To preserve secrecy as Lynch briefed the SEC commissioners during the negotiations, Shad and his colleagues met only in what were dubbed “super-executive sessions,” meaning that only the commissioners themselves, none of their personal staff, and none of the SEC staff that normally was invited to closed meetings could attend. Normally, the commissioners kept the briefing papers prepared by the division of enforcement. But after these meetings, Lynch and a small band of trusted colleagues collected the briefing papers to diminish the risk of a leak. There were a hundred questions about the Boesky case. How much money would Boesky pay to the commission in disgorged illegal profits and fines? Would the commission allow him to sell off the millions of dollars in stock he owned? Would the SEC attempt to seize assets owned by Boesky’s wife and children that may have been derived through his illegal activities? Who else would Boesky implicate? What about the link between SEC charges and his criminal plea bargain? Who had benefited from his massive insider trading over the years?
When he talked about the case and the negotiations with his fellow commissioners and with the few of Lynch’s senior staff who were informed about what was at stake, Shad vacillated between shock and outrage. More than anything, he couldn’t believe that Boesky would go through with the deal he was about to sign. Shad was afraid that Boesky would flee the country—given the scale of Boesky’s fortune, it would be easy enough to arrange. And after all, Marc Rich, the indicted commodities trader who had occupied Boesky’s suite of offices on Fifth Avenue in New York before fleeing to Switzerland, had managed to resurrect his career as a respected businessman and philanthropist who lived comfortably and seemingly happily near Zurich. With personal assets reportedly in excess of $100 million, wouldn’t Boesky be tempted to do the same? Until Boesky actually turned over any money to the SEC, Shad was skeptical that the arbitrager would really do it. Given his interest in personal ethics, it was hard to imagine Shad trading on inside information or fleeing from the law if he were caught. But perhaps his fears about Boesky were based in part on a calculation about what he thought he would do if he were in Boesky’s shoes.
Boesky, though, had been living such a grotesquely distorted life for so long—writing books and making speeches about the legitimacy of his success while systematically bribing Wall Street merger specialists for inside information—that it was hard for Shad and Lynch to know how he felt about the prospect of confession and maybe, in some way, it was a relief for him to disgorge his secrets and to feel that he could finally tell the truth about Wall Street and himself. In any event, there were no concrete signs that early autumn that Boesky, who only months before had appeared at an SEC roundtable and advised Shad, was preparing to flee the country. And he seemed to be following Pitt’s advice that a settlement was in his best interest.
There was a way in which Boesky’s exposure and the related cases shook the foundations of Shad’s tenure at the SEC—his reliance on Chicago School theory; the push for liquidity and efficiency, liquidity and efficiency—even as it provided Shad with an enormous professional triumph. Shad found himself in a reflective mood that September as negotiations concluded with Boesky that would alter permanently and profoundly the public reputation of the SEC and its chairman. “In Washington, perceptions are too often given greater weight than reality,” Shad wrote to a cousin in Utah that month. “New laws and regulations are frequently proposed in response to perceptions. It is not popular to attempt to disabuse misperceptions. It is easier to go with the flow—to address problems with flowery rhetoric, rather than facts. But then, I believe it was Mr. Churchill who said democracy is a very inefficient method of government, it is just the best man has devised.… It seems that life is dictated by emergency meetings—but I enjoy it.”
