Giuliani Gaffe Leaves Wall St. Executives in Legal Limbo

Three prominent Wall Street executives, arrested just over two years ago in a dramatic raid by federal agents, seem destined to remain in legal limbo, neither charged nor cleared.

Departing from standard procedure in securities fraud cases, federal marshals and postal inspectors, armed with warrants, barged into the offices of two big Wall Street firms on Feb. 12, 1987, and arrested two executives on insider trading charges. Another was seized at his Manhattan apartment.

The bold arrest tactics used on respected senior executives were meant to set an example, emphasizing prosecutors’ new get-tough policy on inside trading. It was also meant to scare the three investment bankers into swiftly pleading guilty and cooperating as others already had in the widening Wall Street scandal.

Instead, the frisking, handcuffing and carting off of the executives, in a way that seemed designed to ensure maximum publicity, turned out to be perhaps the biggest blunder of Rudolph W. Giuliani’s six years in office as U.S. attorney in Manhattan.

The executives were Robert M. Freeman, then the head of arbitrage at Goldman, Sachs & Co., and Richard B. Wigton, head of risk arbitrage and over-the-counter trading at Kidder, Peabody & Co., both arrested in their offices in front of shocked co-workers. Wigton, manacled, was led away in tears.

The third executive, Timothy L. Tabor, who had left Kidder Peabody shortly before to become the head of arbitrage at Merrill Lynch, was seized the same day in his apartment. Arrested too late in the day to appear before a federal magistrate, he was forced to spend the night in jail.

The three men were charged with illegally swapping inside information on pending takeover deals, including information that enabled them to profit from trading stock options of Unocal Corp. during an unsuccessful takeover attempt by Texas oilman T. Boone Pickens Jr.

But after charging the men and obtaining a grand jury indictment, an embarrassed Giuliani had to withdraw the charges. Faced with the time limit imposed by the federal Speedy Trial Act, prosecutors were forced to admit that they needed more time to develop evidence and weren’t ready to go to trial.

Although the charges were dropped, a federal judge dismissed the criminal case “without prejudice.” This leaves prosecutors free to refile charges at any time.

Lives Disrupted

Prosecutors at the time said in court documents that the original charges were “just the tip of the iceberg.” They have said repeatedly since that new and even broader charges would be filed soon. But months have dragged by and Giuliani has left office, possibly in preparation for a New York mayoral candidacy. Defense lawyers say they believe that the case isn’t dormant and that a new indictment probably will be brought. But they say they don’t know when it will come.

In the meantime, the prolonged state of legal uncertainty for Freeman, Tabor and Wigton has seriously disrupted their lives and careers.

Wigton, now 58, was suspended without pay by Kidder Peabody. Since the charges against him were dropped, he has been put back on salary but remains suspended, his 33-year career in tatters.

Tabor, now 35, was fired by Merrill Lynch. After being unemployed for a year, he has taken up a different line of work, consulting on computers and software, according to his lawyer.

Freeman, 46, is still employed at Goldman Sachs. The firm has been supportive and vigorously opposed government attempts to incriminate Freeman or the firm. But co-workers say he has had to spend nearly all of his time working on his legal defense.

Jules Kroll, a neighbor of Freeman’s family and the head of Kroll Associates, a private investigations firm, said of Freeman and his wife: “They have held their heads high and tried to get on with their lives.” But, he added, “They are under tremendous pressure because this thing is mentioned in the paper someplace every week of the year. People keep posing the question, ‘When is the other shoe going to drop?’ And that kind of speculation is just brutal.”

Lawyers for all three declined to make their clients available for interviews.

Whether the three are guilty or innocent remains to be determined. But independent legal experts as well as the defense lawyers have strongly criticized the arrest tactics. They also question why Giuliani brought the case if he didn’t have enough evidence in hand to prove their guilt.

‘Didn’t Do Homework’

Stephen Gillers, a New York University law professor, called the arrest an “improper use of prosecutorial power.” He said: “It’s obvious that the government counted on an arrest in a humiliating context to scare the defendants into cooperation.” He added: “It’s obvious that the government did not have an adequate case at the time they decided to proceed with the arrest.”

