Insider Scandal Shows Hartley Knew the Score

So, the insider trading scandal looks to be as broad and wide as many people have been saying it is, and a furiously outspoken businessman named Fred L. Hartley was probably right two years ago when he said there was something rotten about the hostile takeover game.

The latest news, of course, is that the head of risk arbitrage for Goldman, Sachs & Co., a vice president of Kidder, Peabody & Co. and a former Kidder vice president were arrested Thursday on charges of profiting in the millions by trading on non-public information about clients of the two investment banking firms.

One specific charge, in the case brought in New York by U.S. Attorney Rudolph W. Giuliani, was that the accused traded on inside information about strategies that Hartley’s oil company, Unocal Corp., was going to use in its defense against T. Boone Pickens Jr.'s takeover attempt in April, 1985. Goldman, Sachs split $25 million in fees for representing Unocal in that fight.

Oh yes, of course, everybody’s innocent until proven guilty. And it is individual employees, and not the firms themselves, that have been charged with wrongdoing. But the new arrests will send powerful ripples through Wall Street and throughout corporate America.


Touches Top Firms

First of all, the charges reach inside two of Wall Street’s most prestigious and respected companies. Goldman, Sachs is the fifth-largest investment banker and Kidder, Peabody, before it was acquired by General Electric Co. in 1986, ranked 15th on Institutional Investor magazine’s list of America’s 100 largest brokers.

That their employees are charged at all is an indication that insider trading was not a practice restricted to self-admitted villains such as Ivan F. Boesky and Dennis B. Levine, or to aggressive but less-than-Establishment Wall Street firms such as Drexel Burnham Lambert, the “junk bond” backer of many takeovers that is the subject of a Securities and Exchange Commission investigation.

Ever since the insider scandal broke last year, with the arrest and guilty plea of Levine, the Drexel Burnham broker who comes up for sentencing next week, and then of Boesky, who pleaded guilty and paid the government $100 million in November, investment bankers from other firms have been loudly giving thanks that they are not Drexel Burnham.


Quietly they have suggested, as one well-compensated Wall Streeter did at a private luncheon last week, that the whole problem might be confined to “that Beverly Hills operation,” a reference to Drexel Burnham’s key trading operation next to Rodeo Drive.

But you’d have to still be waiting up for the tooth fairy to believe that most of Wall Street resisted temptation as billions of takeover dollars washed through the financial markets in recent years, or that only chaps lacking a good prep school education suffered iniquitous greed when the easy money was made.

Wasn’t Fooled

Hartley, chairman of Unocal, wasn’t fooled. He said investment bankers were pulling a con job on the American people two years ago when his firm was under siege from the Pickens-led investment group, Mesa Partners.


The financiers who backed and often counseled their client companies into making such takeover attempts, were “pious piranhas,” said Hartley, “who are walking away with tens of millions and happy to let society collapse.”

But Hartley, then 68 years old, rough of speech and manner, was out of fashion. He was denounced and ridiculed by Pickens and his supporters for exploring for new oil and investing in oil shale, instead of giving up on tomorrow and paying all the profits out to shareholders today. Hartley fought nonetheless, and saved his firm. But the price was high. Unocal took on on a mountain of debt that so hobbles the company today that exploration has been cut back and employees laid off or retired early. Profits are down, and no new oil has been found.

But investment bankers and speculators made money. And now the U.S. attorney is charging that a key official of the investment firm that worked with Hartley was making money illegally.

Count on it, the year 1987 will see many arrests, and jailings, of white-collar criminals who only yesterday were called financial wizards. Wall Street will never be Sunday school, of course, but it does need to live by the rule of law if the capital markets--one of the country’s great assets--are to work. So we will see congressional hearings into financial market practices.


And with bright, aggressive investment bankers under a cloud of suspicion instead of on the cover of Fortune magazine, we will probably see a general subsidence of takeovers. That’s happening already, as a matter of fact: A Boone Pickens attempt to take over Diamond Shamrock Corp. has just failed, amid indications that financing just wasn’t as available as it used to be.

Sometimes things do change for the better.