Eagle on the Street

by Coll, Steve; Vise, David A. ;

  There is no problem at Drexel Burnham, Joseph said. Dennis Levine was just a bad apple who happened to be working at our firm when he got caught.

  Joseph did not mention that in the days after Levine’s arrest, Drexel had been forced to pull thousands of its annual reports just as they came off the presses, in order to expunge a prominent photograph of Levine swaggering in his suit as one of Drexel’s leading merger advisers. Joseph acknowledged that in the overheated corporate takeover game on Wall Street, standards had loosened at all firms in recent years. And he explained, too, that “as a statistical matter,” Drexel, which had two other employees in addition to Levine with legal problems, was more likely than other firms to have difficulties because it had been the Street’s fastest growing major firm. The truth was that Drexel was attracting a disproportionate share of criminals to its ranks because of its aggressive reputation and willingness to pay higher salaries. Included among those Drexel had hired in recent months was Kidder, Peabody investment banker Martin A. Siegel, who became co-head of the firm’s merger department. At the time of Dennis Levine’s arrest, Ivan Boesky thus had secret information/profit sharing arrangements with three Drexel employees: Michael Milken, Marty Siegel, and Dennis Levine. Even though Levine and Siegel worked in the same bank of offices in Drexel’s lower Manhattan headquarters, neither man appeared to know anything about the other’s secret relationship with Boesky.

  Late in June, following Levine’s debriefing, Gary Lynch began to work with key members of his senior SEC enforcement staff in Washington, attempting to devise a plan that would flush Ivan Boesky out.

  Lynch feared that the SEC’s new investigation of Boesky would collapse into what trial lawyers call a “one-on-one,” a case where everything would turn on whether the jury believed Dennis Levine’s testimony or Ivan Boesky’s. With some additional work, the statements Levine had made in Carberry’s office would certainly be enough for the commission to pursue public charges against Boesky, but if Boesky decided to fight, the ensuing litigation would likely absorb a large portion of the commission’s resources for years. Lynch hoped to avoid a trial. He wanted to pressure Boesky into a settlement—that was the SEC’s usual tactic.

  Ever since Levine’s arrest, Boesky had been under enormous pressure. While he had been investigated by the SEC before, the agency had never had a cooperating witness like Levine who could hurt him. The stakes had been raised in other ways, too. Boesky found himself facing the frightening prospect of both SEC civil charges and Justice Department criminal charges, which meant he could face jail time and banishment from the securities business. In addition to worrying that government investigators might find out about his illegal promise to pay Levine for inside information, Boesky had done something a few months earlier that the speculator now feared could turn out to be an even bigger legal problem: He had sent Drexel a $5.3 million check to settle accounts under his wide-ranging, illegal stock-trading arrangement with Milken.

  Even when he made the payment in March 1986, Boesky had done so reluctantly. It wasn’t just his usual aversion to parting with money; it was the check. Boesky hated the idea of writing a check to reconcile the balance due Milken, because it created a paper trail. He had always paid investment banker Marty Siegel in cash for inside information and had repaid Milken and Drexel for illegal favors through a series of rigged stock and bond trades. That was the clean and neat way Boesky liked to do business—virtually undetectable. But when Milken insisted on being paid the $5.3 million in March 1986, he had considerable leverage to persuade Boesky to go along. Milken had raised a whopping $660 million that March for Boesky to invest in takeover stocks, despite initial objections from Drexel’s supervisory underwriting committee. (After the Drexel underwriting committee objected to the transaction, Drexel Chief Executive Joseph approved it, following discussions he had with Milken.) Combined with funds Boesky was raising at the same time, the Milken-raised funds would give the arbitrager the magic $1 billion to play with that Milken had promised him years ago, making Boesky by far the biggest and most powerful independent takeover stock speculator on the Street. Even though Drexel had charged princely fees of more than $20 million for raising the funds for Boesky, Milken refused to release any of the monies until Boesky paid him the $5.3 million and entered into certain compensating trades to settle accounts under their illegal agreement.

