Boesky’s Illegal Profits May Far Exceed the $50 Million Alleged in SEC Complaint
Ivan F. Boesky may have made far more in illegal profits from inside tips than the $50 million alleged by the Securities and Exchange Commission in its Nov. 14 legal complaint against him, an analysis of SEC documents indicates.
The computation, which suggests that Boesky’s tips from former investment banker Dennis B. Levine alone may have netted the trader more than the total penalty of $100 million imposed on him, is one factor contributing to a rising sense in Congress that the SEC may have let Boesky off comparatively easily.
SEC filings assert that Boesky agreed to pay Levine $2.4 million, representing 5% of his profits from some tips and 1% from others. An extrapolation from that information indicates that Boesky could have made anywhere from $50 million to more than $200 million from Levine’s information.
That figure does not include profits from deals on which Boesky might have received tips from people other than Dennis Levine.
Under his legal settlement with the commission, Boesky has agreed to give up $50 million in illicit profits, pay a further penalty of $50 million and plead guilty to a federal felony charge carrying a possible jail term of up to five years.
An analysis of the filings by the Wall Street Journal placing Boesky’s Levine-inspired profits at more than $203 million was disputed Monday by SEC spokesman Mary McCue. “We . . . do not believe the number is accurate,” she said. “The Journal estimate is not borne out by the facts and is way too high.”
Boesky’s attorney, Harvey L. Pitt, also questioned the analysis. “Straight math wouldn’t necessarily apply here,” he said.
Boesky’s settlement was the product of negotiations in which Boesky agreed to cooperate with a further SEC probe by testifying about his dealings with other takeover professionals and reportedly by secretly audio- and videotaping his conversations with others. He is also permanently barred from participating in the U.S. securities industry except as a private investor.
In return, the stock speculator was permitted to settle the SEC’s civil charges without admitting or denying guilt.
Even assuming that Boesky made only $50 million in illegal profits, the additional $50 million penalty is only one-third of the maximum that could have been sought by the SEC under a 1984 law covering insider transactions. That law allows the commission to seek up to three times the profits earned by an inside trader--in this case, a penalty of up to $150 million.
The indications of the magnitude of Boesky’s possible profits, along with earlier disclosures that an investment fund he controlled sold $440 million of securities prior to announcement of his settlement, have amplified congressional calls for a tightening of insider trading laws and may increase criticism of the SEC’s handling of the record-setting case.
“Now we have to ask, did the SEC tell the whole story,” said Sen. Howard M. Metzenbaum (D-Ohio), who hopes to head a revived antitrust subcommittee within the Senate Judiciary Committee when the newly Democratic Congress convenes in January.
Among the unanswered questions, Metzenbaum said, is the tax consequences of Boesky’s fine. “I’m not sure how much of the fine is tax-deductible” to Boesky, Metzenbaum said. Referring to SEC Chairman John S. R. Shad, he added: “When I asked Mr. Shad, he didn’t know.”
He also took the opportunity to blame the Republican Reagan Administration and the GOP-controlled Senate for failing to restrain the takeover fever that contributed to Boesky’s trading profits.
“Let’s face it, for six years, we’ve had an Administration that’s been indifferent,” Metzenbaum said. “Some of us in Congress have a different approach, and we are going to make the effort, and my guess is we are going to be reasonably successful.”
Others in Congress suggested that any leniency that Boesky may have gained financially should be balanced by strict criminal sentencing. Said Rep. Don Edwards (D-San Jose), a member of the House Judiciary subcommittee on monopolies: “He has to go to the slammer. We’re going to keep after him and holler all get-out if he doesn’t get the maximum.”
The SEC has never disclosed if it knows of the full extent of Boesky’s illegal trading. In its Nov. 14 complaint, the commission listed seven takeovers or corporate restructurings in which the stock speculator traded on advance information provided by Levine between February, 1985, and April, 1986. Levine at the time was a mergers specialist at the firm of Drexel Burnham Lambert, and Boesky was a client of the firm.
On three of the deals cited, the agency said, Boesky made about $9.1 million after buying stock on Levine’s suggestion. The stocks were those of Nabisco Brands, Houston Natural Gas and FMC Corp. The SEC said Boesky agreed to pay Levine 5% of his profits on those deals, or an indicated $455,000.
On three other deals cited by the SEC, Boesky agreed to pay Levine 1% of his profits, on grounds that Boesky had independently taken a position in the affected stocks and had simply decided on Levine’s advice not to sell them. On a fourth deal, a takeover of Boise Cascade that never materialized, Boesky suffered a loss, some portion of which he subtracted from Levine’s account.
As the Wall Street Journal computed in Monday’s edition, if those seven transactions represented the limit of Levine’s tips to Boesky, then the stock trader’s offer of $2.4 million to Levine means he made profits of more than $203 million.
The SEC, however, does not disclose Boesky’s apparent profits on any deals but the Nabisco, HNG and FMC transactions. Depending on how many other tips Levine gave the trader, and on how many other transactions Boesky may have owed Levine 5%, Boesky’s indicated profit could be as little as $50 million.
Michael A. Hiltzik reported from New York and Karen Tumulty reported from Washington.
