The Fall of an ‘Inside’ Trader : Ivan Boesky: Prominence Led to Scrutiny, Charges

For most of his career, Ivan F. Boesky has basked in an aura of pre-eminence. For more than a decade he has been foremost among the aggressive speculators whose stock trades have fueled the merger craze afflicting corporate America.

It was his unbridled speculation that made traders such as himself a force for corporate raiders and company managements to reckon with. He was the richest and most successful takeover speculator of all and seemed the most rigorously scholastic researcher.

Today, his career can still be described in superlatives, but they are negative ones.

On Friday the Securities and Exchange Commission labeled Boesky, 49, history’s biggest illegal insider trader. The SEC said the key to Boesky’s profits on at least seven major takeovers since March, 1985, was not his own brilliant analysis but inside tips from Dennis B. Levine, the former investment banker at Drexel Burnham Lambert who pleaded guilty this summer to making $12 million through insider trading. In all, Boesky made $50 million from Levine’s tips, the SEC said.

The commission extracted a record-setting agreement under which the trader will pay $100 million, including the $50 million in illegal profits, will plead guilty to a federal felony count and will submit to a permanent prohibition from participating in the U.S. securities business, except as a private investor using his own money.

That last item may be the biggest blow of all, for Boesky has built his own fortune atop the shoulders of other investors’ stakes. He incorporated private firms and contributed to them his fabled talent for spotting takeover candidates. The investors contributed the capital. The result was a personal fortune that some have estimated to be worth as much as $200 million.

Whether he has enough left after paying his penalties to remain an important individual player in the stock market is hard to gauge. Certainly his information-gathering techniques will remain under close scrutiny. Some investment professionals believe that he may shift his operations to London, where he has a growing investment interest.

Boesky’s holdings include controlling stakes in a number of public corporations as well as private partnerships he founded as investment vehicles. One holding is a substantial stake in the Beverly Hills Hotel, which was recently put up for sale.

Boesky’s profession, known as risk-arbitrage, has grown in controversy as it has played an increasing role in the corporate takeover wave of the 1970s and 1980s.

Assume Risk

After takeovers are announced, small shareholders or conservative investors often wish to sell their stock for fear that the deal might fall through, sending their stock’s price lower. So arbs step in and assume that risk, hoping to benefit if the deal goes through.

But corporate management has grown to mistrust the arbs, reasoning that their only interest is to see a deal consummated, not to participate in a company’s long-term future. In time, the arbs’ interest in a stock came to signify that a company was destined to be taken over.

Arbs like Boesky further irritated managements and pleased Wall Street deal-makers by buying the stock of likely takeover candidates in the absence of any announcement, effectively sending a signal that they would welcome and support a takeover bid. Among the companies in which Boesky played a controversial role were CBS and Phillips Petroleum.

To this day the Boesky mystique provokes envy and animosity among those who were his competitors or students. “He’s a common criminal,” one arbitrageur said Saturday with satisfaction. “This is a development that’s just without precedent in my business. I went out and bought six copies of the newspaper this morning to send to my kids.”

Imperial Countenance

In person Boesky gives off an imperial air derived from more than his habit of referring to himself with the royal “we.” Dressed in his customary dark three-piece suit, his neck cinched in a high collar, the skin of his face drawn taut beneath close-cropped silvery hair, he resembles old pictures of Woodrow Wilson.

“I think we’ve made a strong impression” on the stock market, he said in a 1984 interview with The Times, sitting in a high-winged chair in an upstairs room at the Harvard Club. (He was not an alumnus, but a major contributor.) “We tried to demonstrate that securities arbitrage was an enterprise all to itself. It was not really known as an investment technique.”

Boesky glorified the mystique of tireless work. He himself needed only a few hours of sleep a night. “We get up earlier and tend to go to bed later at night,” he said. “Like all disciplines, when you apply a great deal of energy and work effort and careful judgment, then you have a greater chance of success.”

Boesky placed a lot of store in his punctilious air and beneficent righteousness. He was a trustee of 10 philanthropic organizations, including the Albert Einstein College of Medicine in New York and the United Jewish Appeal, whose Wall Street division named him Man of the Year in 1984. His name adorns a building at New York’s Jewish Theological Seminary.

Author of ‘Merger Mania’

Last year he brought out a book about his business. Entitled “Merger Mania,” it disappointed anyone who expected to find inside dirt about the famous takeovers of the previous years. Instead, it was a technical treatise drier than a textbook.

Many of today’s successful arbitrageurs are alumni of his firms, where he worked employees sternly and drilled them in what appeared to be immutable principles of exacting research and profound analysis.

“I have a pretty successful firm of my own now,” one of his former traders once said. “But in a brief span of working in that environment, I came to feeling that I knew nothing.”