  Boesky’s fears about making the $5.3 million payment had been confirmed late in March when his outside accountants, who had descended on his firm to handle the final details of the $1 billion financing, started asking questions. The outside auditors’ interest in the $5.3 million payment had been triggered by joking comments made by an in-house Boesky accountant who taunted them for scrutinizing small trading details while he struggled with how to account for the multimillion-dollar payment to Drexel. Was there an invoice from Drexel for the $5.3 million? they asked. What had Drexel done to earn that fee? Why had the accountants not been informed about the payment earlier?

  After a flurry of phone calls between New York and Beverly Hills, the matter was resolved, at least temporarily. An aide to Milken sent Boesky an invoice dated March 21, 1986, which said Boesky owed Drexel $5.3 million, “FOR CONSULTING SERVICES AS AGREED UPON ON MARCH 21, 1986.” With the invoice in hand, the accountants were satisfied, a check from Boesky to Drexel was cut, and Milken released the funds he had raised, giving Boesky the power to move markets with his new $1 billion war chest.

  About two months after Levine’s arrest, Boesky, still worried about the paper trail created by the $5.3 million check and invoice, traveled to California, where he discussed a range of issues with Milken beside the Drexel financier’s San Fernando Valley swimming pool.

  Milken cautioned that they needed to be more careful because of “the new environment.” Among the items they discussed that day was a possible cover-up of the $5.3 million payment. The climate, Milken said, had changed. By that, Boesky thought Milken was referring to the increased risk of detection they faced following Levine’s arrest and the general hysteria on Wall Street about where the SEC’s insider trading probe was headed. Due to the new threat posed by the SEC–Justice Department law-enforcement efforts, they agreed to be more cautious and to limit their dealings. After he returned to New York, Boesky ordered his chief accountant, who had dutifully kept a tally of who owed how much under the Milken-Boesky arrangement, to destroy all documents describing it.

  When Boesky and Milken met by the swimming pool, Levine’s decision to plead guilty and cooperate with the government was publicly known. The disclosure had set off wild and nearly continuous speculation on Wall Street about who would fall next, and already, Levine’s younger accomplices in his insider trading ring—Wilkis, Reich, Sokolow—were dropping like birds from the sky. It seemed to Lynch and his enforcement division colleagues that the best way to approach the biggest fish, Boesky, was to convince him as quickly and dramatically as possible that Levine had told the government everything about their illegal dealings and that there was no use in fighting.

  By striking at Boesky with force and precision, perhaps they could topple him quickly, Lynch thought.

  The enforcement chief and his staff carefully drafted a series of subpoenas based largely on the information provided by Levine. Many of the subpoenas were addressed to different Boesky organizations—there were a number of units under the Boesky umbrella—and they asked for information about stocks and dates and names of people and other specific information calculated to convince Boesky that the evidence against him was overwhelming. One subpoena was delivered to Northview Corporation, the motel company in California through which Boesky conducted some of his stock trading; another went to IFB Managing Partners in New York; another was delivered to Seemala Corporation, the Boesky-controlled brokerage named after his wife, Seema. Although Lynch was hopeful that the barrage of subpoenas would unnerve Boesky when they were served in early August, he thought the most likely outcome was months of arguments with Boesky’s
lawyers over the wide-ranging requests for information that the SEC had made.

  Having completed successfully his legal representation of Bank Leu, which got the Swiss bank off the hook and led to the SEC’s case against Levine, attorney Harvey Pitt had become involved once again, this time defending Boesky. Pitt’s law firm, Fried, Frank, had long handled Boesky’s legal work from its New York offices and Pitt had done some work for Boesky from time to time. When Boesky called to tell him about the SEC subpoenas and to ask him to represent him, Pitt explained, as he explained to all of his clients, that he would take the case under one condition: that Boesky tell him everything he had done wrong. Anything Boesky told him would, of course, be confidential, protected by the attorney-client privilege. And the ultimate answer to the most important question—whether to fight or settle with the SEC—would be up to Boesky. But first, Pitt wanted to know the truth. Boesky agreed to go along with Pitt’s condition, and they held a series of confidential meetings in hotel rooms and other places in the ensuing days. Boesky shocked Pitt and his small team of defense lawyers from Fried, Frank and Wilmer, Cutler & Pickering by telling them about his insider trading arrangement with Levine and his illegal dealings with Milken and Drexel.

