TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/86/86cappeo.3

Text File | 1992-09-25 | 11.2 KB | 213 lines

                ǐ                                                            November 24, 1986

NATION

The Fall of a Wall Street Superstar


Ivan Boesky pays $100 million to settle the biggest
insider-trader case ever


New York City's stock markets had closed for the week when the
stunning announcement came. Even so, the bombshell sent the
U.S. financial world reeling. In Washington, Securities and
Exchange Commission Chairman John Shad announced that
Manhattan-based Ivan Boesky, one of Wall Street's richest and
most frenetically active individual speculators, head been
snared in the biggest insider- trading case ever. In a consent
decree Boesky, 49, had agreed to pay $100 million, which Shad
described as "by far the largest" settlement obtained by the SEC
for insider-trading activity. After a 16 1/2- month transition
period in which Boesky will gradually dispose of his holdings,
he will be barred for life from stock trading in the U.S. The
tall, impeccably tailored Wall Street superstar had agreed to
plead guilty to a single, unspecified criminal charge. Said
Boesky in a contrite statement:  "My life will be forever
changed, but I hope that something positive will ultimately come
out of this situation."

Something momentous already had. At a single stroke the SEC
had written finis to one of Wall Street's most spectacular and
controversial careers, built up in little more than a decade.
The federal agency had also taken a mammoth stride forward in
the insider-trading investigation that first exploded last May,
when the SEC filed a civil complaint against Dennis Levine, a
former managing director of the Drexel Burnham Lambert
investment banking firm, and charged him with illegal trading
in 54 stocks. Levine subsequently pleaded guilty to four
criminal charges and gave up $10.6 million in illegal profits,
the biggest insider-trading penalty until now. Ever since,
Levine has been singing to the SEC; his testimony led directly
to last week's judgment against Boesky. Now Boesky is
cooperating with the regulators. There is no telling what
further shocks may hit the stock market as a result. Said one
Manhattan banker:  "There'll be people named from almost every
firm on Wall Street before this is over--including mine."

The SEC's huge judgment could have a further chilling effect on
the speculation that has swept the high-tech, high-volume stock
market of the '80s. Boesky (pronounced Boe-ski), the son of a
Russian immigrant, often played a central role in the
dealmaking. His career was based on the high-rolling game known
as risk arbitrage--the opportunistic buying and selling of
stocks in companies that appear on the verge of being taken over
by other firms. The prices of those securities generally surge,
giving arbitragers the chance to make swift profits.

Boesky always insisted that he bought stocks only after formal
takeover bids were announced. But the SEC has shown that he
and others often obtained advance tips from investment bankers
about what deals were in the works and then used the information
to make illegal trades. Says Investor William Simon, who was
Treasury Secretary under Richard Nixon:  "If anybody ever had
any doubts that the authorities were serious about the issue,
this ought to put those doubts to rest."

Under the SEC's consent judgment, Boesky agreed to relinquish
$50 million in illegal profits and pay an equal amount in civil
indemnities. That is an enormous total by SEC standards:  in
the twelve months that ended in September the agency had
obtained fines and returns of illegal profits totaling only
$41.9 million. But the penalties will not bring financial ruin
to a man whose reputation on Wall Street was gained by staking
tens of millions of dollars on a single stock-market plunge.
His worth has been estimated at $200 million, and could easily
be much more.

Nor will Boesky abandon the stock-trading world right away:  he
will continue until April 1988 to exercise control, under the
gaze of a court-appointed supervisor, over a diverse business
empire that holds about $2 billion worth of securities. The
transition period is intended to guarantee the "orderly and
smooth transfer of control," meaning, in effect, the return of
money to Boesky's many investors, who only last March anted up
$900 million to participate in his speculations. In his
statement, Boesky said he was "grateful" to the SEC for allowing
him to insulate from harm others involved in his business
affairs.

The commission's charges against Boesky, which the investor
neither confirmed nor denied in accepting last week's judgment,
are detailed in some areas and fuzzy in others. In essence the
agency says that from February 1985 to February 1986, Boesky
profited as part of a far-flung insider scheme that involved
Investment Banker Levine and at least three others. Named in
the SEC complaint are Robert Wilkis, formerly at Lazard Freres
and E.F. Hutton; Ira Sokolow, once with Lehman Bros. Kuhn Loeb
and then with Shearson/American Express; and David Brown,
formerly of Goldman, Sachs. The trio have given up a total of
about $3.5 million in illegal profits and fines. Two weeks ago
Sokolow was sentenced to a year and a day in prison on criminal
insider-trading charges; the other three have pleaded guilty to
similar charges and await sentencing.

According to the SEC, Levine, whose job was to work on mergers
and acquisitions, passed on insider information about the deals
to Boesky. In return Boesky at one point allegedly agreed to
pay Levine 5% of any profits made by his firms in trading on
information from Levine that led Boesky to make an initial stock
purchase. Boesky is alleged to have offered Levine a 1%
commission when his information affected trade in stocks that
the speculator already possessed. Around April of this year, the
Government charged, Boesky offered Levine a lump-sum $2.4
million payment for his illegal tipster services. None of that
money had been paid by May 12, when the SEC closed in on Levine
for his misdoings.

