SEC, Stung by Criticism, Seeks Stiffer Insider Penalties
When prominent corporate takeover adviser Martin A. Siegel turned himself in to federal authorities late last year, sleuths at the Securities and Exchange Commission were still smarting from accusations that they had been too lenient in penalizing Siegel’s co-conspirator, confessed inside trader Ivan F. Boesky.
Congressmen were threatening investigations. Legitimate stock traders were crying foul. Even federal prosecutors who had worked hand in hand with the SEC investigators on the biggest insider trading case in history were privately chiding the securities watchdog agency for demanding only $100 million in fines and repayments from the millionaire stock speculator.
The sum was far more than any admitted inside trader had coughed up until then but was only about half the amount Boesky is widely reported to have made from illegal trades.
So, despite knowing Siegel to be a font of information unparalleled even by the gossipy Boesky, SEC investigators during several weeks of negotiations stubbornly held out for a settlement that they felt sure no one would criticize: every cent that Siegel is alleged to have personally collected for his illicit tips plus $8.5 million more.
“Let’s just say we were sensitive to the criticism,” said one SEC investigator who spoke on the condition that his name not be used. “Here we had this great case. And instead of being cheered, we were being booed. No way were we going to let that happen again.”
The stiff penalty against Siegel, a former Kidder, Peabody merger chief, and the handcuffing of three other insider trading defendants arrested last week, mark a new, tougher attitude on the part of the SEC and federal prosecutors in the U.S. attorney’s office here, government and securities industry sources said Tuesday.
Before they would forge a deal with Siegel, SEC officials elicited an unusual promise from the takeover-defense architect: Siegel had helped Boesky make money illegally, so he should be forced to repay the profits Boesky made on Siegel’s tips.
“Our theory is that he is liable for the profits by Boesky and the Boesky entities” as well as for the $700,000 he received in briefcases from Boesky, SEC enforcement chief Gary Lynch told reporters Friday after Siegel pleaded guilty in federal court here to charges of evading taxes and conspiring to break securities laws.
The government’s new tough stand on these white-collar criminals also was apparent last week in the arrests of three other Wall Street executives whom Siegel has identified as his collaborators in a separate insider trading scheme he initiated after becoming concerned about his ties with Boesky.
One, Timothy L. Tabor, a former Kidder, Peabody vice president, was arrested at his Manhattan home and taken to jail for a night. The other two--Goldman, Sachs partner Robert M. Freeman and Richard B. Wigton, a vice president at Kidder, Peabody--were arrested at their offices Thursday morning in full view of their stupefied colleagues.
Even more to the amazement of Wall Street--five days later, the financial district was still abuzz about this, much more so than about the fall of Siegel--all three were hauled away to federal court in handcuffs. It is treatment that white-collar offenders have become accustomed to escaping.
Deny a Shift
Publicly, federal authorities here deny that their actions last week reflect a shift in attitude toward securities-laws abusers.
“Yes, all three were cuffed,” said John Savinsky, chief of the U.S. Postal Service in New York. “But that is our policy. Until they get to the facility where they are to be arraigned, people we arrest for breaking postal laws are always handcuffed.” Postal Service inspectors were involved in the arrests because the charges included mail fraud.
Likewise, U.S. Attorney Rudolph W. Giuliani insisted at a press conference Friday that the criticism over Boesky’s fine last November had “no effect whatsoever” on the settlement negotiations with Siegel.
But, privately, government sources said the SEC was a much tougher negotiator this time in the wake of the criticism. “Giuliani made it clear to (the SEC’s) Lynch that he was tired of the criticism. He wanted us to play tough, and we did,” one SEC source said.
Siegel’s lawyer, Jed S. Rakoff, would not discuss the settlement negotiations, and Siegel’s whereabouts are not known. But sources credit Rakoff--and his knowledge of the U.S. attorney’s office, where he once was a prosecutor--for getting the settlement down to $9 million.
The SEC’s opening offer could not be learned. But a source at the SEC said the agency initially demanded several million dollars more.
“Remember,” this source said, “Boesky made at least $33 million in profits from Siegel’s tips.” Siegel has admitted giving details of six corporate battles to Boesky, who in turn traded stocks using the confidential information.
Formula Unclear
How the SEC settled on $9 million is not clear. Under the Insider Trading Sanctions Act of 1984, those who trade on information not available to the general public can be made to give back their illegal profits and to pay a penalty of three times as much as their illegal activities produced. But that would bring the penalty to only $2.1 million.
Lynch would say only that “we wanted $9 million. That’s what it took to get us to settle.”
Rakoff has told friends that the SEC finally came down to $9 million after Rakoff successfully argued that that figure represents the vast bulk of Siegel’s wealth. “He couldn’t have given much more because he doesn’t have much more,” Rakoff is quoted by friends as having said.
In fact, the government permitted Siegel to keep the estimated $5 million he has made by selling his Manhattan apartment and the Connecticut home he and his wife had had built several years ago. The bulk of that money is earmarked for legal fees. With the rest, he will buy a new home--reportedly in Florida, where he is widely believed to have moved his family recently.