  From the start, Pitt could tell that the SEC was playing hardball with Boesky. Normally, after subpoenas were issued to one of his clients, Pitt called SEC enforcement lawyers and asked to see the commission-approved “formal order of investigation” authorizing the probe. In it was valuable information not contained in the subpoenas that gave a sense of an investigation’s scope and focus. In the past, the SEC had made a copy of the formal order available. But this time, SEC lawyers told Pitt they would not give him a copy. After some discussion, the commission staff agreed to let Pitt see the formal order at SEC headquarters, provided he did not make a copy of the document. Pitt responded to the offer by going over to SEC headquarters with two sharp-minded staff members from his law firm. Each of them memorized a portion of the formal order and then wrote it down as soon as they stepped out of the room where SEC officials allowed them to examine it.

  Following his questioning of Boesky and many hours of tactical deliberations over how Boesky should respond to the commission, Pitt called Lynch, who was on vacation in Maine, to try to set up a meeting. Lynch’s sister answered the telephone, and Pitt left a message. When he got the message, Lynch was certain that Pitt was calling to argue about the extensive information requests contained in the Boesky subpoenas, so when he returned the call, Lynch decided to get tough with Pitt for calling him on vacation about routine legal maneuverings.

  “Hi, Harvey,” Lynch said. “I hope you didn’t call me here in Maine to negotiate a subpoena.”

  Pitt laughed.

  “Gary, I want to come in and talk to you about this case,” Pitt said, without naming Boesky. “I think we ought to get together.”

  “Harvey,” Lynch replied, “I’m on vacation. If you’re calling me back from vacation to argue about subpoenas, I’ll be pissed.”

  “We ought to get together,” Pitt said. “This is an important client, and I think it will be worth your while.”

  He had been skeptical, but Lynch trusted Pitt’s judgment. Eight months earlier, at the “Moby Dick” meeting at commission headquarters, Pitt had taken the initial steps that led Lynch and his staff to the insider trading case against Levine. Although he enjoyed the time away with his family, Lynch knew, too, that timing was important. He decided to take Pitt up on his offer immediately.

  Let’s meet at the commission’s Boston Regional Office, Lynch said.

  I’ll see you there, Pitt replied.

  Around a government-issue conference table they met once again, the defense lawyers led by Pitt and the SEC attorneys headed by Lynch. To maintain confidentiality and explain why such a meeting of high-powered lawyers was taking place in the dog days of August, Lynch made up a plausible-sounding, but false, story for the agency’s Boston regional administrator. Shad, too, knew nothing of the meeting’s true nature, since Lynch felt it was within the normal course of enforcement division activities to hold preliminary discussions with defense counsel and to relay information to the chairman and the other commissioners when there was something more tangible to discuss.

  As he always seemed to, for key meetings with SEC attorneys, Pitt showed up with carefully scripted notes, which he read from as he spoke.

  “My client sees this as a matter that could go on forever, eat up his business, and be very distracting,” Pitt said. “In this era of Levine and all the publicity, he thinks it is in his interest to get this behind him. He has authorized us to explore a possible settlement.”

  Lynch did his best to look stone-faced, as if to say, “So what else is new?” He had been expecting a fight over the details of subpoenas; instead, he suddenly heard Pitt talking about negotiating a settlement of the SEC’s insider-trading case against Boesky. And that wasn’t all.

  “We could give you insight into practices on Wall Street that you’re not aware of,” Pitt said, offering an enticing carrot.

  “This sounds like the outline of something we can talk about,” Lynch replied.

  There is enough there, Pitt added, that Boesky’s cooperation could help to cleanse the securities world to such a degree that he should not have to plead guilty to any criminal charges. Boesky can’t face jail, nor should he have to, Pitt said.

  “The one thing I can’t speak for is the U.S. Attorney’s office,” Lynch said, “but there is no way in the world there could be a deal without some kind of criminal plea. It is not my deal to cut, but I think you’ve gotta get real and that is not real.”