Specifically, the SEC said that in April and May of 1985 Levine
passed on information from Investment Banker Sokolow about the
merger of the food giant Nabisco Brands and R.J. Reynolds, the
tobacco firm. From May 22 to May 29, Boesky bought about 377,000
shares of Nabisco stock, and he sold out on May 30, after the
company announced its merger talks. Boesky's alleged profit:
about $4 million. Also that April, the agency said Levine
tipped off Boesky with information from Wilkis about the
prospective purchase of Houston Natural Gas, a pipeline concern,
by another natural-gas carrier, Omaha's InterNorth. On May 1,
1985, Boesky bought 301,800 shares of the Houston company. A day
later the two firms announced a $2.25 billion merger. Two weeks
afterward Boesky sold his holding for a profit of about $4.1
million.

Boesky earned $975,000 on the February 1986 sale of about
95,300 shares in FMC, a Chicago-based machinery manufacturer.
In early 1986, the SEC charged, Investment Banker Brown passed
on to Levine information abut an impending move by FMC to
recapitalize itself. Levine told Boesky, who bought his shares
days before the plan was made public. According to the SEC,
Boesky also traded on tips from Levine in the securities of
American Natural Resources, Boise Cascade, General Foods and
Union Carbide. The agency complaint alleged that the profit
from all of Boesky's trades amounted to "at least $50 million."

Boesky's uncanny knowledge of impending merger deals had long
formed part of his mystique as a stock-trading genius and had
often fueled speculation that he made use of illegal tips. He
had come very far very fast, amid a fanfare of often
self-generated publicity.

Boesky grew up in Detroit, where his parents eventually owned
a chain of restaurants. He likes to tell the story that at 13
he bought a panel truck and drove it without a license to the
city's parks, where he sold ice cream. He graduated from the
Detroit College of Law in 1964, and married Seema Silberstein,
the daughter of a real estate developer. Boesky moved to
Manhattan in 1966, and in 1972 joined the arbitrage department
at the brokerage firm of Edwards & Hanly. During Boesky's time
there the SEC fined him $10,000 for failing to make timely
delivery of securities that he had sold in a speculative
transaction.

In 1975 Boesky launched his solo act with $700,000 in capital.
He quickly became known as a startling risk taker, often
plunking down four or five times as much on deals as his
confreres. By the end of the decade the estimated worth f his
firm had grown to more than $90 million. During the merger boom
of the '80s he lost and won with apparently equal abandon--but
usually seemed to win. In 1984 he was said to have hauled in
about $50 million when Texaco bought Getty, and an additional
$65 million last year when Chevron purchased Gulf. But he was
reputed to have dropped $40 million in less than a week in
December 1984 when Phillips Petroleum fended off Corporate
Raider T. Boone Pickens.

Above all Boesky made research about takeovers his obsession.
From his lavishly appointed Midtown Manhattan offices the lean
marauder directed batteries of lawyers and financial detectives
to sniff out possible outcomes and hurdles in takeover deals.
Usually standing rather than sitting at his desk, he worked
18-hour days behind a 300- line telephone bank. He cultivated
the image of a man who lived and breathed only for stock deals,
sleeping little, hardly seeming to eat, and apparently
subsisting largely on gallons of black coffee.

Even so, in the few hours a day that Boesky spent at home, he
lived in baronial style. He and his wife maintain a costly
apartment overlooking Manhattan's East River but spend much of
their time on a 200-acre estate in suburban Westchester County,
where guards patrol a laser-controlled entrance gate to the
property. Inside the Georgian- style house, paintings by Monet
and Renoir adorn the walls, and valuable works dot a nearby
sculpture garden. Recently Boesky applied to local town
planners for permission to add a dome to the residence, to give
it, said his architect, a more "Jeffersonian look."

Boesky obviously was sensitive to charges that his was
essentially an opportunistic and unproductive occupation. Last
year he wrote a book on the subject, Merger Mania, and subtitled
it Arbitrage:  Wall Street's Best Kept Moneymaking Secret. In
the book Boesky loftily declared that "there are no easy ways
to make money in the securities market...there are no esoteric
tricks that enable arbitragers to outwit the system."

Now everyone knows better. Last week Boesky said, "If my
mistakes launch a process of re-examination of the rules and
practices of our financial marketplace, then perhaps some good
will result."  It was premature to say what further revelations
and reforms might ensure. Nonetheless, asserted former Treasury
Secretary Simon, "this is a landmark case. This is going to
change the arbitrage business dramatically. People are going
to behave with much more prudence." If not, they have a dramatic
example of what can follow.

--By George Russell.  Reported by Gisela Bolte/Washington and
Frederick Ungeheuer/New York