The biggest question at the SEC that fall was how much Boesky would have to pay. After extensive negotiations back and forth involving Boesky’s lawyers, Lynch and Carberry, the straight-talking Carberry finally blurted out, “Cut the crap. The number is one hundred million dollars.” Soon thereafter, Boesky agreed to pay the agency the record $100 million, a figure the SEC commissioners approved following Lynch’s recommendation. Although it was later explained by Shad, Lynch, and other SEC officials that Boesky made $50 million trading on the illegal insider tips from Levine and that the $100 million figure represented a return of that $50 million plus a one-time $50 million penalty, lawyers involved in the negotiations agreed that the $100 million figure was reached primarily for another reason: It was a nice round number that people would talk about for years to come and that would send a message to Wall Street and around the world that Shad’s SEC had come down on insider trading with hobnail boots. So great was the figure in SEC terms that it approximated the agency’s entire operating budget for 1986. Although Lynch did not require a detailed financial statement or endeavor to make any independent assessment of Boesky’s assets, Pitt assured him that the $100 million payment would virtually wipe out Boesky’s personal wealth. The SEC charges would relate only to tips Boesky received from Levine, but it would absolve him of liability for any other wrongdoing. As part of the settlement, the SEC also agreed to let Boesky sell off his huge holdings of takeover stocks before the public announcement of charges against him and agreed not to prosecute those investors who had made investments in Boesky’s arbitrage fund. On the criminal side, Pitt and Carberry eventually reached a compromise. Boesky agreed to plead guilty to a single charge of filing false documents with the SEC, carrying a maximum five years in prison, in connection with the rigged 1984 takeover of Fischbach Corporation, a transaction that Boesky had helped Milken orchestrate.
At forty-nine, Boesky had effectively agreed to start a new career as a professional government witness. He secretly began taping conversations with investment bankers, traders, and the others whom he did business with on Wall Street. The better the tapes, the smaller the chance Boesky would have to testify publicly at trials of those he implicated, where the speculator would have to endure cross-examination from hostile defense lawyers. Wearing a wire that October, Boesky traveled to Beverly Hills, where he met with Milken in a room at the Beverly Hills Hotel. With rumors about Boesky’s cooperation circulating on Wall Street, Milken had been warned to stay away. But he went to meet Boesky anyway, cognizant of the need to be careful in what he said and did. Boesky hoped to tape the financier discussing the illegal $5.3 million payment and other, still unresolved financial aspects of their illegal arrangement. But Milken was circumspect, saying to a colleague before he met with Boesky that he would assume he was “speaking for the record.” Milken seemed intent during the meeting on providing Boesky with a false explanation for the $5.3 million payment. The pair also assured one another that their employees would be reliable if confronted by government investigators. Shortly thereafter at the SEC, Shad and the other commissioners privately approved formal orders of investigation focusing on securities law violations committed by Milken, Siegel, and others whom Boesky had fingered.
As the day when Boesky’s cooperation and settlement would be publicly announced neared, the spotlight turned on John Shad. It was his turn now to be a major player in Washington and in the national media. But the truth was that Shad had mixed feelings about the Boesky bombshell because of the shame it would bring on the industry where he had labored for so long.
The day before the SEC’s case against Boesky was disclosed publicly, Shad called Federal Reserve Board Chairman Paul Volcker to clue him in.
The announcement about Boesky and the $100 million fine is going to be made after the stock market closes for trading on Friday afternoon, Shad said, but I wanted you to know about it in advance in case there are any problems with the banks.
The next morning—November 14, 1986, the day of the announcement—Shad called Congressman John Dingell and Senator Jake Garn, chairmen of the congressional committees that oversee the SEC. At 2:45 P.M., just hours before going public, Shad called Treasury Secretary James A. Baker III to inform him. He also called t
he White House chief of staff, Donald Regan.
Boesky was a major contributor to the Republican party, but the news of his demise was a “complete shock” to the White House.
On that Friday in November when the SEC prepared to tell the world that Ivan Boesky was a crook, rumors about the impending announcement had been circulating for much of the day through the enforcement division. It was about 3:00 P.M. when Gary Lynch finally called his staff together in an open hallway area outside his corner office. John Sturc stood beside him, along with the other attorneys who had worked on the case.
This is a very proud day for the SEC, Lynch told them. At 4:30 or 5:00 P.M., the commission is going to announce at a press conference downstairs that Ivan Boesky has agreed to pay $100 million in fines and disgorgement for insider trading.
Cacophonous cheers and applause erupted.
