The idea was that if somebody on Wall Street knew of someone violating the securities laws, he could call up the SEC, and if his tip led to a prosecution, he would be paid for his information. Most of the experts thought this was a terrible idea. Dan Fischel, a free market economist from the University of Chicago and the only academic invited by Shad to the roundtable, said that no one had proven there was much market manipulation and insider trading to be concerned about.

  Silent most of the day, Gary Lynch finally spoke up. He said it was hard to mount a major fraud prosecution without the help of an informant. “If you have ever tried to track a rumor to its source, I think you will know it is almost impossible to do that,” he remarked. “As far as the insider trading area, I think we have seen in a number of cases that informants can be extremely helpful to the case, and certainly it would be good to have an informant who could actually appear and testify at trial.”

  Ivan Boesky wasn’t around to comment on Lynch’s observation about informants. He had been forced to leave the meeting early. His schedule, he had explained, was pressing.

  For Harvey Pitt and Michael Rauch, Bank Leu’s attorneys, it was a calculated risk. On an April afternoon in a conference room at the London offices of Pitt’s law firm, Fried, Frank, Shriver, Harris & Jacobson, the bank’s Bruno Pletscher was in the midst of two weeks of interviews and SEC testimony about his dealings with Dennis Levine. Because the settlement agreement outlined by Pitt, Lynch, and the others at the SEC that past December wasn’t yet completed, Pletscher hadn’t revealed Levine’s name to the SEC. He had agreed to testify—outside of the United States, to protect Pletscher’s own legal interests—but in telling his story, he referred to Bank Leu’s customer only as “Mr. X.” Now, Pletscher had reached the point in his narrative when Mr. X, during his December visit to the Bahamas, had pulled a letter from John Shad from his pocket and brandished it as evidence of his intimate relations with the commission. If Pletscher told that story, he would provide an easy clue to Mr. X’s identity. Rauch, however, couldn’t resist. The story was priceless, and if the SEC had any lingering doubts about its generous, pending settlement deal with Bank Leu, the tale would surely wash those doubts away.

  “Bruno,” Rauch said. “Tell them about the letter.”

  Later that month, after the testimony in London was completed, one of the enforcement lawyers working on the Moby Dick investigation asked a clerk to pull from the SEC’s basement library the agendas and guest lists from recent commission roundtables on takeover issues. The enforcement staff assigned to the Moby Dick case spent hour upon hour trying to guess or deduce who Mr. X was, and one SEC attorney, Leo Wang, had begun to suspect Levine for circumstantial reasons. Wang had harbored doubts about Levine’s honesty ever since he questioned him about the Textron deal in 1984. When Levine’s name showed up on the list of investment bankers invited by Shad to attend the November 1985 roundtable on takeovers, the staff’s suspicions hardened.

  Still, they had no proof. One problem was that before Pitt would authorize Bank Leu to disclose Levine’s name to the commission, he wanted the Bahamian government to exempt the bank from its secrecy rules. Largely because of the earlier efforts led by Fedders and SEC attorney Michael Mann, international banks and their regulators in Switzerland and certain other neutralist countries had grown increasingly willing to disclose the names of customers if incontrovertible proof of fraud was presented to them. In this case, the testimony of Bank Leu executive Bruno Pletscher and other investigative work by the SEC had established beyond almost any doubt that, whoever Mr. X was, he had earned more than $ 12 million in profits by trading illegally on inside information about takeovers in the United States. Early in May, Lynch and Mann flew to the Bahamas to meet with the country’s attorney general. Mann argued that the Bank Leu case was exempt from Bahamian secrecy law because Mr. X had used the bank almost exclusively to trade securities and had not engaged in traditional banking practices. The attorney general agreed and granted unqualified permission for Bank Leu to turn over the name of its customer to the SEC.

  Ecstatic, Lynch and Mann returned hurriedly to Washington. There were signs early that month that Bank Leu’s customer had begun to panic and that he might try to move the millions in his account to Panama. Pitt still hadn’t revealed Levine’s name to Lynch—he said he needed an official letter from the Bahamas authorizing the disclosure.

  Around noontime on Friday, May 9, 1986, Levine telephoned Bank Leu from New York and said that he was transmitting written instructions for his funds to be transferred out of the bank. Bank Leu’s officials immediately called Pitt in Washington—they had to comply with Levine’s written request, and even if they didn’t, Levine’s lawyers could quickly force them to in a Bahamian court. Pitt said he was still waiting for permission to turn over Levine’s name to the SEC—then Lynch could rush into federal court in the United States and obtain a freeze on Levine’s account pending court review of the SEC’s insider trading charges.

  Later that day, a messenger finally delivered to Bank Leu’s Nassau offices the letter from the Bahamian government granting permission to reveal Levine’s name. Around 5:30 P.M. that Friday, Harvey Pitt, the bank’s attorney, called Gary Lynch.

