The Fall of a Wall Street Superstar

By George Russell

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, had 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 has 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 $2.26 billion merger. Two weeks afterward Boesky sold his holdings 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 about 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 of 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 that 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 ensue. 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.

With reporting by Gisela Bolte/Washington and Frederick Ungeheuer/New York