Eagle on the Street

  Scores of senior officials on Wall Street rushed to explain to reporters and to one another that Boesky was an aberration, that he was a crazed and maniacal outsider who in no way represented the trend of American finance. In these defensive and insistent voices it was possible to detect the tenuous denial of an overwhelming fear: that there were other Boeskys soon to be exposed.

  During that first week, the fury on Wall Street about Boesky’s confessed crimes became mixed and blended with anger and outrage directed at John Shad’s SEC. It began with the arbitragers, generally a volatile lot by temperament and occupation. Dozens of arbs lost millions of dollars in the stock market as prices of takeover stocks fell in reaction to the SEC’s announcement about Boesky. When the newspapers confirmed that Boesky was already out of the market himself, that he had been allowed to sell off shares before the disclosure of his own demise, the arbs reacted with unbridled rage. How could the SEC have allowed Boesky to trade on advance knowledge of his own plea bargain with the government? It appeared that he had been allowed to engage in one last series of insider trades, profiting on inside information about his impending fall and his work as a stool pigeon. It wasn’t immediately clear whether Boesky had pulled a fast one on the regulators or executed the trades with the commission’s explicit permission. But to the angry mob on Wall Street, it didn’t really matter—John Shad and the SEC were responsible.

  Inside the commission’s locked sixth floor meeting room late that November, Shad, Lynch, and the others didn’t so much debate whether their critics on Wall Street were right as console one another with rationalizations about their decision.

  What Boesky did by selling his shares was not illegal, Shad declared at the table during one meeting. The criticism we are getting is unfair. The media coverage has been outrageous. The press just doesn’t understand why we did what we did.

  Lynch agreed. We can’t tell the whole story yet without blowing our continuing investigations, the enforcement chief argued.

  If Boesky had been forced to sell immediately after the announcement, he might have had to dump $1 billion of stock, causing a financial panic. How would the SEC have looked then? Shad wondered.

  But inside the meeting room, Shad was preaching to the converted. They convinced themselves that they were right and that they had no choice but to keep quiet and conduct their work in total secrecy. The newspapers were full of stories attacking the commission for allowing Boesky to profit while others suffered financially. Still, in those crucial days when public opinion was formed on Wall Street and in Congress, Shad and the SEC remained silent.

  It was characteristic of Shad, who had lurched from one public relations snafu to another since arriving in Washington, that he did not anticipate the political and public reaction to the Boesky settlement. Yet the truth was that no one else at the SEC had thought in advance, either, about the implications of Boesky being permitted to sell off stock before public disclosure of his plea bargain. In the midst of harried meetings and negotiations with Boesky’s lawyers and the federal prosecutors in New York earlier that fall, the commissioners and enforcement staff had been concerned about other issues. Shad feared that Boesky would flee the country. Lynch worried about preserving secrecy so that Boesky’s undercover work wouldn’t be blown. All of them were distracted by the myriad technical and investigative issues raised by Boesky’s deal—how his money would be turned over to the government; what arrangements would be made to supervise Boesky’s existing business affairs; how the enforcement staff would pursue the influential financiers against whom Boesky had provided evidence, including Milken and Drexel merger-specialist Marty Siegel. During all of that time, during so many meetings at SEC headquarters and in New York, no one in power had argued against allowing Boesky to sell off his stock before the November announcement.

  Not only had Shad, Lynch, and the others not doubted their decision to allow Boesky to sell, they hadn’t even talked about whether it would be smart to disclose the sales publicly along with the terms of Boesky’s plea bargain. In that respect, they were victims of their own obsession with secrecy. The belief that the SEC should conduct nearly all of its important business in private had become deeply entrenched among the commissioners and senior staff. This was true despite the fact that a foundation of SEC regulatory policy had for years been that public corporations should disclose the facts about their business, even if disclosure of the facts might be damaging. Had the commission disclosed up front, at the November 14 press conference, that Boesky had been permitted to sell off shares in advance in order to prevent a potential financial panic, questions about the SEC’s judgment no doubt would have been raised, but the commission would have controlled the debate and been on the offensive from the start. Instead, after doing a superb job keeping the Boesky case secret, Shad and the others had put their backs to the wall.