  Moby Dick is Dennis Levine, a managing director at Drexel Burnham Lambert, Harvey Pitt said. You’re going to have to move fast. Levine is trying to transfer his money out of Bank Leu. The bank isn’t going to voluntarily release any of his money, but the question could end up in a Bahamian court on Monday.

  Levine transmitted his written order that Bank Leu transfer $10 million of his money to a new account in the Cayman Islands. The order arrived late enough that Friday so that the bank could plausibly refuse to act, saying it would take up the matter on Monday. At SEC headquarters in Washington, a team of enforcement lawyers led by Lynch drafted the voluminous papers necessary to obtain a freeze on Levine’s account in U.S. federal court Monday morning.

  There was no time to call a full commission meeting to obtain approval. All of the commissioners had been aware of the Moby Dick investigation since the previous July, and it had become a subject of increasing interest that spring. On Sunday, Lynch called Commissioner Aulana Peters at home and left a message on her answering machine, asking that she please come into work early the next morning. The commissioners rotated in the position of “duty officer,” empowered by SEC rules to act for the full commission in emergencies. Peters picked up the message Sunday night, and early the next morning, she signed the papers authorizing securities fraud charges against Levine and the request for a court freeze of Levine’s Bank Leu accounts
. SEC attorney John Sturc flew to New York to argue the case before U.S. District Judge Richard Owen, who was reputed to be sympathetic to government prosecutors who appeared in his courtroom. In any event, Owen granted all of the SEC’s requests promptly.

  Levine didn’t know what had happened. The previous Friday, he had attended an exclusive screening of the film Top Gun at the Gulf & Western building, which towered over the southwest corner of Manhattan’s Central Park. He spent the weekend with his pregnant wife, Laurie, and his son, Adam, in their expansive upper Park Avenue cooperative apartment—Levine had recently spent $450,000 to redecorate the place, using money withdrawn from his Bank Leu account. (Levine was able to pay for the extra touches that can distinguish one investment banker’s apartment from another: He paid $175,00 to his general contractor; $86,000 to an interior designer; $40,000 to an architect; $40,000 for cabinet work; $5,000 for marble work; $8,000 for a piano, and about $95,000 for miscellaneous items. Levine also owned a $90,000 Ferrari Testarossa.) On Monday, Levine was supposed to meet with Ronald Perelman, the corporate raider turned Revlon cosmetics executive whose acquisitions were financed by Drexel’s junk bonds. But Levine never showed up. He had heard through the grapevine that the commission and the U.S. attorney in Manhattan were after him and that they were attempting to arrest him. Levine surrendered to U.S. marshals downtown and hired attorney Arthur Liman to represent him. He spent a night in jail before he was able to post bail.

  The story of the SEC’s insider trading charges against Levine, splashed across the front pages of every metropolitan newspaper in the country, dwarfed the attention paid to any previous event at the commission under John Shad, eclipsing the flood of negative publicity that surrounded the resignation of John Fedders. Though Shad seemed uncomfortable with the implications of the case, Lynch and Sturc and Mann and the other enforcement lawyers basked justifiably in the attention, even as they moved to fight Levine in court. “Let’s just say it is not the end of our insider trading program,” Lynch said.

  The SEC’s allegation that Levine had made more than $12 million in illegal profits made this the biggest insider trading case in history. The commission had moved swiftly enough to freeze his millions before they were transferred out of the Bahamas. But Lynch and his staff still had to reel Moby Dick in. Initially, Levine’s lawyers boldly asserted their client’s innocence, holding impromptu press conferences on the courthouse steps and promising to vanquish the government when Levine was brought to trial.

  Levine himself reveled in the attention—far from collapsing into morose depression from the public humiliation of his arrest and downfall, he seemed at times to be genuinely excited by his notoriety. And why not? For six years Levine had directed a sophisticated ring of conspirators, brokering inside information about mergers to and from half a dozen other young lawyers and investment bankers. There was Robert Wilkis at the prestigious Wall Street firm of Lazard Frères, who had told him about Textron and many other deals; Ilan Reich, a highly regarded young partner and protégé of takeover critic Marty Lipton at the Wachtell Lipton law firm; Ira Sokolow, a vice president and rising star in the mergers and acquisitions department at Shearson Lehman Brothers; David Brown, an associate at Goldman, Sachs & Company; and Randall Cecola, a student at the Harvard Business School who had worked briefly at Lazard. Levine assured several of the members of his ring that everything would work out fine. He was still in charge.

  On May 20, shortly after his arrest, Levine met Wilkis, with whom he had traded money and inside information for several years, at a garage in the seedy Hell’s Kitchen neighborhood of Manhattan, near the Hudson River in midtown.

  As they drove off in Wilkis’s car, Levine exclaimed gleefully, “This is the biggest insider trading scandal in history and it’s all because of me.”

