A Raid on Wall Street

By George Russell

The bust was carried out with all the speed and precision of a major drug raid. There was nothing sleazy, though, about the locale: Manhattan's pinstriped financial district. On a chilly midmorning last week, a pair of federal agents strode into the gray stone headquarters of the blue-chip Kidder, Peabody investment firm. They headed for the 18th-floor office of Richard Wigton, 52, head of the company's risk-arbitrage and over-the-counter stock-trading departments. As Kidder, Peabody employees looked on in dismay, the officers arrested Wigton, then led the stunned executive away. The charge against Wigton: conspiracy to commit illegal insider stock trading.

Meanwhile, only three blocks away at the 30-story modernistic headquarters of the Goldman, Sachs investment firm, another cops-and-robbers drama was played out. Federal agents quietly entered the 29th-floor office of Robert Freeman, 44, head of the company's arbitrage department. Freeman was arrested and escorted from the building. Driven across town to Manhattan's federal court building, the handcuffed executive joined another distinguished Wall Streeter who had been arrested the night before. Timothy Tabor, 33, a former Kidder, Peabody investment banker and subsequent Merrill Lynch executive, had been picked up at his Upper East Side apartment. The charge against both men: conspiracy to commit insider trading.

! The stench of scandal was strong again on Wall Street, and it was rising higher in executive suites than ever before. For the first time prominent officers at some of the most prestigious investment banks were snared and handcuffed in the insider-trading investigation that has been gathering momentum since Arbitrager Ivan Boesky was nabbed last November and began cooperating with authorities. Wigton, Freeman and Tabor have not been shown to have had any direct dealings with Boesky, but they were trapped, almost by chance, in the widening network of information that the investigators were gathering. Their arrests seemed to confirm what many bankers and investors had long feared: in the frenetic climate of Wall Street's protracted bull market, insider trading had become a spreading stain with the potential to blacken the reputation of the entire financial community.

The latest arrests, and the ongoing criminal investigation of insider trading, were supervised by U.S. Attorney Rudolph Giuliani, 42. The tough- talking Giuliani has made what almost amounts to a career specialization in cleaning up Wall Street's questionable practices. Said Giuliani last week: "This is a lesson to people who want to be millionaires in their 30s: better do it legally." In reply, an angry Wall Street official termed the arrests "a masterfully orchestrated shock designed to scare the hell out of the investment-banking community."

As is usual in the hazy area of illicit trading, Giuliani made his case only with the help of an informant. The man who actually fingered the arrested trio was Martin Siegel, 38, who resigned last week as co-chief of mergers and acquisitions for the Drexel Burnham Lambert investment firm and who had previously worked in a similar department of Kidder, Peabody. Known in investigators' documents by the code name CS-1, Siegel had confessed that while at Kidder, Peabody from June 1984 to January 1986, he had been part of an insider-trading ring that included Wigton, Freeman and Tabor. Last week Siegel pleaded guilty to tax evasion and criminal conspiracy to violate U.S. securities laws, and agreed to a demand by the Securities and Exchange Commission that he give up $9 million in illegal profits. He had become a target of the investigation because of his position at Drexel Burnham, which has had close ties to Boesky.

In the SEC's civil complaint against Siegel, the agency charged that he had passed on insider information to Boesky starting around August 1982. On the basis of those tips, the arbitrager was said to have made at least $33 million in illegal profits. Among the deals in which Siegel, as a Kidder, Peabody vice president, was charged with having passed on information was the proposed 1984 sale of about 20% of the shares in Los Angeles-based Carnation, a move that seemed bound to attract takeover sharks. Siegel is believed to have tipped off Boesky, who bought 1.7 million shares of Carnation. On Sept. 4 of that year, the expected takeover bid materialized from Nestle Holdings, and Boesky and partners sold their holdings for a $28.3 million profit. In return for such toothsome tips, Boesky agreed to pay Siegel a percentage of the profits made by trading on the information. Boesky associates reportedly held at least three cloak-and-dagger meetings with the Kidder, Peabody executive and handed over briefcases full of cash -- $700,000 in all.