I want to apologize for the unusual secretiveness that has characterized this investigation, he went on. I will try in the weeks ahead to make an effort to get more people involved in the work that is yet to come.
At virtually the same moment, Ivan Boesky stood at the head of a marble conference table on the thirty-fourth floor of 650 Fifth Avenue in Manhattan and embraced his employees, one by one.
Moments before, drawn and somber, he had entered the crowded room to read a statement prepared by his lawyers. After apologizing and telling the dozens of gathered executives and support staff that what he was about to say was difficult, Boesky announced that he had settled insider trading charges by paying the government an unprecedented $100 million. He said that his firm ultimately would be closed, but that it would stay in business for the foreseeable future.
The government has given me eighteen months, or until early 1988, to sell off my stock portfolio, Boesky told them. I would like to have everyone’s support.
I hope you will remember the whole Ivan Boesky, not just the bad part, he said.
There were questions and answers. At one point, Boesky was asked if he would be allowed to buy stock—purchasing stock while selling off his holdings would help Boesky disguise the unloading of his $1.2 billion portfolio.
“Well, we can still buy, but we won’t be doing any hostile takeover deals,” Boesky said.
Boesky also issued a public statement.
“The announcement this afternoon by the Securities and Exchange Commission and the U.S. Attorney justifiably holds me and not my business associates or business entities responsible for my actions,” Boesky said. “I deeply regret my past mistakes, and know that I alone must bear the consequences of those actions.… My life will be forever changed, but I hope that something positive will ultimately come out of this situation. I know that in the wake of today’s events, many will call for reform. If my mistakes launch a process of reexamination of the rules and practices of our financial marketplace, then perhaps some good will result.”
Later that afternoon, when his employees had hugged him and dispersed, Boesky made telephone calls to investors in his arbitrage partnership and directors of the public companies he controlled. He told some of them that while his deal with the government would strip him of the right to ever again own a stock brokerage firm, he hoped that he would be able to work with them again some day, perhaps as an investor.
Some of those who heard him say such things thought that perhaps Ivan Boesky was being unrealistic.
Jim Dahl, the top salesman in Michael Milken’s Beverly Hills junk bond department, was in Las Vegas that Friday, attending a friend’s bachelor’s party. His wife telephoned him in tears—she had heard the news about Boesky while at a health club with several other wives of Drexel traders, and she was afraid now that Milken and his employees were in trouble. Rumors about Levine and Drexel had been passing among the Drexel salesmen and traders for weeks, contributing at times to an atmosphere of paranoia.
Dahl told his wife not to worry. Nothing was going to happen.
He spoke with Milken, who told him to get back to Los Angeles immediately.
“The force in this country buying high-yield securities (junk bonds) has overpowered all regulation,” the seemingly invincible Milken had declared in a speech just before Dennis Levine’s arrest. But on Sunday morning, November 16, two days after Boesky’s fall and the delivery of government subpoenas to Drexel and Milken, Dahl received a phone call from Milken who said he would like Dahl to come into the office to review some matters. Dahl wandered onto the junk bond trading floor and saw Milken, surrounded by boxes of documents and working with an assistant, sorting intently through his papers. Dahl, according to statements he later made to government lawyers, sat quietly for about two hours, waiting for Milken to finish. Finally, he grew a little impatient. If he wasn’t needed, Dahl wanted to go home—it was a Sunday, after all.
“Mike, if there is something you want to talk to me about, let’s do it, because I am out of here soon,” Dahl said.
Milken said he wanted to talk. He motioned for Dahl to follow him. They circled off the junk bond trading floor and into the men’s room. Milken checked the stalls to be sure that no one was inside. Then he walked over to the sink and turned on the faucet so that a crescendo of running water filled the room. If the room were bugged, the tape recording would have been engulfed by the sound of water.
Milken leaned down next to one of the sinks, motioning as if to wash his hands. Dahl leaned down to hear him.
