Dark Clouds Over Wall Street

By Gordon M. Henry

Dennis Levine was one of Wall Street's hottest young investment bankers. A managing director with Drexel Burnham Lambert, Levine, 33, was glib and gregarious, and had a knack for cultivating clients. In addition, he had a particular gift for obtaining information about impending hostile merger bids and then persuading takeover targets to hire his firm for their defense. According to federal law-enforcement officials, Levine also used his expertise for a less innocent pursuit: buying stock in companies that he knew were about to be acquired, and then selling the shares at a profit after a takeover bid sent the prices sky-high.

This illegal practice, known as insider trading, caught up with Levine last week. The Securities and Exchange Commission filed a civil complaint charging him with 54 violations of federal securities law that were part of an elaborate scam involving fictitious names, phony Panamanian corporations and a Bahamas-based broker. Soon thereafter, U.S. marshals arrested him in Manhattan on the criminal charge that he had obstructed the SEC's investigation. If the SEC's civil charges are upheld, Levine could be forced to hand over $7.6 million in illegal profits and pay a $22.8 million fine. He could also be sentenced to as many as five years in prison and fined another $250,000 if he is found guilty on the criminal charge.

The Levine case was the largest insider-trading complaint ever filed by the SEC, and it spurred anxiety and soul-searching in Wall Street boardrooms. Levine had allegedly amassed a total of $12.6 million in illicit profits while working for three investment firms--Drexel Burnham Lambert, Lehman Bros. and Smith Barney--during the past 5 1/2 years. Insider-trading cases come and go like stock-market rallies, but never has such a high-level executive been accused of using privileged information for so much personal gain over so long a period of time. Wall Streeters think that Levine must have been trading tips with a group of moneymen and fear that his arrest may be the first installment in a spreading scandal, especially if he or his confidants name accomplices in exchange for clemency. Indeed, Government sources told TIME that several more insider-trading charges against high-profile individuals will be filed soon. Some brokers are talking nervously about a Wall Street Watergate.

Illegal insider trading can take many forms. Advance knowledge that a company is about to introduce a new product, issue a spectacular earnings report or even be the subject of a flattering story can enable investors to reap easy profits on timely stock trades. But the bread and butter of inside traders is tips about takeover bids.

As a merger specialist, Levine was privy to valuable information week in and week out. Curiously, in 35 of the 54 insider-trading cases cited in the SEC charges, the investment bank that Levine worked for was not involved with the merger bid. The implication is that he may have been exchanging information with other investment bankers or stock traders.

One theory is that Levine was plugged into a network of arbitragers, the investors who speculate on takeover battles. The arbs, as they are called, typically buy shares in a takeover target after a merger bid is announced. They hope to make a quick profit because rival suitors may start a bidding contest and drive up the price of the stock. Some arbs seem to know about proposed takeovers before they are announced.

Whomever it was that Levine traded tips with, he allegedly conducted his deals through Bernhard Meier, 35, an executive for the Bahamas subsidiary of Bank Leu, a Swiss institution with headquarters in Zurich. Meier, who is accused of pocketing $152,000 from Levine's insider trades, was charged last week as an accomplice in the case. Their first transaction took place in May 1980, when Levine was an associate at Smith Barney. He bought 1,500 shares of Dart Industries and sold them less than two weeks later for a modest profit of $4,000, when Dart announced that it was merging with Kraft.

After that promising start, Levine used his Bahamas connection again and again. He called Meier collect from public pay phones during his lunch hour, using the alias "Mr. Diamond." The owners of his stocks were listed as International Gold Inc. and Diamond Holdings S.A., which were dummy corporations that Levine had set up in Panama. When he needed to confer with Meier in person, he flew to the Bahamas under a fictitious name, using plane tickets that he purchased with cash. So as not to arouse the suspicion of his wife, he never mentioned his out-of-town trips and avoided spending the night in the Bahamas.

As time went on, Levine's purchases--and profits--grew larger. In November 1982, after joining Lehman Bros., he bought 50,000 shares of Itek. He sold the stock two months later, after Itek was acquired by Litton Industries, netting $805,035. By last May Levine had joined Drexel Burnham Lambert, and in his most lucrative deal yet, he bought 150,000 shares of Nabisco. Three weeks later, speculation over Nabisco's merger talks with R.J. Reynolds enabled him to sell the stock for a profit of $2,694,421.

That kind of money was apparently intoxicating to a man who was raised in a middle-class neighborhood in Queens, N.Y., and who graduated from Baruch College, a branch of the City University of New York. During his years of insider trading, Levine bought an elegant apartment on Park Avenue, a summer house on Long Island, a red Ferrari Testarossa sports car and a handsome collection of fine jewelry and art.

Meanwhile, the SEC's enforcement division, headed by Gary Lynch, was on Levine's trail. After tracing a large number of insider trades to Bank Leu, the SEC found out from unnamed sources in the investment community that Levine was behind the deals. Armed with this information, U.S. officials persuaded lawyers for the bank to provide them with details of Levine's illegal trades. After learning about the SEC investigation, Levine ordered Meier to get rid of his passport and other documents at the Bahamian bank. On May 9, SEC officials say, Levine tried to transfer $10 million from the Bahamas to a bank account in the Cayman Islands. At that point SEC officials froze Levine's accounts and, along with U.S. Attorney Rudolph Giuliani, filed charges against him in Manhattan. Said the SEC's Lynch: "It demonstrates that people who think they can violate federal securities laws by using foreign accounts are mistaken."

The arrest is only the latest in SEC Chairman John Shad's war on insider trading. Upon taking office in 1981, he pledged to come down on violators "with hobnail boots." In the past four years, the SEC has filed some 77 insider-trading suits, more than it started in the preceding 32 years. Only two weeks ago, the First Boston investment firm was forced to give up profits of $132,000 and pay a $264,000 penalty for making trades in CIGNA stock based on intelligence it had garnered from company insiders. Last year R. Foster Winans, a former Wall Street Journal reporter, was sentenced to 18 months in prison for trading in stocks that he had intended to plug in his column for the paper, and Paul Thayer, former chairman of LTV, received a four-year term for obstructing a Government investigation into his role in an insider stock- trading scheme.

Despite the SEC's stepped-up enforcement, many Wall Streeters believe that the investment world is still rife with insider trading. They note that in scores of mergers, including General Electric-RCA, Capital Cities-ABC and Philip Morris-General Foods, a run-up in the price of the target company's shares proves that many investors bought stock based on advance knowledge of the deal.

Some securities experts believe that the SEC is woefully understaffed. Richard Phillips, chairman of the American Bar Association's committee on federal regulation, notes that while the volume of securities traded grew by 800% between 1976 and 1985, the size of the SEC's enforcement staff dropped by 5%.

Last week's news shook Wall Street like a 100-point dive in the Dow Jones industrial average. Traders are wondering who might be the investigators' next target. Says one broker: "Everybody has done insider trading at one time or another." Observes a senior investment banker: "People used to joke around about insider trading. Now it's in extremely bad taste to crack such jokes." These days, needless to say, Dennis Levine and those who swapped secrets with him are not laughing.

With reporting by Ricardo Chavira/Washington and Raji Samghabadi/New York