With Siegel's help, Giuliani has cast a harsh spotlight on the elite Wall Street profession of investment banking. Most of the attention focused on Kidder, Peabody and Goldman, Sachs, since the alleged crimes took place while the accused were employed at those companies. The name of Merrill Lynch came up because Tabor worked at the firm for about six months prior to his arrest, but none of the insider trading uncovered by investigators took place there. All three companies issued strong denials that they had taken part in any illegal activity.

But, like most other investment banks, they are heavily involved in the takeover game. They both advise corporate clients on acquisitions and engage in risk arbitrage, or speculation in takeover stocks. In theory, such investment banks have erected so-called Chinese walls of discretion between the acquisition specialists on the one side and the arbitragers on the other. Last week's arrests seemed to show that such walls could be porous, to put it mildly.

The arrests also seemed to contradict the notion that charges of malfeasance on Wall Street were aimed mostly at brash young M.B.A.s with an eye for a quick buck. Wigton had been a member of the Kidder, Peabody firm for more than 30 years. He was elected last year to the board of governors of the National Association of Securities Dealers, the respected regulating arm of the over-the-counter stock industry. Freeman was a 22-year Goldman, Sachs veteran. Only the youthful Tabor could be described in fast-track terms. A Rhodes scholar, he held down the No. 2 job in Kidder's arbitrage department under Wigton. In 1986 he hopped to Chemical Bank to head a new arbitrage unit. When his views clashed with those of bank superiors, he moved again last June, to Merrill Lynch.

The charges against the three date back to June 1984, and, among other things, they involve the 1985 takeover battle waged against oil giant Unocal by Corporate Raider T. Boone Pickens. (At no point last week was Pickens alleged to have taken part in any wrongdoing.) Unocal, which was advised by Goldman, Sachs, eventually beat off the raider's advances, at a cost of $4.4 billion. But according to the charges, Goldman, Sachs Partner Freeman, who was privy to Unocal strategy, disclosed inside information about an important defensive move to Siegel at Kidder, Peabody. The move was a so-called exclusionary stock tender, which meant that Unocal would purchase stock from shareholders other than Pickens in a move to isolate the raider.

Siegel allegedly passed the information on to Wigton and Tabor. According to the charges, that duo then embarked on some sophisticated dealing for the brokerage's private trading account, based on their assumptions of how the stock market would react to the Unocal ploy. The twosome allegedly bought put options that allowed Kidder, Peabody to sell Unocal stock at a future date for a preset price that subsequently earned a handsome premium for the seller. The brokerage firm is said to have made "millions of dollars of illegal profits" on that and other transactions.

The federal authorities also charged that at roughly the same time, Siegel passed illegal insider information back to Goldman, Sachs' Freeman. Siegel allegedly told Freeman of secret plans by a Kidder, Peabody client, the Manhattan investment firm Kohlberg, Kravis, Roberts, to launch a takeover bid for Miami-based Storer Communications. That put Freeman in a position to profit from trading in Storer stock.

In their charges, authorities made clear that those two incidents were by no means the only cases of illegal trading. The conspiracy, said the Government, lasted from June 1984 to January 1986 and involved "many specific significant corporate events."

Wall Street reacted to the latest arrests with shock and fear. Says Jerome Markowitz, head of equity trading at the L.F. Rothschild, Unterberg, Towbin brokerage firm: "These are not fly-by-night operations. The firms and the people are the cream of the crop." Predicted Pierre Rinfret, a leading Manhattan money manager: "You ain't seen nothing yet. Before it's all over, hundreds of people may end up behind bars."

Indeed, one aspect of the latest arrests that mesmerized the financial community was the severe public handling of the allegedly guilty trio. All three were handcuffed at some point during the arrest process. Members of the financial community speculated that the dramatic arrests might have been inspired by a previous outcry against kid-gloves handling of Insider Trader Boesky. The highflying arbitrager, who had to pay a settlement of $100 million, was allowed to sell off hundreds of millions of dollars' worth of stock from his firm's trading accounts before his misdeeds were made known. To many Wall Streeters, it almost seemed as if Boesky had profited from inside knowledge of his own downfall, while other, more honest arbitragers lost an estimated $2 billion in the subsequent market turmoil. The latest arrests, says Daniel Bergstein, a senior partner at the Manhattan law firm Finley Kumble Wagner Heine & Underberg, "are a reaction to claims that the SEC was treating the investment-banking community different from other white-collar criminals."