Over the years, SEC investigators regularly called him in for testimony about his sources after he had taken huge positions in deals. The SEC lawyers had no illusions about their chances of extracting a useful admission. “I learned you shouldn’t expect him to volunteer information he knows you want,” one said. “You should be prepared to walk away somewhat frustrated.”

Part of Boesky’s success derived from his skill at squeezing every ounce of value from the dollars he put to work. Under federal rules, most investors are prohibited from borrowing more than 50% of the value of any securities they put up as collateral. Firms that are members of the New York Stock Exchange, however, can borrow up to 85%; so Boesky became a member.

Furthermore, stock “specialists,” or firms that agree to help maintain a balance between the supply and demand in a stock by buying and selling it through their own accounts, can theoretically borrow up to 100%. Specialists get a further break in computations of their capital, a figure that establishes the limit of their total borrowings against their securities holdings.

The value of this added “leverage” was not lost on Boesky. From 1976 through 1978 his firm registered as a specialist on the Philadelphia Stock Exchange in 23 stocks, including Carrier Corp., Reliance Electric and Book of the Month Club, a virtual social register of takeover stocks of that period.

Headed Arbitrage Desk

Ten years ago, nobody on Wall Street could have imagined that Ivan Boesky would so preoccupy the investment community. Born in Detroit in 1937 to the owner of a chain of small restaurants, he attended three Michigan colleges before accumulating enough credits to enter Detroit College of Law. After brief stints with an accounting firm and a brokerage, he ended up in 1974 at Edwards & Hanly, a New York brokerage that would soon go under, as head of its arbitrage desk.

At Edwards, Boesky maintained a peripheral role, except for a moment in 1974 when he was fined $10,000 by the SEC for failing to deliver on time the securities he owed in a sale, an offense that is often a signal of overaggressive trading. After the firm failed in 1975, Boesky took $700,000 in seed money from the family of his wife, Seema, and in a portion of his old employer’s quarters opened Boesky & Co.

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After a few successful deals and a 1977 Fortune magazine article illustrated with a photograph of Boesky at one end of a telephone cord stretching across two pages, he had built a roster of 60 wealthy clients. Among the limited partners in his firm were Mortimer B. Zuckerman, the Boston real-estate magnate who later purchased the Atlantic Monthly and U.S. News & World Report, and Kaufman & Broad Chairman Eli Broad.

As the merger wave of the 1970s and 1980s gathered steam, Boesky became an even more aggressive player. The patience of waiting for takeovers to be announced gave way and he began buying shares of companies that were only anticipated takeover targets. Boesky traded with such apparent prescience that rivals and corporate executives assumed he was receiving inside information. It was a charge he rejected crisply.

“Contrary to a lot of surmise,” he told The Times in 1984, “the information we address ourselves to involves 8Ks and 10Ks (publicly filed corporate reports)--all sorts of available data.”

Asked about his contacts with investment bankers, who were direct participants in takeover deals, he flashed a cold smile. “I suppose that if one lives long enough in the business community, one ought to have one or two friends . . . . “

Yet there was evidence Boesky was becoming as much an instigator of deals as a passive investor. In an epic 1984 takeover battle involving Phillips Petroleum, Carl Icahn, the corporate raider and a key suitor of Phillips, testified that Boesky had kept in close touch with him from his neighboring suburban estate in Westchester County, N.Y. Holding a stock position that could be rendered profitable only by a takeover, Boesky urged Icahn on and later sold the raider some of his stock.

CBS Stock Deal Told

Boesky played a similarly provocative role in the speculation around CBS stock in 1985. After Ted Turner announced his takeover bid, Boesky bought heavily into the network, accumulating an 8.7% stake within two weeks of Turner’s announcement and disclosing blandly that he intended to remain “supportive of management.” Horrified CBS executives charged in court that Boesky had set out to destabilize the stock in the hope of attracting more bidders, driving the price up further.

CBS disclosed that Boesky had unsuccessfully approached the company with an offer to sell back his stock for a profit of $24.7 million. The network further charged that Boesky had accumulated his stock illegally. Boesky, CBS said, had offered to lend his CBS shares to stockbrokers in return for cash equal to 100% of their value, a violation of federal limitations and a practice that gave Boesky more capital to buy more CBS stock and thus increase the swirl of speculation about the company’s future.

To persuade the brokers to overlook the regulations, CBS charged, he offered to pay them interest rates as high as 11.75% at a time when the market rate on margin borrowings was only 8.75%.

Although he denied the charges, they had their effect. Three weeks later, Boesky agreed to limit his stake to 4.3% and to stay out of any CBS takeover raid for two years. In return, the network dropped its suit.