BUSINESS ECONOMY

After the Titan fell

D’ARCY JENISH December 1 1986
BUSINESS ECONOMY

After the Titan fell

D’ARCY JENISH December 1 1986

After the Titan fell

Ivan Boesky’s Wall Street contacts were legendary, his 18-hour days frenetic and his profits from stock-market speculating breathtaking. He operated from behind a 160line telephone bank, watched his employees on television monitors and barked buy or sell orders into a microphone dangling over his desk. Boesky, 49, was Wall Street’s richest and most powerful arbitrager—a

breed of investor that speculates on corporate takeovers and restructurings. But his reign is over, and last week the Securities and Exchange Commission (SEC) was investigating at least 10 other individuals linked to Boesky.

In addition, a federal grand jury began questioning executives at Drexel Burnham Lambert Inc., an aggressive and growing New York-based invest-

ment bank which has raised billions of dollars to finance corporate takeovers in recent years. And the Senate banking committee in Washington was planning hearings on insider trading. According to congressional aides, the committee intended to look at increasing the SEC budget and perhaps drafting more detailed definitions of insider-trading abuses.

The chain of events began on Nov. 14, when the SEC revealed that Boesky was at the heart of the largest insidertrading scandal ever uncovered on Wall Street. He was fined a record $138.5 million and barred for life from trading securities in the United States. He also pleaded guilty to a criminal charge that could bring a five-year prison term.

But that was only the beginning. Boesky is rumored to have implicated top executives at a number of respected securities firms. Declared Daniel J. Good, managing director of New York’s Shearson Lehman Brothers Inc.: “This ranks among the scandals of the century.” Indeed, the SEC’s announcement, 40 minutes after the markets closed for the weekend, brought the Dow Jones industrial average tumbling down when markets reopened at the start of last week. Stocks of companies rumored to be takeover targets plummeted.

Meanwhile, Britain’s newly deregulated London Stock Exchange was jolted by a similar incident. Last month Geoffrey W. Collier, the 35year-old director of securities for Morgan Grenfell Group PLC, a widely renowned London-based merchant bank, resigned after admitting that he had purchased 50,000 shares of AE PLC, an engineering company, only 20 minutes before Hollis PLC, Grenfell’s client, announced a takeover bid. Collier netted about $29,000 in profit when he subsequently sold the shares. After he confessed to authorities, Collier threatened to expose others, and although no one else has been implicated to date, the British government last week announced that its stringent rules to investigate insider trading would take effect immediately rather than on Jan. 1 as originally planned.

Meanwhile, Canadian regulatory officials admitted last week that insidertrading violations occur in this country—although not on the same scale as in the United States. Ontario Securities Commission (OSC) chairman Stanley Beck said that the OSC has conducted six major investigations in the past decade but has only been able to secure a few minor convictions.

The OSC is currently investigating trading prior to the $2.4-billion takeover of Genstar Corp. last April by Imasco Ltd., the Montreal-based tobac-

co and retailing giant. Commission director Ermanno Pascutto said that he ordered securities firms to freeze the funds of non-North American clients who had acquired more than 1,000 Genstar shares before the takeover bid until the purchasers identified themselves. Eight months have elapsed and most of the money has not been claimed.

Regardless of what the OSC finds, it is unlikely to surpass the scandal on Wall Street that is now unfolding around Boesky. Raised in Detroit by Russian immigrant parents, Boesky moved to New York in 1966, two years after graduating from Detroit College of Law.

By 1972 he was a member of the arbitrage department in a small brokerage house.

Three years later he launched his own company with $969,500 in capital. Boesky’s company was estimated to have had $2.6 billion in available capital when his insider-trading activities were revealed two weeks ago.

Boesky was an extraordinary risk-taker and, as a result, he made spectacular profits. He is reputed to have earned $90 million on Chevron Corp.’s $18.3-billion purchase of Gulf Corp. in 1984, and $138.5 million when Texaco Inc. acquired Getty Oil Co. for $14 billion the same year. With success came power. Leading corporate executives and investment bankers frequently consulted him about takeovers. Meanwhile, Boesky was wooed by corporate raiders who coveted the huge blocks of shares he controlled. By selling those blocks, Boesky often influenced the outcome of a takeover battle—and the fate of a company.

Boesky’s downfall began in February, 1985, when he was lured into an insider trading plan by Dennis Levine, then a 32-year-old Wall Street managing director of mergers and acquisitions with Drexel Burnham Lambert Inc. Drexel pioneered the use of highrisk, high-interest junk bonds to finance takeovers. In recent years the company has underwritten $45.7 billion worth of junk bonds, half the total issued in the United States. Levine had access to confidential information about imminent takeovers, while Boesky had the financial resources to take advantage of the information.

After testing Levine’s information through several small purchases, Boesky was sufficiently impressed to enter a profit-sharing arrangement. According to the SEC, Boesky then embarked on a buying spree, basing his moves on tips from Levine, that netted him $69.3 million in unlawful profits. The scheme ended last May when the commission charged Levine with using inside information in about 54 takeovers during the previous five years to earn $17.5 million in illegal profits. He pleaded guilty to four criminal charges and began implicating others. By midJuly, three investment bankers and a lawyer who specialized in takeovers faced charges.

Boesky was initially rumored to be part of the scheme, but when the summer passed without charges, speculation on Wall Street faded. However, Levine had revealed everything, and Boesky, who had become aware of the SEC investigation in August, approached the government through his lawyers to settle the case and co-operate with the commission. In the six weeks before the announcement of his fine, Boesky’s office phone was tapped, he was wired for sound and meetings in his offices were videotaped. By last week the SEC investigation had spread to at least 10 other individuals who had dealt with Boesky. The commission also issued subpoenas to obtain information about trading in 12 securities in which Boesky was involved.

Following his settlement with the SEC, Boesky told his employees, “My life will be forever changed, but I hope that something positive will come out of this situation.” His downfall created intense speculation about how he would pay the enormous $138.5-million fine. Estimates of Boesky’s personal worth go as high as $277 million. As well, he unloaded, for a large profit, $609.4 million worth of shares managed by one of his investment funds just days before his penalty was announced. “It’s the irony of all ironies,” snapped one Wall Street executive. “The biggest inside information is that Boesky is being put out of business— and he gets to trade on it first.”

D’ARCY JENISH with correspondents’ reports