Boesky’s Fall in Insider Case Chills Takeover Speculation
The reverberations from Ivan F. Boesky’s fall echoed along Wall Street on Monday as stocks subject to takeover rumors fell sharply on the New York Stock Exchange and participants in the business of takeover speculation pondered the future of their trade.
Particularly hard hit were stocks on which trading had been based almost entirely on takeover rumor. Among these, Lockheed, which had risen $10.50 a share on Thursday and Friday, gave up $3 to close at $52.25; E. F. Hutton, which had been buoyed by speculation that another company would supersede American Express as a bidder for the brokerage, fell $2.125 to $42.25 on Monday.
On Friday, the Securities and Exchange Commission stunned the investment world by disclosing that it had charged Boesky, the nation’s leading speculator in takeover stocks, with having made $50 million in illegal profits by using tips about impending deals from Dennis B. Levine, a former investment banker who pleaded guilty to insider trading charges earlier this year.
Boesky settled the case by agreeing to pay $100 million, including disgorgement of the illegal profits and a penalty of $50 million, by submitting to a permanent bar against conducting a securities business in the United States except as an individual and by pleading guilty to a federal felony charge carrying a prison term of up to five years.
Sources said Monday that the felony charge, which government prosecutors have so far refused to specify in public, will be securities fraud.
As previously disclosed, the SEC issued a number of subpoenas on Friday to Wall Street figures, apparently following leads provided by Boesky.
Some of the subpoenas went to the investment banking firm of Drexel Burnham Lambert, an aggressive company that has financed many recent major mergers with risky “junk bonds.” Boesky was a client of Drexel’s and a huge speculator in many of its deals; the relationship between Levine and Boesky also began about the time Levine joined Drexel in 1985.
Drexel executives were not available for comment Monday. Through a spokesman, the firm released a statement acknowledging that it has been “asked to provide information to regulatory authorities” in connection with the case and has pledged to “cooperate fully.”
“As we have said repeatedly,” the statement continued, “we regard the integrity of the marketplace to be of paramount importance and will not condone or tolerate any activities which violate the integrity of the market.”
Attorneys and securities professionals familiar with elements of the case suggested that the SEC hopes now to focus on the use of inside information by investment firms to gain competitive edges over their rivals. Among the practices, one professional said, is the use of such information to bid up the stock price of a takeover target to destroy a deal being managed by a competitor with the hope of giving a firm’s own corporate client an opening to advance a counterbid.
“One of the next big areas is the use of information by firms moving the market against their competitors,” one source said.
Boesky was by far the biggest and wealthiest player in a trading technique known as “risk arbitrage,” in which traders buy stocks subject to takeover deals and try to turn a profit from those stocks’ rise in price between the time a deal is announced and its closing. The risk that the “arbs” assume by purchasing the stocks from more conservative investors is that a deal will fall through, forcing the stock’s price down.
More Speculation
Pure risk arbitrage requires a trader to wait until a deal has been publicly announced. Over the last 10 years, however, takeover speculation has grown more intense in the market, and Boesky and other arbs have committed more capital to trading, a pair of symbiotic developments.
Boesky began investing more in stocks in which takeover interest was only speculative; with his capital of more than $1 billion and the appearance of other investors in the game, the interest of arbs in a stock was often enough to attract takeover interest, rather than the other way around. As the Boesky case demonstrates, investment bankers interested in bringing about deals found they had a shared interest with arbs who profited only when deals took place. Information began to pass freely throughout the circle.
Several arbitrageurs said Monday that the Boesky case might inspire arbs to shun such speculative trading, or “pre-arbitrage,” to return to the more mathematical exercise of pure risk arbitrage. Any such large-scale change might reduce takeover speculation generally in the market.
Some traders argued that the case against Boesky will encourage investors to return to the stock market, on the reasoning that a major illegal player has been removed. “If Wall Street was thinking clearly, it would take up a collection for the SEC to add to their staff,” one arbitrageur said. Insider trading “is the stuff of which confidence in the market is shaken,” he added.
Sources familiar with SEC investigations said the agency had been assembling circumstantial evidence for some time that Boesky was trading on inside information. But Boesky was such a major player, with access to such powerful legal counsel, that investigators were loath to make a case without a smoking gun. In many recent cases circumstantial evidence has not been enough to win insider trading convictions.
“(Boesky’s) trading records were devastating,” one source said. “You didn’t need to be a Dick Tracy to figure this one out, but you needed one last piece to make the case.” Levine provided the missing piece, the source said, by testifying after his own arrest that he and Boesky had an information-sharing arrangement.
The Washington Post, quoting lawyers and Wall Street sources close to the case, reported that prominent Wall Street investment firms have been told that Boesky, in a bid to obtain lenient treatment from prosecutors, secretly tape-recorded conversations with his employees and business contacts recently to provide federal investigators with evidence.
Boesky’s attorneys and SEC officials refused to confirm or deny reports of the secret taping.
SEC Officials ‘Ecstatic’
Meanwhile, SEC officials were described by one source as “ecstatic” at having made a case against the biggest known takeover speculator on Wall Street.
At the agency, John H. Sturc, the associate director of enforcement who helped manage the case, said: “It’s a mixed feeling. On the one hand, we felt being able to put together a case of this nature was an achievement. But we also wanted to ensure that it was kept in proper perspective and that there isn’t an overreaction in some ways.”
Sources familiar with the case said SEC officials took unusual pains to keep the settlement talks secret. Although Boesky’s entanglement with Levine had been rumored for months, there were no leaks before Friday’s announcement.
Within the agency, sources said, few lawyers knew any more than that a special team was assembling a case against a major figure. “A lot of people thought it was some political leader,” said one lawyer close to the SEC.
