On Nov. 14 , the Securities and Exchange Commission stunned Wall Street by announcing that it had charged stock speculator Ivan F. Boesky with having illegally traded on inside information for more than a year, starting in February, 1985.
Boesky agreed to pay a penalty of $100 million, encompassing $50 million in allegedly illegal profits and a $50 million fine. He was also permanently barred from the U.S. securities industry except as a private investor and he will plead guilty to a federal felony charge carrying a sentence of up to five years in prison. He did not specifically admit or deny guilt.
As the story has unfolded, many questions have arisen over the nature of Boesky's business, his offense, its impact on the stock market and the SEC's pursuit.
Here is a summary of these questions and the best answers available.
Question: Who is Ivan Boesky?
Answer: For more than 10 years, Ivan F. Boesky has been Wall Street's leading speculator in takeover stocks, a trade he practiced so heavily and with such a large following that his trading itself became a major factor in the takeover market, often affecting the outcome of merger transactions.
Q: What was he charged with?
A: From February, 1985, to April, 1986, the Securities and Exchange Commission charged, Boesky accepted illegal inside tips on impending mergers from Dennis B. Levine, who at the time was a mergers and acquisitions specialist for the investment firm of Drexel Burnham Lambert. In addition to tipping Boesky to Drexel deals, the SEC said, Levine also passed on tips he received from his own contacts at Goldman, Sachs and other firms. Boesky used Levine's information to buy or hold at least seven stocks that were subject to takeovers or were undertaking takeover defenses.
Q: What is insider trading?
A: By the SEC's own definition, insider trading is using "material non-public information" to trade a security, whether it is a stock, bond, or stock option. This category of information could include a corporation's yet-unpublished earnings reports or confidential merger plans. In one celebrated case, the SEC managed to extend the definition to include advance information of the contents of the Wall Street Journal's influential "Heard on the Street" column, a digest of market opinion and gossip.
Those who have been successfully prosecuted as illegal inside traders include corporate executives and directors, lawyers, investment bankers, a reporter for the Wall Street Journal, and a professional printer who cracked the code used for early printings of corporate takeover documents.
Civil penalties for violations of the rules include return of the illegal profits, or "disgorgement," and a fine of up to three times those profits.
Q: Why is this case so important?
A: Beyond being the biggest insider trading case of all time in terms of disgorgement and fine, the Boesky case exposes what appears to be a network of Wall Street professionals trading information with one another at close to the highest levels of the takeover field. It is conceivable that some takeover bids were even inspired by the prospect that participants could turn an illegal side profit.
Q: Who else is involved?
A: No one has yet been charged in the case other than Boesky, Levine and some of Levine's associates. SEC and Justice Department subpoenas have been issued to several other market professionals, however. These include Carl C. Icahn, the corporate raider, and Boyd L. Jefferies, a Los Angeles stockbroker whose business was assembling and trading huge blocks of stock for professional investors who often included Boesky and assorted takeover raiders.
Q: What is the role of Drexel Burnham Lambert?
A: Considerable attention has focused on this aggressive Wall Street investment firm, which employed Levine, helped finance Boesky and played an indispensable role in many of the largest mergers of the last few years. Drexel's renowned "junk" bond unit, headquartered in Beverly Hills, provided financing for many top takeover entrepreneurs by assembling syndicates of investors willing to put up billions of dollars to back hostile takeovers.
Among Drexel executives who have been served with subpoenas in this case are Michael Milken, the creator of the modern junk bond market, and Martin A. Siegel, a former Kidder, Peabody takeover specialist who recently joined Drexel. Sources have told The Times that as many as five Drexel executives are currently seeking legal representation in the case.
Q: How much did Boesky make illegally?
A: The SEC in its formal complaint said Boesky made at least $50 million in illegal profits in slightly more than a year on tips he got from Levine alone. Estimates of his total illegal profits attributable to Levine run as high as $200 million, but the SEC says much of that would include money Boesky earned legitimately in stocks he also traded illegally.
In any event, Wall Street professionals and the SEC have suspected Boesky of receiving illegal tips for years. The SEC's investigation may yet produce evidence that Boesky had a network of tipsters.
Q: How much money does he have left?
