I started my Wall Street career in November of 1982 which, since
the Bull Market began in August of that year, makes me a Bull
Market baby. Oh, to think that the market was around 770 that
summer. Also in 1982, an arbitrageur by the name of Ivan
Boesky decided that he didn”t exactly always have the magic
touch in selecting deals to invest in so he switched tactics, thus
earning his place in the annals of Wall Street as one of the biggest
scumbags in history.
Boesky was the son of a Detroit bar owner who had come to the
Street in 1975. Setting up shop in relative obscurity and having
attended a law school no one on the Street had ever heard of,
Boesky used his family”s money to enter the arbitrage business
when he could not find a real job on his own. He quickly built a
reputation for himself as a shrewd operator.
Boesky used to bet on takeover situations, mostly after a deal had
been announced, thereby assuring the arb of a profit if the deal
went through at the announced price. For example, Co. X
announces a takeover of Co. Y at $70 a share. Co. Y stock,
which had been $40 before the announcement, climbs to $65. An
arb may step in at that point (or as it is climbing to that level) and
place a heavy bet that the deal gets done at the announced $70 a
share, thereby assuring him a $5 profit. Now if you leverage that
bet, the percentage gain could be much greater than the simple $5
and sometimes a competing offer would enter the picture at, let”s
say, $75 or higher. All the better for the arb.
But there were other times when the announced deal would fall
through. In these cases the arb could get squeezed. Thus was the
case in May of 1982 when Gulf Oil”s announced takeover attempt
of Cities Sevice failed. Boesky lost $24 million on this deal. And
it was this loss that apparently led Ivan to build a secret network
of investment bankers and brokers, simply to improve his odds.
This network would then supply Boesky with insider information.
Two of the key figures were Martin Siegel of Kidder Peabody and
Dennis Levine of Drexel, Burnham, Lambert; both old and respected
firms.
Using inside information supplied by Siegel, Boesky made $28
million from Nestle”s acquisition of Carnation in 1984. They
were heady times for many on Wall Street. It was the time of
“Master”s of the Universe,” and much cruder labels. The big
money guys on the Street worked hard. “Lunch is for wimps,”
said Gordon Gekko in the movie “Wall Street,” a great depiction
of that era. Boesky was one who worked 21-hour days.
Hardwork, a product of the trader culture, came to replace play
as the motif of the super-rich.
It was also the time when the LBO, or leveraged buyout, took
off. LBO”s were ways to make money by taking public
companies private. Companies would float bonds to buy up a
controlling interest in the stock and then use the company”s cash
flow to finance the debt. The secret was forecasting out the
company”s cash flow, the measure of how much debt it could
support.
Dennis Levine of Drexel and Boesky became fast friends by 1986.
Boesky had opened an investment fund called the Hudson Fund.
Drexel agreed to raise over $600 million for him through a junk
offering provided that it was paid almost $24 million fees. And
later, even the notorious Charles Keating of Lincoln S&L fame
contributed $100 million to Boesky”s arbitrage partnership.
Boesky began to work some deals but he was building an empire
built on tips more than doing his homework. And he invested a
portion of his gains in ways that only enhanced his reputation.
For example, Boesky owned the Beverly Hills Hotel in L.A., site
of Michael Milken”s Predator”s Ball which spoke of the virtues of
junk bonds as dozens of politicians and academics feasted on
sumptuous dinners amid a bevy of Trump-like arm candy. [Even
Bill Bradley found himself delivering a speech to Milken”s
audience.]
But during the course of 1986, the Fed”s were growing
increasingly leery of the trading activity in some of the deals that
Boesky was investing in. He was soon indicted on a variety of
charges in an insider-trading scandal that was to stain the industry
for the rest of the decade.
The most notorious of the Boesky allegations involved an
engineering company, Fischbach, that had been subject to a
hostile raid by a Drexel client. As described in Charles Morris”
book, “Money, Greed, and Risk,” the deal went down like this:
“(Fischbach) bought back the raider”s stock, and negotiated a
standstill agreement, barring another takeover attempt unless
some new raider acquired a 10% stock position in the company.
Boesky later acquired a 10% position in Fischbach, allegedly at
the behest of Michael Milken, and made a takeover declaration,
opening the door to an eventual takeover by another Milken
client. Milken allegedly guaranteed Boesky against any losses,
which would have been illegal. Milken said he never made any
such guarantees, that he merely advised Boesky that Fischbach
was a great opportunity, but that he never made guarantees.
Boesky”s testimony went like this.”
Q: O.K. And did Milken say to you in that conversation that he
would guarantee you against loss?
A: These were not the words, never were the words.
Q: It”s the code you were talking about, the Wall Street code?
A: I never used that word either. It was an understanding.
Q: O.K. What were the words you remember Milken using?
A: “Just buy it, don”t worry about it,” something to that
effect.I”ve forgotten the exact language of the conversation.
Officials at Fischbach ended up being indicted for bid rigging. A
deal eventually went through but not at the level that Boesky had
even paid. Allegedly, Boesky had bought the stock at $50 with the
final sale being at $45 compared with current market value of $40.
Boesky admitted to numerous offenses and then turned state”s
evidence, primarily against Milken. He received a 3 + year prison
sentence and $100 million fine after admitting to the charges and
reached a plea bargain with Rudy Giuliani, U.S. attorney for the
Southern District of N.Y. Giuliani was to draw criticism because
Ivan was allowed to unload his holdings before his indictment was
officially announced, realizing profits from it before being
convicted. Others considered the sentence and fine as being too
light. But Giuliani and company were after much bigger fish,
namely Milken.
As Boesky left federal court in 1987, he proclaimed, “Greed is all
right.everybody should be a little greedy.” The man who once
paid for secret information with a suitcase full of cash was off to
the slammer.
Next week the beginning of the Michael Milken story.
Sources: Charles Morris, “Money, Greed, and Risk”
Charles Geisst, “Wall Street / A History”
Edward Chancellor, “Devil Take the Hindmost”
John Steele Gordon, “The Great Game”
Brian Trumbore