  On the sixth floor, questions about how much secrecy was really necessary to preserve the fruits of Boesky’s confessions provoked bickering between Shad and his colleagues. Before the Boesky announcement, the commissioners had met with Lynch and a handful of top enforcement officials in “super-executive sessions,” meetings that were off-limits even to the commissioners’ own legal advisers. In the days after Boesky’s crimes were announced and his undercover work was reported in the newspapers, Shad and Lynch told their colleagues that they were still inclined to exclude high-level staff, other than those with an absolute “need to know,” from closed meetings. But Commissioner Aulana Peters argued with Shad, and after a sometimes awkward debate, the exiled staff lawyers were allowed back into the meeting room. Amid the internal disagreement over which SEC officials should be permitted to critique and debate the issues surrounding the Boesky settlement, the commissioners never considered opening the substance of their discussions to the outside world. Thus the decision to allow Boesky to sell had leaked to the public through rumor, speculation, and aggressive newspaper reporting. When Shad’s spokeswoman in Washington finally issued an official statement on Friday, November 21 (one long week after the Boesky case was announced) in an attempt to revive the commission’s public image, it sounded flat and defensive.

  “Prior to the announcement, the commission and staff were concerned about a large number of important considerations including the fact that substantial margin debt [owed by Boesky] could force precipitous and uncontrollable liquidations of securities that would have had a very serious adverse affect on the market. The orderly reduction of these loans has avoided such consequences.… Throughout this matter, the commission has and will continue to exercise its best judgment to serve the public interest with minimum adverse impact on the market. The commission cannot comment further at this time because of the necessity to preserve the confidentiality of its continuing investigations.”*

  The SEC statement came too late to alter public perceptions. Two days later, on Sunday morning, Shad rode to the studios of ABC News just off Connecticut Avenue to appear on the television talk show “This Week with David Brinkley” and explain the commission’s handling of the Boesky case publicly. Soon after the lights on the set went up, the vociferous correspondent Sam Donaldson began to arch his knifelike eyebrows and needle Shad about the stock sales.

  “What is more insider than the knowledge that Boesky’s about to take a fall?” Donaldson demanded loudly. “Why didn’t you make that available to everyone who has stock in the market who could buy or sell based on the same information?”

  “Because it would have blown the case, the ongoing investigations, and would have had a drastic effect on the market, that’s why,” Shad responded.

  “So millions may have to lose profits, or lose in their stock, in order to preserve this case,” Donaldson said. “Was it worth it?”

  The answer clearly depended on what Ivan Boesky had delivered to the government in exchange for his plea bargain. In their tightly guarded executive sessions that fall, Lynch and the commissioners had mapped out a kind of investigative blitzkrieg des
igned to topple the financiers implicated by the government’s new star witness. At the same time that Boesky’s settlement was announced, SEC investigators in New York and Los Angeles fanned out to deliver dozens of subpoenas seeking trading records, accounting records, office diaries, and other documents concerning some of the best-known corporate takeovers of the 1980s. The biggest batches of subpoenas landed at the Beverly Hills office of Drexel Burnham Lambert and at the firm’s headquarters at 60 Broad Street in lower Manhattan. (The subpoenas were delivered just at the time of the SEC’s Boesky announcement so that anyone at Drexel who responded by destroying documents could be prosecuted for obstruction of justice. The delivery took place two days before Milken told Jim Dahl in the men’s room that no subpoenas had arrived.) The subpoenas contained the names of two of the country’s most celebrated financiers: Martin Siegel, the handsome young merger specialist, and Michael Milken, maestro of the junk bond economy. When some of the names on the subpoenas were reported in the newspapers, an angry and nervous consensus emerged on Wall Street: to justify its extraordinary deal with Ivan Boesky, the federal government would do everything within its power to bring down Milken and end his grip on the $100 billion junk bond market.