A: Estimates of Boesky's wealth have run as high as $200 million, a conjectural figure published by Forbes magazine. His attorney, Harvey L. Pitt, has been insisting that Boesky's personal wealth is much smaller. Pitt said on the night of the settlement announcement that, after the $100-million penalty, "there ain't much left."
Boesky's holdings include a web of public corporations and limited partnerships, real estate and securities. He and his wife control slightly more than 50% of the Beverly Hills Hotel Corp., owner of the distinctive hotel on Sunset Boulevard, and other hotels. The hotel is to be sold shortly, following a sealed-bid auction at which the minimum bid was set at $100 million.
One important question is whether Boesky will have enough money to continue to engage in risk-arbitrage, a practice that requires a critical mass of capital running into scores of millions of dollars. Under the SEC settlement, he is probably prohibited from seeking trading capital from outside investors, as he did in the past.
Q: Did Boesky get off easy?
A: Some congressmen and Wall Street traders argue that if Boesky truly is history's biggest inside trader, with hundreds of millions of dollars in profits from illegal tips over the years, his $100-million penalty and the rest of his settlement may be too lenient. Sentiment in this direction rose after disclosure that one of his investment funds sold $440 million in securities shortly before his settlement was announced.
Still, Boesky's settlement is, by a large margin, a record recovery in an insider trading case. Securities attorneys who have handled similar cases note that had Boesky chosen to fight the SEC charges in court, instead of settling the case, the SEC might have lost. A judge or jury might have imposed a lesser penalty than the $100 million extracted by the SEC.
Furthermore, Boesky's settlement includes an agreement to plead guilty to the federal felony count of securities fraud, carrying a prison term of up to five years. Legal observers suggest that, given the furor over his dealings, the Justice Department may well recommend to a judge that Boesky spend at least some time in prison.
Q: Should he have been permitted to sell stock before the announcement?
A: Securities lawyers say there are no signs that Boesky violated any law, much less insider trading rules, in selling stock on knowledge of his own imminent settlement with the SEC.
It should be noted that the stock sales came out of a limited partnership Boesky controlled, formed about the time that he ceased to receive information from Levine. Under the terms of the SEC settlement, Boesky is required to pay the penalties out of his own pocket, with his investment partnerships left intact. Also, as general partner of the limited partnership that owned the investment fund, he receives only a portion of the proceeds of the stock sales, with much of it going to his customers.
Q: Is he subject to further legal penalties?
A: Boesky, Levine, and any others implicated may be subject to civil suits filed by corporations or stockholders claiming financial injury from the defendants' trading. At least four shareholder suits have already named Boesky; all are seeking to be designated class actions, meaning that they would be brought on behalf of all investors similarly injured by the speculator's trading. Several companies whose shares were the subject of Boesky's illicit speculations are also considering lawsuits, although none has yet been filed.
The model for these suits is a case filed by Anheuser-Busch, the brewer of Budweiser beer, against W. Paul Thayer, a former Anheuser director and former U.S. deputy secretary of defense. The case has not yet come before a judge for a ruling.
The company charges that by tipping friends to its plans to acquire another company, Thayer helped drive up the price of the target's shares and the cost of the acquisition to Anheuser. Thayer has already been sentenced to a jail term for obstruction of justice in connection with the case.
Q: What impact does this case have on takeovers and the stock market?
A: The market in general dropped precipitously for several sessions, starting Nov. 18, when the breadth of the SEC's investigation began to emerge. Stocks subject to takeover bids--especially those for which the bids were financed by Drexel--experienced especially severe slumps, as investors feared that Drexel's entanglement in the scandal might impair its ability to support its clients. Many of these stocks had been heavily traded by Boesky. Two Drexel deals have actually collapsed: an offer by Wickes Cos. for Lear Siegler, a Drexel client and a bid by Drexel client Ronald O. Perelman for Gillette.
In later days the stock market has strongly rebounded. As of Friday, the Dow Jones industrial average was trading well above its level of Nov. 14, just before the SEC announcement.
Furthermore, Thanksgiving week saw an explosion of new takeover activity, much of it possibly timed to beat the Dec. 31 deadline for transactions to be subject to current tax rules. Those are more liberal in their treatment of takeovers than the new tax code.