Anonymous Tipster Wrote About Questionable Trades : Strange Letter Triggered Insider Probe
On May 22, 1985, a strange letter arrived at the headquarters of Merrill Lynch in the heart of New York’s financial district. No one realized that the one-page letter, typed in broken English, would help unravel the biggest insider trading scandal in history.
Allegations in the letter started an internal inquiry at the nation’s largest brokerage firm that led ultimately to a Swiss bank in Nassau. From there, federal authorities picked up the trail and followed it to Dennis B. Levine, a investment banker in New York.
At the time, Levine was earning $1 million a year and driving a red Ferrari as a managing director in the acquisitions department at Drexel Burnham Lambert.
When confronted in May, 1986, Levine cut a deal with the Securities and Exchange Commission and the U.S. attorney’s office in Manhattan. In exchange for leniency, he provided information about the Wall Street professionals who had helped him make $12.6 million from illegal insider trading.
Levine was released on parole Thursday from a Manhattan halfway house for federal prisoners. He had served 18 months of his 2-year sentence on charges of securities fraud, tax evasion and perjury.
Levine’s greatest gift to the feds was Ivan F. Boesky, the stock speculator who had used inside tips from Levine to collect at least $50 million from illegal trading.
Boesky in turn agreed to cooperate with the government, implicating individuals and organizations in a sophisticated web of stock market manipulations and even donning a tape recorder to gather evidence against them in the summer and early fall of 1986.
The first to fall from Boesky’s cooperation was Martin A. Siegel, also a managing director in acquisitions at Drexel. Next came Boyd L. Jefferies, who ran an innovative stock trading company in Los Angeles. Both pleaded guilty to crimes involving Boesky and are cooperating with the government while awaiting sentencing.
Federal prosecutors and SEC lawyers have confirmed that Boesky first implicated Drexel and Michael Milken, the man behind its enormously profitable high-yield bond department in Beverly Hills and Boesky’s one-time confidant.
No one knows what the author of the letter to Merrill Lynch thinks of the scandal that has enveloped Wall Street. The letter was anonymous, and efforts to uncover its author were swept aside in the investigative flood it touched off.
Ironically, the allegations in the letter never resulted in formal charges. The writer said two brokers in Merrill Lynch’s office in Caracas, Venezuela--Carlos Zubillaga and Max Hofer--were trading on inside information.
Compliance officials at Merrill Lynch brought the brokers to New York and questioned them about a pattern of trading in which they had bought stock for themselves and customers in advance of announcements of mergers that sent the stock prices soaring.
Zubillaga and Hofer, according to SEC documents, said the information had come from Brian Campbell, a broker in Merrill’s New York office who had recently left for another firm. Campbell’s departure put him outside the reach of Merrill Lynch, but officials discovered an important clue in his trading while at the firm.
Campbell’s biggest client had been Bank Leu International, a Nassau subsidiary of Switzerland’s oldest bank. Bank Leu had bought thousands of shares of stock just before takeover announcements.
Merrill Lynch turned over the results of its inquiry to SEC officials in Washington, who opened an intense investigation of the bank. The SEC found that Bank Leu had bought takeover stocks through several other New York brokerages, too.
In August, 1985, the SEC notified Bank Leu of its inquiry into the purchase of about 30 takeover stocks by the bank. But the inquiry was threatened by Bahamian banking laws that prohibit disclosure of a bank customer’s identity without the client’s permission or an order from a Bahamian court.
Working with two officials of the bank, Levine sought protection behind the law and a facade of lies. Levine persuaded the bank to hire American lawyers and convince the lawyers that the stocks had been purchased for their fundamental soundness on behalf of numerous customer accounts.
Levine’s plan, as described in court documents, was for the bank to persuade the lawyers that there was no single account for the purchases and therefore no insider. The lawyers would convey the story to the SEC and the investigation would be called off.
However, after spotting several holes in the bank’s story, the American lawyers, Harvey L. Pitt and Michael H. Rauch, confronted Bank Leu officials and persuaded the bankers to tell them the truth.
Once they discovered the identity of the insider, Pitt and Rauch set the stage for the first in a series of deals that would unravel the insider trading scandal.
At a critical meeting in December, 1985, Pitt asked the SEC for blanket immunity for the bank and its employees in exchange for the name of the person behind the trades under investigation. Pitt promised it was a “big fish.”
John Sturc, an SEC enforcement official, responded: “For what you’re asking, he’d damn well better be Moby Dick.”
Pitt had no way of knowing then what a whale of a catch he was turning over to the federal government. Just as the unknown writer in Caracas had no idea what an anonymous letter could unleash.