Defense lawyers claim that the original charges contained factual errors, misstating the timing of securities trades. “It demonstrates that (the prosecutors) didn’t do their homework,” contends Stanley Arkin, Wigton’s lawyer, who accused the prosecutors of “irresponsibility.”

Arkin and the other lawyers also claim that the trades carried out by the executives were amply justified, based on publicly available information and rumors at the time.

In white-collar crime cases, especially securities fraud cases, surprise arrests are unusual unless there is reason to fear that the targets are about to flee the country. Usually, indictments are obtained first. And targets often are simply notified to turn themselves in at a specified time to be fingerprinted and enter a plea before a federal magistrate.

At the time of the arrests, Giuliani maintained that there wasn’t anything out of the ordinary about his treatment of the men. “It’s not at all unusual for us to arrest people for federal felonies,” he said at a press conference shortly after the three were seized.

When the charges were dropped three months later, Giuliani said his office would bring an indictment with even more charges “in record-breaking time.”

Instead, the continuing investigation and lack of any new charges to date seems to prove the adage that the wheels of justice grind slowly. When Giuliani was asked about the case again last month during his farewell press conference as U.S. attorney, he said he wouldn’t have approved the arrests “if we had known all the things that we subsequently learned.” But he said that because the case is still under investigation he couldn’t discuss it further.

Through his secretary, Giuliani again declined to discuss the case when called for comment last week.

A spokeswoman for Benito Romano, the temporary U.S. attorney in Manhattan who is serving until a permanent replacement is named, also refused to comment on the status of the case.

In offering explanations for the tactics used in the arrests, private lawyers speculated that the prosecutors, still relatively inexperienced in bringing big securities fraud cases, had become overconfident after a series of quick and easy victories. Beginning with Dennis B. Levine, an investment banker caught trading on advance knowledge of takeover deals, prosecutors had obtained 10 guilty pleas in the widening investigation. Among those admitting guilt were Ivan F. Boesky, the wealthy stock speculator said to have made $50 million based on tips from Levine, and Martin A. Siegel, a managing director in acquisitions at Drexel Burnham Lambert.

Maintained Innocence

It was information from Siegel, after his agreement to cooperate with prosecutors in exchange for lenient treatment, that led to the case against Freeman, Tabor and Wigton.

But, to the prosecutors’ evident surprise, the three steadfastly maintained their innocence. They refused to become government witnesses and asserted that they had no one else to turn in. For the first time in the Levine-Boesky series of cases, prosecutors were faced with having to bring a case to trial.

One lawyer who has played a role in the case attributed the gaffe to lack of experience by Giuliani and some of his staff at the time in dealing with securities fraud cases. The assistant prosecutors assigned to the case, for the most part, were new to securities law and had experience mainly in prosecuting narcotics cases. The lawyer said they simply didn’t realize the amount of investigative time and expertise in the complex world of stock and options trading needed to prove a case to a jury.

Reasons for continuing delay in the case aren’t entirely clear. The U.S. attorney’s securities fraud unit, limited in staff, has been devoting much of its time and resources to the Drexel Burnham Lambert case. Drexel has agreed to plead guilty to six criminal charges, but indictments are still expected to be brought against key employees, including Michael Milken, the head of the firm’s “junk bond” unit in Beverly Hills.

Sources say another factor complicating the case is that prosecutors have sought to persuade Freeman to cooperate in another pending case, against five senior officials of a small now-defunct securities firm, Princeton/Newport Partners. In a case related to the Drexel investigation, the Princeton/Newport officials were indicted on racketeering charges in July.

One of them, James Sutton Regan, is a former college roommate and business school classmate of Freeman’s, and the two had remained close friends. Prosecutors are known to suspect that Freeman has knowledge of illegal activity at Princeton/Newport, something his attorney has denied.

Lawyers familiar with the case also say prosecutors this time are determined to be more careful. Despite pressures to act quickly, they want to make sure that they are thoroughly prepared before bringing any new charges against Freeman, Tabor or Wigton.