Wall Street Trader Fined $1 Million, Jailed for 4 Months
A highly publicized insider trading case that turned into an embarrassment for prosecutors ended Tuesday with the sentencing of Robert M. Freeman, the former head of risk arbitrage at Goldman, Sachs & Co., to four months in prison and a $1-million fine.
U.S. District Judge Pierre N. Leval said Freeman’s exemplary character and the relatively minor nature of the single charge he pleaded guilty to ordinarily would have led him to allow Freeman to remain free.
But, the judge said, insider trading has been rife among traders who speculated in takeover stocks, adding that the defendant’s wealth and prominence on Wall Street made it necessary to make an example of him.
“I can’t pass a sentence that would give the world a message that when people in those positions violate the law, the court will treat it as trivial,” the judge said.
Freeman technically was sentenced to a year in prison, with all but four months suspended. At the defense’s request, the judge recommended that Freeman be allowed to turn himself in by June 1 at a minimum security federal prison camp in Pensacola, Fla. The judge also sentenced Freeman to two years of probation, during which he must perform 150 hours of community service each year.
The case began in February, 1987, when federal agents took the highly unusual step of barging into the offices of three major Wall Street firms and arresting Freeman and two other prominent Wall Street traders. They were Richard B. Wigton, the former head of risk arbitrage at Kidder, Peabody & Co., and Timothy L. Tabor, a former Kidder official who had moved to Merrill Lynch.
Risk arbitrage, a major activity of many Wall Street firms in the 1980s, involved speculative investments in stocks of companies involved in takeovers or mergers.
The government charged that the three were involved in an elaborate, longstanding arrangement to trade confidential insider information on dozens of takeover deals handled by their firms. But months later, lacking evidence, prosecutors dropped all charges. They admitted that they had acted too hastily in making the arrests.
After a prolonged grand jury investigation, the U.S. Attorney’s Office in Manhattan said last August that no new charges would be brought against Wigton and Tabor. At the same time, Freeman agreed to plead guilty to a single count of mail fraud related to one incident of insider trading.
Freeman, who is said to be a multimillionaire from his 19 years at Goldman, resigned from the firm when he agreed to plead guilty.
The single incident that led to Freeman’s guilty plea involved the 1985 leveraged buyout of Beatrice Cos. by Kohlberg Kravis Roberts & Co. Goldman, and Freeman personally, invested heavily in Beatrice stock and options. On Jan. 8, 1985, Freeman said he began to see that something had gone wrong with the deal. He placed orders to liquidate some of his and Goldman’s holdings. He then phoned Bernard (Bunny) Lasker, a trader at another firm, who told Freeman that he also had heard that something had gone wrong.
Freeman then admittedly called Martin Siegel, an investment banker at Kidder who was representing KKR in the deal and who had access to confidential information. Siegel confirmed what Lasker had said, remarking that “Your bunny has a good nose.”
Based on that confirmation by an insider, Freeman ordered more of Goldman’s and his personal position in Beatrice sold, violating insider trading laws. The judge said the illegal action enabled Freeman and the firm to avoid about $548,000 in losses.
The problem with the deal turned out to be a difficulty in raising financing that caused KKR to offer less cash for Beatrice’s stock. The Beatrice buyout ultimately was completed.
Freeman’s lawyers on Tuesday had urged the judge not to impose any prison time. They noted that Freeman had already begun selling off the Beatrice holdings even before he received the illegal information.
Defense lawyers also strongly denied that Freeman was involved in any other insider trading. They said he and his family had suffered severely from the long investigation.
The original case against Freeman, Tabor and Wigton had come from information supplied to the government by Siegel, who himself had been implicated in insider trading by former stock speculator Ivan F. Boesky.
Like Boesky, he agreed to plead guilty and cooperate with prosecutors. Although he entered his plea in 1987, Siegel still hasn’t been sentenced.
Even after reaching the plea agreement with Freeman, the government never abandoned its claim that his offense was part of a much larger pattern of illegal activity.
Judge Leval had rejected an earlier version of the government’s sentencing memorandum, in which prosecutors attempted to spell out evidence of other specific alleged episodes of insider trading.
