Scandal Causes Dow to Plummet : 43-Point Fall Laid to Probe of Insider Trading

Worries over the insider-trading investigation centering on speculator Ivan F. Boesky sent a new chill through the stock market Tuesday and pushed the Dow Jones industrial average into a 43.31-point plunge, its fourth-largest one-day decline.

As the trading floor was swept by rumors that more Wall Street figures would soon be implicated, investors bailed out of stocks that had risen on takeover speculation, stocks of some Wall Street investment firms and even the stocks of some companies that hold large portfolios of the “junk” bonds that are commonly used in takeover transactions.

56-Point Decline

The Dow average has thus declined 56.38 points--to 1,817.21--since the announcement late Friday that Boesky, the most successful of Wall Street’s takeover stock speculators, had agreed to pay $100 million to settle Securities and Exchange Commission charges of insider trading and to cease securities trading in the United States, except as an individual.

The settlement raised questions not only about the activities of such speculators, or arbitrageurs, but also about the entire process of takeover finance that has helped drive the stock market in recent years.

At the same time, the insider trading investigation may have helped scuttle at least one merger. Wickes Cos. late Tuesday said that its deal to purchase Lear Siegler may fall apart because it has been unable to arrange satisfactory bank financing. Wickes has close financial ties to Drexel Burnham Lambert, an investment firm caught up in the investigation.

Wall Street observers said lenders appear to have been spooked by the investigative turmoil and the uncertainty surrounding Drexel’s financings, but others close to Wickes dismissed such speculation as unfounded.

Tuesday’s fall in the Dow Jones average represented a 2.33% loss in its value, the largest such decline since it took an 87-point, 4.61%, drop on Sept. 11. The greatest one-day percentage fall in the history of the average remains the Oct. 28, 1929, decline, when the market--then at a much lower level than today--dropped 38.33 points, or 12.8%.

Although some Wall Street professionals insisted that the tremors will soon subside, others said they expect many stock prices to remain depressed until it is clear how many firms will be implicated in the scandal and whether Congress and federal regulators will make new rules to prevent trading based on illegal use of inside information.

Sources say Boesky had agreed to let the U.S. attorney’s office in Manhattan gather further evidence by secretly taping telephone calls with associates and wearing a hidden tape recorder in personal meetings. The taping began at least six weeks ago, sources said.

Not Buying Stocks

“The market has hit a stone wall,” said Perrin Long of Lipper Analytical Services in New York. “Nobody wants to recommend stocks; people don’t want to buy them until it’s clearer exactly how far all of this will go.”

Donald Trott, a market strategist for the New York financial firm of Mabon, Nugent, advised clients that they should sell off some stocks because the freeze in takeover stock speculation would end the bull market that began in 1982. “While the prices of takeover candidates have been under pressure all week . . . in our judgment you ain’t seen nothing yet,” he wrote in urging clients to pare their stock portfolios.

Adding to the pressure on takeover stocks have been signs that the Securities and Exchange Commission is interested in Boesky’s links to Drexel Burnham Lambert, the investment banking house most closely associated with the use of junk bonds in takeovers. Nervousness about such stocks was heightened Tuesday by rumors that Michael Milken, head of Drexel’s junk bond department, was about to resign after receiving a federal subpoena.

The rumors were so persistent that Robert Linton, Drexel’s chairman, publicly denied them as “categorically untrue.”

Analyst Long said investors fear that Drexel’s junk bond activities are so important to overall activity in junk bond trading that legal problems for the firm would sorely crimp the market. “If Drexel has to deal with charges, that market would be a lot less liquid and a lot less active,” he said.

The shares of First Boston Corp., an investment bank that is known for its financing and arranging of takeovers, declined $3.125 a share, to $46.375.

Among the investment houses, declines were also registered at Paine Webber, down $1.875 to $32.25, Merrill Lynch, which fell $2.125 to $37.25, and E.F. Hutton, which was off $2.25 to $40.

A number of stocks that had been the focus of takeover speculation declined sharply.

Gillette, the target of a takeover bid by Revlon Chairman Ronald O. Perelman, declined $7.25 to $60, and Federated Department Stores, a rumored target, declined $5.50 to $91.50.

USX, which has been threatened by Carl C. Icahn, declined 12.5 cents to $21.125. It was the most heavily traded stock on the New York Stock Exchange, with 3.5 million shares changing hands.

Goodyear, another subject of takeover speculation, was down $1.50 to $44.875.

The market’s jitters also affected Holiday Corp., which had announced a restructuring that would involve junk bond financing. Holiday’s stock declined $2.625 to $70.50, as investors reasoned “that this could postpone, if not cancel, their ability to go through with the plan,” said Eugene Peroni, an analyst with the Janney Montgomery Scott brokerage in Philadelphia.

Junk Bond Holders Hurt

Peroni said fears of the scandal’s effects seemed also to be penalizing companies with a large volume of junk bonds in their investment portfolios, such as Columbia Savings & Loan of Beverly Hills and First Executive Corp. of Los Angeles.

Columbia’s stock was off $1.125 to $10.875, and First Executive’s lost 87.5 cents in over-the-counter trading, to end the day at $15.75.

Wickes Cos. edged down 50 cents to $4. Lorimar Telepictures, the television producer and distributor, which has sold bonds through Drexel, was down 50 cents to $4.

On the New York Stock Exchange, declining stocks outnumbered advances by a ratio of about 5 to 1. Volume was 185.3 million shares, an increase from Monday’s 133.3 million.

Analysts said other factors contributed to the market’s decline. They said that, because of necessary time lags in filing documents with the SEC and state regulatory agencies, Tuesday was the last day that investors could start a hostile takeover bid and hope to complete it in time to take advantage of tax benefits that will be phased out at the end of this year.

In addition, declining prices triggered some so-called program trading. In such trades, investors buy the various stocks that make up market indexes, to profit from the growing difference between their value and those of the indexes.

All of the 30 stocks in the Dow Jones industrial average suffered losses, including IBM, which was down $1.50 to $120.50, and General Motors, which fell $1.50 to $69.375.

Leading Wall Street investment firms and deal-makers have been implicated in the Boesky investigation. Story in Business.