BULL STREET - The art of the Con

Boesky and Levine, The Terrible Twosome

I knew Boesky, but not well. He literally sat right next to me at Edward and Hanley, a medium sized brokerage firm that had overreached itself in the late 1970s, as will happen in that industry more often than not. I had recently moved from Chicago where I had been at the top of the heap in retail stockbrokerage sales, to New York where a friendly face was something of an oxymoron. Being the king of the hill in Chicago was a walk in the park, but in New York, everyone seemed to be Godzilla. However, it was becoming apparent to me that the retail end of the brokerage business was soon going to be taking a back seat to the newly bourgeoning institutional side of the business. Edwards and Hanley was the place that I had designated as the place to learn this new craft.

Anyway, it was there that Boesky literally sat beside me in the office, however, we were both aloof and other than a few passing cordialities of the day, our conversations were very limited and although he tried to explain what he did on numerous occasions, I was probably just not smart enough to comprehend this highly technical new world of arbitrage. I think that my problem was the difference between what he seemed to be doing and what arbitrage really was. My definition of arbitrage goes something like this, you purchase and sell two reasonably identical negotiable instruments simultaneously. When you do this, you believe for whatever reasons, that one side of these similar securities will substantially outperform the other. As an example of this would be the simultaneous buying and selling of the common stock and the convertible preferred stock in a publicly traded company. If the stock goes up, the preferred will rise as well and even if it doesn’t you can convert the preferred to common and deliver that in against your sale being none the worse for the ware when the books were tallied up.

Should the stock go down, the preferred will not go down as much because its dividend will protect you from any catastrophe on the downside, provided the catastrophe doesn’t result in bankruptcy. This is what arbitrage meant to me, but that just didn’t seem to be what the man was doing. Incidentally, Carl Ichan, who I knew very well used this strategy to a fair-the-well in growing his business. The interesting difference between the two men was that Icahn was bright, paranoid and relied on own instincts to make money and as you know he succeeded. Boesky, was fairly new to the game and had graduated Detroit College of Law with a degree. Boesky never really practiced. He was also bright and paranoid but was totally dependent upon his connections to make it.

Boesky had a good friend by the name of Dennis Levine. Dennis had done pretty well for himself and was at this point in time, the Managing Director of Drexel Burnham Lambert, in 1986, maybe the most connected brokerage firm on Wall Street. By this time I had made a small mark on Wall Street and was the president of a respectable brokerage. My firm catered to foreign banks that early on were not members of the New York Stock Exchange and had to use others for access. We provided that link.

One of the firms that was our client was Europartners Securities, a consortium of European banks that had found that there was some safety in numbers. Among the partners were Commerce Bank in Germany, Nordic Bank in Norway, Bank Liu in Switzerland, Credit Lyonnais in France and Banco de Roma in Italy. The head trader at Europartners was good friend and he called one day and asked what I though was a strange question, “Did I notice anything out of the ordinary with any of the orders we were getting from him?” I told him that I hadn’t seen anything unusual. He then said, one of the banks, the one in Switzerland couldn’t make a losing trade for the life of them. Everything they touched seemed to have gone up, would I look into the history of what they had done by going through my copies of the tickets. (trades)

Well, I didn’t have a chance to look. Government authorities soon had arrested both Boesky and Levine. Apparently the Swiss Bank that held Levine’s account was my client. Moreover, he was getting the tips on what to do based on the inside information he was getting from the corporate finance department of his own firm. Moreover, in reality, Levine was the ultimate senior official actually running that department as well as others in the firm. In addition, Levine had worked out a sweet little deal with Boesky that he would sell him this inside information for a price.

The plan eventually caved in as they all do and both conspirators confessed when grilled by the U.S. Attorney (Giuliani) and named their other co-conspirators in exchange for a lighter sentence. They brought down the house. Never had an act like this played Wall Street. Moreover, this was the first time I had seen an instance of ratting out partners on this level. Boesky was arrested secretly and quickly had agreed with government officials to tape his criminal telephone conversations with others which more than numerous. The government also gave Boesky time to unravel some of his more complex transactions before they announced his cooperation.

Boesky’s indictment caused a revision of the way things done on the “Street” and many of the “deal” stocks collapsed. Some estimated that losses suffered by Arbitrageurs surpassed $1 billion because of the Levine - Boesky disaster. One unhappy trader that I knew at the time and who lived in New Jersey, became so enraged over Boesky’s singing that he wrapped a shotgun in some newspaper, put it into his car and headed for Boesky’s office to save the government the expense of feeding him in jail. He was caught before he was able to finish the job. People on the “Street” were not happy about the whole matter and many at the top had been tarnished by it. Levine though had really brought down the house of cards when strangely the Caracas office of Merrill Lynch informed Swiss authorities as to what Levine was doing.

Among the higher ups that were implicated in this mess were Martin Siegal from Kidder Peabody, Michael Milken at Drexal, and Robert Freeman of Goldman Sachs. Siegel got four years in the slammer and paid $4 million, Drexel was fined $630 million and closed its doors after looking at their $175 million legal bill in addition to what they already owed. Milken got 10 years in jail and was fined $1 billion, most of which was so that his brother would not have to serve time. Boesky was fined $100 million and spent time at Kampoc Federal Prison in California, his wealthy wife left him over this and other matters. Robert Freeman confessed to mail fraud, was sentenced to 4 months and was fined $1 million. This case is probably the most flagrant example of what can happen when information is stolen for a price. Many economists blame the recession that hit the country in 1990 on folks involved in this smelly deal.

 

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