  18

  The Fall

  There was hardly room for them all in the cramped, cluttered offices of the Manhattan U.S. attorney’s securities fraud unit, situated in a bulding erected on cement stilts behind the city’s towering and majestic federal courthouse. They were going to be here for hour after hour and day after day, so they had to get used to it. The unadorned environs seemed to suit perfectly the demeanor of Charles Carberry, the assistant U.S. attorney in charge of federal criminal securities-fraud cases in New York. Carberry was pale, at least seventy pounds overweight, balding, and utterly unflappable. Raised in Queens and graduated from Manhattan’s Fordham University law school, he had never lived anywhere but New York, and he spoke with the marbled accent of the streets. A career prosecutor and lifelong bachelor, it was said that apart from an interest in attending college basketball games, Carberry had no social life. He did, however, enjoy his work.

  Dennis Levine sat near Carberry, his brashness tempered by the presence of so many lawyers and the circumstances of the meeting. It was June 2, less than three weeks after his arrest.

  It hadn’t taken long for Levine, whose principal loyalty had always been to himself, to calculate that his best interest lay in cutting a deal with the government. The cooperation between the SEC and the Manhattan U.S. attorney’s office—the commission had alerted the criminal prosecutors about their Moby Dick investigation earlier that spring—had squeezed Levine convincingly. He knew that if he pleaded guilty to insider trading, a prison term was inevitable, but at least the government would urge leniency because of his testimony against others. If he chose to fight the case and was convicted following trial, a federal judge might throw the book at him, particularly given the public hysteria about the collapse of Wall Street ethics, which had ensued upon Levine’s arrest. So Levine had decided to cut a deal and provide testimony against his coconspirators. And his lawyers had hinted that besides the several young Wall Street professionals with whom he had traded tips, Levine would provide evidence against one major financier whose importance dwarfed them all.

  Before Levine was smuggled into the U.S. attorney’s office that Monday morning by his lawyers, Carberry and several SEC lawyers invited up from Washington to attend the debriefing didn’t know for sure who the coconspirators were in Levine’s insider trading ring, or the name of the fish who was purportedly bigger than Moby Dick. That Monday morning in Carberry’s office, Levine dropped his bombshell.

  I’ve leaked inside information about takeovers to Ivan Boesky since February of last year, Levine said. As part of our deal, Boesky promised he would pay me as much as five percent of whatever stock trading profits he made. Although he never paid me anything, in April we agreed that he owed me $2.4 million.

  What stocks? the government lawyers wanted to know.

  Many of the big ones, Levine answered—Nabisco, Houston Natural Gas, FMC, Union Carbide, General Foods, and others.

  This might be it—after so many years, after so many false starts, Dennis Levine appeared to be delivering to the SEC and the criminal prosecutors a potentially major fraud case against one of the most influential stock traders on Wall Street. Lynch thought there were gaping holes in Levine’s story that might make his allegations difficult to prove in court, especially Levine’s statement that Boesky had never paid him anything. Boesky could just deny any illicit arrangement with Levine and say that Levine made the story up in return for lenient treatment. Still, this was as close as the SEC had ever come to nailing Boesky, and the government attorneys grilled Levine over and over about Boesky that morning, and in about ten other sessions in Carberry’s office extending over about a week’s time in early June. They questioned Levine in minute detail, even asking him at one point to describe the interior of Boesky’s limousine. At another session, Levine was presented with some of his own doodlings and was asked to interpret them. The prosecutors wanted to take advantage, as much as possible, of Levine’s cooperation before his decision to plead guilty and turn state’s evidence became known.

  That same Monday night, June 2, using a tape-recorded telephone in the Manhattan U.S. attorney’s office that was rigged to sound like a pay phone, replete with the ch
ink of coins and the recorded voice of an operator, Dennis Levine began to telephone his friends and associates. He drew Robert Wilkis into a long and incriminating talk about their schemes. He telephoned others in his ring—attorney Ilan Reich and investment banker Ira Sokolow.

  Then he called Boesky.

  I’m in deep trouble, Levine told Boesky. I’m going to jail. If I don’t give you up, what will you do for me?

  Is there anything I can do for your family? Boesky asked, refusing to take the bait.

  Although Levine had set a trap for Boesky, the arbitrager carefully avoided saying anything that would acknowledge their arrangement about inside information or cause him other legal problems.

  The evidence Levine had provided about Boesky was good—but it was far from perfect. Levine said he was prepared to testify under oath that he had a deal to swap inside information about takeovers with Boesky in exchange for a percentage of Boesky’s profits. But the trouble remained that Levine’s deal with Boesky had never been fully consummated; they had exchanged only stock tips and promises about future compensation. And while a preliminary review of trading records and other documents provided by Levine tended to corroborate his claims about a secret relationship with Boesky, there was no “smoking gun” among Levine’s files, principally because no money had ever changed hands.

  At Drexel, Chief Executive Officer Fred Joseph did his best to minimize the damage from Levine’s fall by granting interviews to major news organizations and speaking to employees throughout the firm. The controversial firm that had spearheaded the wave of junk-bond-backed hostile takeover bids found itself at the center of the storm over insider trading and ethics on Wall Street as speculation about the identity of Levine’s coconspirators mounted.