“There haven’t been any subpoenas issued and whatever you need to do, do it,” Milken said.
19
A Generation of Giants
During the chaotic weeks of late November, the five SEC commissioners and their senior staff from the enforcement division gathered virtually every day in the sixth-floor meeting room to discuss the implications of Ivan Boesky’s fall. There was an atmosphere of crisis. Moods shifted and passed like storm clouds racing across the horizon. At times, there was a feeling of feverish excitement as Shad, Charles Cox, Aulana Peters, Gary Lynch, and the others moved in and out of hastily called, highly secretive “super-executive sessions.” Disclosure of Boesky’s crimes and his decision to turn state’s evidence had spawned a frenzy of rumor, speculation, and public outrage. Journalists from around the world deluged the SEC daily with telephone calls seeking information about Boesky’s fraud and his settlement with the commission. Stock prices on Wall Street initially plummeted amid widespread fear that Boesky’s exposure and his testimony against others would quash the takeover game once and for all. There was a sense, within the SEC and without, that the financial world had been turned upside down.
It might have been a period of unqualified celebration and triumph inside John Shad’s commission. For nearly five years, John Dingell and his Democratic allies in Congress had attacked and ridiculed Shad’s public commitment to the Reagan austerity program, saying that with Wall Street growing rapidly he could not possibly achieve the SEC’s mandate to protect investors without expanding the agency. The enforcement program crafted by Shad and Fedders, with its emphasis on insider trading, had been criticized as soft, ineffectual, and incomplete. Stanley Sporkin had repeatedly and publicly questioned his former agency, implying that the commission had gone downhill since his departure. And now, finally, with the stunning and unprecedented capture of Boesky, Shad’s SEC had seemingly been vindicated. Already Boesky’s $100 million settlement was being hailed as the most significant Wall Street corruption case since the 1920s.
Yet so often on those November afternoons when they took their chairs around the oval meeting table on the sixth floor, Shad and Gary Lynch wore expressions of exasperation, perplexity, and frustration. They could not understand why the Boesky case had turned against them. They could not understand how so much could have gone wrong so quickly. To Lynch, the triumphant Boston meeting about Boesky a few months earlier seemed a distant memory, replaced by a Kafkaesque nightmare. With the Boesky case in hand before it was announced, Lynch thought he might deliver Wall Street from an era of corruption to an era of cleansing.
Now that the news about Boesky was out, he found that people were viewing him and his team of lawyers in the SEC’s enforcement division as if they were criminals themselves.
The trouble had begun within hours of the SEC’s Boesky press conference on Friday, November 14, presided over by Shad at the commission’s Washington headquarters. As traders, money managers, and arbitragers prepared for Monday’s reopening of the shocked stock market, three rumors—all of which turned out to be true—made the rounds on Wall Street. The first was that Boesky had been working as a government informant for months, wearing a wire to secretly tape record incriminating conversations with his coconspirators and other financiers. The second was that Boesky had provided damaging testimony and evidence to the government about Michael Milken and Drexel Burnham, which was in the midst that fall of financing several large takeover bids with junk bonds. And the third—the one that seemed the most incredible, almost impossible to fathom or accept—was that Boesky, in order to preserve the fortune he had accumulated, had been able, with the SEC’s apparent acquiescence, to secretly sell off hundreds of millions of dollars of stocks prior to the public announcement of his fraud and guilty plea.
So deep and pervasive was the bitterness about Boesky that it was hard in those first days to sort out exactly why everyone on Wall Street was so furious about him. There were some who seemed angry because Boesky—by allowing himself to be exposed, not merely as a crook, but as an outrageous liar who had advised Shad on takeover issues and had even written a book promoting his alleged genius—had generated an immediate public backlash that threatened to ruin the profitable pastime of takeover speculation for everyone else. There were many others who said they were mad because Boesky, once confronted with Levine’s allegations, had chosen to rat on his friends rather than continue to lie and fight the government at a trial.
Eagle on the Street Page 36