In 1985 Fedders was replaced by Gary Lynch, a staff veteran who worked under Sporkin and would head the division for the next four years.(1) At the time, the battle against insider trading was far from won. The Division had managed to successfully bring some high-profile cases, including one against Deputy Secretary of Defense Paul Thayer, but the general impression remained that insider trading was out of control. In April 1985, the same month Thayer pled guilty in a related case, Business Week ran a cover story warning the SEC was “fighting a losing battle” against an “epidemic of insider trading.”(2) Over the next two years, the SEC would start to win.
In August 1985 Lynch received a tip that ultimately led the Division to accounts at the Bahamas office of Switzerland’s Banc Leu. There a manager, Bernhard Meier, seemed to have had remarkable luck in buying shares of firms whose stock was soon to rise due to a takeover attempt. Meier attributed his success to skill in identifying likely takeover targets, but the staff suspected he had access to inside information. Meier stalled on providing information, but had underestimated the staff’s persistence. On a trip to New York, he checked into the Waldorf-Astoria, not realizing the SEC had alerted U.S. Customs to watch for him. He was astonished when a knock on his door revealed an SEC attorney with a subpoena demanding the bank’s trading records—and Meier’s.(3)
Meier’s story crumbled, as it became clear that the suspicious trading had not been his, but an unidentified client of Bank Leu’s. Fearing the SEC, the bank began exploring cooperation, but faced a problem: Bahamian bank secrecy laws might prohibit disclosure of its customers’ names. Only after a delegation from the U.S., including Lynch and the U.S. Ambassador, persuaded the Bahamas’ Attorney General that the privacy laws applied only to banking transactions, and not securities trading records, did the Bank hand over the identity of the customer, an investment banker at Drexel Burnham Lambert named Dennis Levine.(4) It was Levine’s name, and his employer, that turned another episode of insider trading into an inquiry into corruption at the heart of American corporate capitalism.
The takeover boom of the 1980s had transformed the corporate landscape, and it owed its existence to Drexel Burnham Lambert. The bank’s leading light, Michael Milken, had become the master salesman and evangelist for the sub-investment-grad “junk bonds” that had fueled the takeover boom, and by the mid-1980s he was arguably the most powerful investment banker in America.(5) Levine’s ties to Drexel alone made him a major catch, but after his arrest he agreed to cooperate with the SEC and Federal prosecutors. He revealed that he had shared inside information with another major Wall Street figure, the merger arbitrageur Ivan Boesky. The SEC soon was in pursuit of Boesky and, after secret negotiations, he agreed to cooperate as well, giving the enforcement staff the biggest name of all: Milken.
On November 14, 1986, Boesky’s cooperation and plea deal became public. He settled with the SEC, pled guilty to one count of conspiracy to commit securities fraud, and paid a penalty of $100 million.(6) On that day “Federal securities law enforcement entered the mainstream of public consciousness.”(7) Boesky was on the front covers of the major newspapers and magazines. That same day, subpoenas were served against a number of major figures including Drexel and Milken.(8)
The denouement was long. Drexel and Milken fought bitterly against the insider trading charges brought by the SEC and Justice Department, and their cases were not resolved for over two years. In the end, however, both settled. Milken pled guilty to six criminal counts, earning a sentence of ten years in prison, and agreed to pay a $600 million fine. Drexel pled guilty and paid huge fines as well, and in its settlement with the SEC agreed to far-reaching governance changes, including new compliance procedures. It even named John Shad, who had left the SEC in 1987, as its new chair.
(1) Alison Muscatine, SEC Official Quits After Abuse Stories, Wash. Post Feb. 27, 1985: A1.
(2) James B. Stewart, Den of Thieves: 273 (1992).
(3) Stewart, Den of Thieves: 279.
(4) Id. 293.
(5) Connie Bruck, The Predator’s Ball: The Insider Story of Drexel Burnham and the Rise of the Junk Bond Raiders.
(6) Daniel Hawke, “Boesky Day” November 14, 1986; Stewart, Den of Thieves: 366.
(7) Hawke, “Boesky Day.”
(8) Stewart, Den of Thieves: 344.
(Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
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