‘Inside’ Trader to Pay Penalty of $100 Million
In one of the biggest securities fraud cases in history, federal authorities Friday charged Wall Street investor Ivan F. Boesky, one of the nation’s most successful and controversial stock traders, with having illegally made $50 million in profits from insider trading.
To settle the charges, Boesky, 49, agreed to pay a record $100 million in penalties, including the $50 million in profits and a fine of $50 million, and agreed to plead guilty to an unspecified federal felony charge carrying a possible jail term of up to five years.
The Securities and Exchange Commission permanently barred Boesky from involvement in the securities business except as a private investor. He will be forced to withdraw from all the securities firms and partnerships with which he is associated, including an investment fund of nearly $1 billion he raised over the last year from wealthy individuals hoping to profit from his legendary trading skill.
The settlement is by far the largest in any insider trading case. SEC sources said it outstrips the agency’s recovery from all insider settlements in 1985 taken together, a $30-million total that itself was a record for any year.
Federal law prohibits anyone from trading stock on the basis of material information not available to the public. Among those charged with violating the rule over the last year have been corporate executives, investment bankers and even a Wall Street Journal reporter.
The Boesky case is the climax so far of an insider trading investigation focusing on the activities of Dennis B. Levine, a respected New York investment banker who was charged on May 12 with having made $12 million in illegal insider trading profits over a period of five years. According to SEC documents made public Friday, Levine was Boesky’s source for the inside information he is charged with misusing.
According to a complicated and carefully negotiated arrangement the two men had reached, Boesky owed Levine $2.4 million for his information. But Levine was arrested before the payment was made. SEC sources say they are certain that no money actually changed hands. Levine has since lost his job, pleaded guilty to criminal charges and settled civil charges in the case. He is due to be sentenced shortly.
SEC sources say the investigation is continuing and that subpoenas were issued in connection with the case to a number of Wall Street figures shortly before the announcement of Boesky’s settlement was made. Boesky has agreed to cooperate with the investigation.
Although Boesky, in his formal settlement, agreed to the SEC penalties without admitting or denying the charges, in a prepared statement he appeared to acknowledge the illegal trading.
“I deeply regret my past mistakes and know that I alone must bear the consequences of those actions,” he said. “My life will be forever changed, but I hope that something positive will ultimately come out of this situation. . . . If my mistakes launch a process of reexamination of the rules and practices of our financial marketplace, then perhaps some good will result.”
Worth Up to $200 Million
Although Boesky’s net worth is not known, it has been estimated at as much as $200 million. Much of that, however, represents his controlling interests in public corporations and private partnerships.
Under the terms of the settlement, the entire penalty is to be paid out of Boesky’s personal funds. The stipulation is designed to prevent public shareholders and Boesky’s partners from being harmed.
“All of this came from his own pocket,” said Boesky’s attorney, Harvey Pitt, a former SEC general counsel, “and there ain’t a lot left after that.”
Boesky resigned, effective immediately, from the boards of two public corporations he controls, Northview Corp. of San Diego and Cambrian & General Securities.
Under the terms of the settlement, the SEC order permanently barring him from association with securities firms will be deferred until no later than April 1, 1988. This will allow him to withdraw from the firms without harming their resources or provoking their financial default. In the meantime, his activities will be supervised by a court-appointed “compliance agent,” Boston attorney Gerald F. Rath.
Trading to Be Monitored
Nothing will prevent Boesky from engaging meanwhile in the aggressive trading that was his hallmark, Pitt said, but his decisions will be carefully monitored and will probably be aimed at winding down his firms’ businesses. “This is not quite a liquidation,” Pitt said, “but it is certainly not business as usual in any sense.”
Boesky can apply to the SEC in the future for reinstatement in the securities business, but securities professionals do not expect that to happen for many years, if ever.
Among Boesky’s holdings is an interest in the renowned Beverly Hills Hotel, passed on to Boesky’s wife, Seema, by her father, the late Ben Silberstein. Although the hotel is up for sale, Pitt said that transaction is the result of family disagreements and tax considerations, rather than Friday’s settlement.
Career May Be Ended
The settlement may well end the career of a man who for more than a decade has been one of Wall Street’s most controversial figures. Boesky has been the investment world’s preeminent “risk-arbitrageur,” a term that describes an investor who trades in securities that are the subject of takeover speculation and announcements.
The “arb’s” goal is to make a profit from short-term changes in the prices of those securities. It is a technique that can lead to tremendous profits, and equally daunting losses in cases in which expected takeovers fall through. Clearly, access to inside information about impending but nonpublic deals is extremely valuable.
As the best-financed and most aggressive arbitrageur in the market, Boesky’s access to inside information has often been the subject of conjecture. The SEC has called him in for questioning in connection with many deals over the years but, until Friday, never charged him with wrongdoing. Boesky’s entanglement in the Levine circle was the focus of further rumors after Levine’s arrest.
The arbitrageur, who began his career with a $700,000 stake given to him by his father-in-law, always insisted that his investment judgments were based on painstaking research among publicly available documents. In his book “Merger Mania,” a technical primer of arbitrage published last year, Boesky wrote of his profession: “Undue profits are not made; there are no esoteric tricks that enable arbitrageurs to outwit the system.”
According to SEC documents, Levine “began to cultivate a relationship” with Boesky in February, 1985. At the time, Levine was a mergers-and-acquisitions specialist at the investment banking firm of Drexel Burnham Lambert and Boesky was a Drexel client and the best-known speculator in takeover stocks. Over time, the two men reportedly agreed that Levine would receive 5% of Boesky’s profits from any trade in which Levine’s information persuaded Boesky to buy a stock and 1% of the profits in any case where Levine’s tips persuaded Boesky to hold a stock he had already bought.
Among the deals on which Levine funneled information to Boesky, the SEC said, was the 1985 takeover of Nabisco Brands by R.J. Reynolds, in which Boesky purchased 377,000 Nabisco shares for his investment firms and made a $4-million profit; the 1985 acquisition of Houston Natural Gas by InterNorth, in which Boesky’s firms bought 301,800 Houston National Gas shares and later sold them for a $4.1-million profit; and the recapitalization of FMC Corp., in which Boesky’s stake of 95,300 shares yielded $975,000.
In each of those cases, Levine’s information came from other tipsters who themselves have been charged by the SEC and indicted by federal prosecutors. The SEC said there is no evidence that Boesky knew their identity or that they knew of Levine’s relationship with the investor.
The SEC cited three other deals in which Boesky made money by holding stakes he had already acquired. These were American Natural Resources (subject of a takeover bid from Coastal Corp.), General Foods (takeover by Philip Morris) and Union Carbide (takeover bid from GAF Corp.).
In one other case cited by the SEC, Boesky lost money on the stock of Boise Cascade Corp. The loss was deducted from Levine’s “account.”
Sources close to the case say Levine may have tipped Boesky to scores of other deals. “It’s fair to say those seven cases are cited as examples,” one source said.