  Though Shad’s commission had angered and frightened Wall Street, it had failed to impress Congress. This, too, an increasingly shaken Shad could not fully comprehend. On December 11, about a month after the Boesky announcement, he was summoned over to Dingell’s hearing room to testify about the implications of Wall Street’s scandal. After all of the partisan abuse he had suffered at Dingell’s hands, after five years of contentious debate over the commission’s budget, its regulatory programs, and its enforcement priorities, Shad hoped that Dingell and his Democratic colleagues would at last acknowledge the righteousness of his reign at the SEC. But when the lights went up and Dingell rapped his gavel menacingly, it became clear that far from being impressed by the SEC’s prosecution of Boesky, the Democrats wondered why so much corruption on Wall Street had flourished undetected for so long.

  “The hearing today is about just the kind of events which can destroy public trust and confidence,” Dingell began. “… In many ways, these are the same questions the House Commerce Committee was asking fifty years ago when it created the Securities and Exchange Commission.… At that time, the public was shocked by the revelations of stock manipulations, pools, insider trading, and a host of other abuses. Now, we are facing what appears to be the biggest series of stock market abuses since the 1929 crash.”

  “The Boesky and Levine cases demonstrate how much someone can get away with before the system catches up to them,” chimed in Congressman Ron Wyden, an Oregon Democrat.

  “The system did not catch them; it was freak tips from outside,” added Ohio Democrat Dennis Eckart, referring to the anonymous letter from Caracas, Venezuela, to Merrill Lynch that led the SEC first to Levine and finally to Boesky.

  “I thought we were here for a Tony Award,” Shad lamented.

  As he observed the congressional proceedings, Lynch grew cynical. He had anticipated that the momentum that had developed as the enforcement division pursued Levine and Boesky would continue as the SEC bulldozed right through the 60 Broad Street headquarters of Drexel Burnham Lambert. He felt members of Congress, in their pursuit of the limelight, were giving aid and comfort to the enemy by criticizing the commission and complicating the ongoing investigations that grew out of Boesky’s cooperation.

  All through the Reagan years, Dingell had said that the SEC needed more money to fulfill its mandate. But in budget debate after budget debate, Shad had been loyal to the administration’s streamlined approach, arguing that the commission’s productivity had more than kept pace with Wall Street’s explosive growth because of efficiencies achieved through the application of cost-benefit analysis. In fact, late in 1986, the SEC employed slightly fewer people than it had when Shad arrived in 1981, even though trading volume in the financial markets had grown exponentially and the number of registered stockbrokers in the country had almost doubled. In a reversal after the Boesky bomb hit, Shad revealed that he intended to seek the biggest increase ever in the SEC’s budget—a 27 percent jump that would take the agency to about $145 million annually and enable it to beef up its enforcement ranks.* Shad never suggested that his past resistance to budget increases had been a mistake, but his sudden enthusiasm for increased government spending seemed a public sign that despite his unrelenting rhetoric about the health of the nation’s markets and the essential integrity of Wall Street, Shad, too, was disturbed by the revelations of Ivan Boesky.

  Dingell pounced on this anomaly. “We are delighted to observe the SEC chairman is willing to ask for additional funds,” he said, his tone dripping with sarcasm. “I intend to see to it, whether you like it or not, that you have the resources you need.”

  All across the capital that December, there was a giddy sense among Democrats that finally, after virtually two terms of Ronald Reagan’s political magic, the spell had been broken. The Boesky case was seen as just one aspect of the Democrats’ antidote. Just five days after John Shad’s November 14 press conference at the SEC, Attorney General Edwin Meese had appeared before television cameras at the White House to announce an incredible discovery: The United States had sold weapons to the government of Iran’s Ayatollah Khomeini in an apparent effort to free American hostages held by Iranian sympathizers, and proceeds from these sales were diverted to support U.S.-backed rebels in Nicaragua. So shocking were Meese’s revelations that news of the burgeoning Iran-contra scandal quickly engulfed coverage of the continuing Boesky affair, but in some ways the two scandals complemented one another. Underpinnings of the Reagan political mandate—prosperity on Wall Street and Main Street, consistency and strength in foreign policy, efficiency in government—suddenly and simultaneously were called into question. There was a sense, manifested as glee among Democrats and dread among Republicans, that the politics of the Reagan era were coming unraveled at the seams.