If the authorities ever had such an attitude, it has changed. Last month a Manhattan federal judge sentenced Wall Street Lawyer Ilan Reich, 32, to a year and a day in prison for his role in an insider-trading ring led by Investment Banker Dennis Levine, a former Drexel Burnham managing director whose 1986 arrest led to the eventual uncovering of the Boesky scandal. In passing sentence on the now disbarred lawyer, the judge said his punishment was intended as a deterrent. Last week another Manhattan judge gave an identical term to Robert Wilkis, 37, a former investment banker at Lazard Freres who also was in the Levine ring.

That there will be other tough examples in the future seems certain. At a press conference last week, U.S. Attorney Giuliani announced that the latest shock wave was only the beginning of a "very long and substantial investigation" of Wall Street practices that would not be limited merely to insider trading.

Siegel's guilty plea helped refocus attention on the investment bank that has perhaps suffered most from the aftershocks of insider trading: Drexel Burnham. That firm was quick to issue a statement saying Siegel's offenses took place before he joined the company.

Nonetheless Drexel Burnham, which earned a record $800 million in profits last year, most of it connected with its ability to sell takeover-related junk bonds, is now limping badly. The firm claims that it is raising more new money than ever before, but it appears that precious few new takeovers financed by the company have been announced in the past two months, while a number of previous deals have collapsed. Sources close to the company say Drexel Burnham has had to buy up all or part of several recent junk-bond offerings on its own account after they could not be sold to regular clients. In December the firm canceled a $1 billion deal to move its offices into the third tower of Manhattan's prestigious World Trade Center.

In connection with the Boesky case, at least six Drexel Burnham employees, including Siegel and Junk Bond Guru Michael Milken, have been subpoenaed by the SEC, an action that does not imply guilt of any kind. Even so, Milken has reportedly hired three of the country's top criminal lawyers, Edward Bennet Williams, Arthur Liman and Martin Flumenbaum, to represent him before the SEC and in a parallel federal grand jury investigation. In December, Drexel Burnham Chief Executive Frederick Joseph publicly admitted that for a time, when Milken lined up potential buyers for takeover junk bonds, the investment bank would supply these would-be customers with a sealed envelope containing the name of the target corporation. Joseph said the letters warned against use of the information for insider trading; eventually, however, the sealed-letter practice was dropped.

Drexel Burnham was not helped by the revelation that it received an undocumented $5.3 million fee from Boesky last March, which Milken's brother Lowell later averred was for "advisory services." A similar $3 million fee for "investment advisory services" went from Boesky to the Los Angeles brokerage firm Jefferies & Co., headed by Boyd Jefferies, 56. That company specialized in quietly assembling large blocks of shares for corporate raiders outside the purview of the New York Stock Exchange. In that role, Jefferies & Co. almost always had advance knowledge of any important takeover deal. Lawyers familiar with the SEC say the regulatory agency is looking very closely at how such relationships could lead to illegal insider trading.

That investigation, coupled with the latest arrest bombshells, has made the already nervous financial community more circumspect than ever. Some members say the Federal Government's rough handling of alleged insider traders will cause other potential informants on illegal activity to refuse to cooperate. Says a Wall Street lawyer: "Attorneys are advising their clients to take the Fifth Amendment unless they can strike some kind of deal with the Government. But the Government appears to be less interested in striking a deal than in sending Wall Street a message." One knowledgeable stock-market analyst thinks he knows what the message says: "They're going to widen the net until they run out of fish." Last week's sudden haul is an intriguing sign that there is plenty of net left.

With reporting by Thomas McCarroll and Frederick Ungeheuer/New York