  Pitt knew that while it was important early in this minuet with government lawyers to be titillating, it also was important to “undersell,” so he did not mention Milken’s name as he hinted at the fruits of Boesky’s potential cooperation. He did, however, reiterate that in return for becoming a government informant and settling the SEC case, Boesky wanted complete immunity from criminal charges, although he recognized there would be civil SEC charges and fines.

  Both sides agreed on the need to maintain strict confidentiality; that would give them the best chance to reach an agreement and maximize the potential value of Boesky’s cooperation. Although Pitt mentioned no names, he discussed with Lynch the nature of violations Boesky could help SEC investigators uncover.

  “I need to think about it,” Lynch finally said, dismissing those assembled. “We’ll get back to you.”

  After Pitt and the other defense attorneys left the SEC’s Boston office that day, Lynch broke into his widest grin since he had taken over the enforcement director’s job from Fedders the prior year. Sure, there was work to be done and a settlement with Boesky was by no means certain. But it was clear that the stream of SEC subpoenas had shaken Boesky and that both sides wanted to enter into a major deal. In Lynch’s experience, an investigation target in such a state of mind usually went ahead and agreed to a settlement after negotiations over the details. John Sturc and the other SEC attorneys gathered there with Lynch broke into a spontaneous celebration, with at least one person recalling that someone actually climbed onto the conference room table as they whooped it up. For the even-keeled Lynch, it was a great moment of rare elation.

  By the third week in September, a secret deal involving Boesky, the SEC, and the Justice Department was close, including the understanding that Boesky would work as an undercover government informant, pretending to run his arbitrage firm and conduct business as usual while secretly telling the government all that he knew and wearing a device that tape-recorded conversations with his Wall Street compatriots.

  Since the meeting in Boston, it had been an intense but productive several weeks. There were all-night negotiating sessions in Pitt’s Washington office, after which a bleary-eyed Lynch stumbled into SEC headquarters, taking care not to miss work or give clues that anything unusual was taking place. Immediately after the Boston meeting, Lynch had called Carber
ry in the Manhattan U.S. Attorney’s office to alert him to the talks and the possibility of settlement. Carberry had been adamant from the start that no matter how valuable Boesky’s cooperation, he had to plead guilty to criminal charges. On the other side, Pitt had been firm about his client’s desire to receive criminal immunity in return for his cooperation.

  From the first time he heard Boesky tell of his fraud-riddled relationship with Milken and of the $5.3 million payment that Milken had demanded of him the prior March, Pitt thought Boesky should cooperate with the SEC while he still had something—Milken—left to trade. Pitt feared that if Boesky delayed, Milken might beat Boesky through Lynch’s door, leaving the arbitrager facing a devastating array of witnesses. In that scenario, Boesky would become a professional defendant for the rest of his life, receive a gargantuan prison sentence if convicted, and probably see his business and his life destroyed. The ante had been raised for another reason, too, making this inquiry different from past SEC investigations of Boesky: The likelihood of criminal charges that carried a possible jail term seemed high. By settling the charges, it seemed, Boesky would be able to sell off his stock portfolio in an orderly fashion, receive leniency from a judge at sentencing for his cooperation, and then eventually try to put the matter behind him, after enduring years of pain and public humiliation brought on by his guilty plea, prison term, and his decision to snitch.

  The scale of the settlement negotiations was unprecedented for Shad and the other SEC commissioners, but it was an especially high-risk strategy for a government employee like Lynch. If he cut a deal with Boesky, no matter what the deal, he was open to criticism that the SEC’s director of enforcement was too soft. If he instead filed massive charges against Boesky, there was a risk the SEC would lose in court. But in that event, Lynch personally would not be subject to the same second-guessing. Despite the risk, Lynch preferred the certainty of a settlement. He thought that a settlement would eliminate years of litigation with Boesky and accelerate any possible SEC cleanup of Wall Street corruption—on Lynch’s watch, and to Lynch’s potential credit. Provided the commission received certain fundamental assurances from Boesky, Lynch preferred not to negotiate for months over all of the small details. It was more important to reach a settlement quickly so that Boesky could start taping a new set of targets, especially Milken.