  Among John Shad’s senior staff at the commission, chief economist Gregg Jarrell was committed more than anyone to the philosophy of the Reagan movement, and he was the first to see that the intellectual insurgency he had joined was no longer tenable. Jarrell was certain enough of his Chicago School ideology to be untroubled by Boesky’s exposure—a crook is a crook, Jarrell thought—but he was smart enough to see quickly that Boesky’s crimes had political as well as legal implications. Even if he had failed to recognize this immediately, the Democrats in Congress would have brought it home to him: by December of 1986, Jarrell had acquired enough of a reputation as an influential free market theorist at the SEC that Reagan’s political opponents began to single him out for attack. Soon after the Boesky announcement, Democratic Senator William Proxmire, chairman of the powerful Senate Banking Committee, was quoted in the newspaper calling Jarrell a biased economist who churned out propaganda for the free-market movement. An aide to Proxmire called Jarrell soon thereafter and demanded that he send over all of the studies he had done for the commission. Jarrell began to lose sleep. He decided that he had done what he could in government, and that he should leave before the Democrats took him down the way they had taken down so many other radical conservatives who refused to accept the terms of conventional political debate in Washington. He managed to have one last iconoclastic study released. “Stock Trading Before the Announcement of Tender Offers: Insider Trading or Market Anticipation?” was the title. While everyone else buzzed about widespread corruption on Wall Street, Jarrell concluded that press reports and legal stock purchases were responsible for much of the suspicious movement of stock prices in advance of takeover announcements.

  Jarrell was buoyed by his self-confidence and youth, but for Shad the implications of Ivan Boesky’s fall were far more troubling. As the new details of the scandal came to light late in 1986 and early in 1987, Shad often defended Wall Street rather than relishing the victory over Boesky along with Gary Lynch and his comrades
in the enforcement division. So much was happening after Shad had decided it was time to move on. Early in 1987—after Reagan had indicated he would nominate Shad to another term as SEC chairman—Shad had begun to press the White House for a change of assignment. He was anxious for a change of scenery besides, so he had put his name forward to become the next U.S. ambassador to the Netherlands. It was clear that he would win the post, but the nomination and Senate confirmation took time. Now, in what amounted to a period of professional limbo, an unprecedented scandal had erupted publicly. For Shad, one of the many difficult questions it raised was whether fraud and insider trading had grown into an epidemic on Wall Street while he chaired the SEC, or whether the scandal was a temporary problem detected and effectively expunged by the commission’s enforcement program. Did the Boesky case and the continuing investigations of Drexel and others indicate that “the system” he supervised had worked, or had it failed?

  It was the evidence Boesky provided to Shad and the SEC about Michael Milken and Drexel that seemed the most troubling. If Boesky was to be believed—and Lynch and others at the commission certainly believed him—Milken had systematically violated the securities laws to rig corporate takeovers, earn illegal trading profits, help select clients, evade taxes, manipulate stock prices, and push around some of its corporate clients. Not only had Drexel harbored Milken’s scheme, it had employed at least two other senior investment bankers, Dennis Levine and Martin Siegel, who brazenly leaked inside information about takeovers to Boesky, partly because such leaks made it easier to complete takeover deals. Yet when presented with this evidence at closed meetings on the sixth floor, Shad openly rejected the idea that Drexel’s spectacular growth during the 1980s had been founded on systemic corruption. Nor did he believe that Milken’s alleged crimes had played a major role in the junk bond financier’s success. Intellectually, objectively, Shad’s position about Drexel was defensible, even if it wasn’t widely shared inside the SEC. But some of those who listened to Shad talk about the massive Milken investigation in late 1986 and early 1987 understood that the chairman’s view of the case had a deeply personal aspect. If Shad decided that Drexel and Milken were fundamentally corrupt, then his world view and some of his closest friendships would be called into question.