Bad Boys, Bad Boys

Seventeen years ago, Ivan Boesky ushered me into a conference room in his palatial digs above Piaget on Fifth Avenue. I had come to see the most famous arbitrageur in America to talk about bumming some office space for my nascent hedge fund. I had met Boesky multiple times before, both at work and at charity events—he was a huge giver—and he was always gracious and gentlemanly, almost scholarly in his demeanor.

I had my reservations about connecting with Boesky, though. It was pretty much an open secret that he trafficked in inside information. My boss at Goldman Sachs, Bob Rubin, had told me repeatedly to be careful of Boesky. Funny thing, it mattered to ethical people like Rubin, but it didn’t appear to matter to the Feds. As long as it didn’t seem to matter to the Feds that he bought stocks ahead of takeovers, why should it matter to anyone else? At least that’s what went through my mind when I visited Boesky.

On the long walk down to Boesky’s conference room, I passed vacant office after vacant office and halls lined with packing cartons. Boesky, almost always tanned and relaxed, seemed edgy and gaunt that day. You could tell he didn’t want to chitchat. In fact, he seemed eager to get rid of me. Curtly, he asked what he could do for me. I told him I wanted to borrow some of his spare office space. No, he said, there was no room for his people as it was. I told him that I just needed a little space and that it looked like he had a lot of it. No, he said, he didn’t, he had no spare room at all. He kept swinging his head from side to side, distracted, almost goofy in his lack of attention. I looked at him like he was nuts. But you didn’t push a kingpin like Boesky. Suddenly, he got up and said he had to run off and he left me to find my way out.

Weird, I said to myself as I walked back to my studio apartment on East 72nd Street. What the heck was that about? What’s eating Boesky? And then, at home, I put on the TV to watch the Nightly Business Report on PBS and saw a picture of Ivan Boesky flashing along with the news that shortly after the close of the market, the Feds had busted him for insider trading. He was cooperating with the government—in fact, he had been undercover for the Feds for the past few months, building cases against others with whom he had trafficked in inside information. The Feds had been watching and listening in the next room during our meeting that day.

With Boesky’s arrest, an era ended. The government, which seemed to look the other way as people made big bets with inside information, had decided to put an end to the practice. In another year’s time, after a series of high-profile perp walks and indictments, no one would dream of trading on inside information. The arrests changed the game; if you found out news before you should have, you closed your eyes to it. Too dangerous; you’d get caught just like Boesky, or Marty Siegel, the most important investment banker of that time, or, alas, Michael Milken, the most powerful financier of the era.

“The mutual-fund boys were in middle school when Boesky was busted.”

In fact, at the height of the prosecution’s zeal, many of us thought they went after the guilty and the innocent. You and your colleagues lived in fear of a phone call from the prosecution, from Rudy Giuliani’s Southern District of New York or from Gary Lynch, head of enforcement for the SEC. One call and you were finished.

Roughly a decade and a half after Boesky’s arrest, Dr. Sam Waksal learned in advance of others that his company’s drug application would be turned down by the FDA, a classic piece of material inside information. Waksal’s move, to buy puts on his own company, would have been viewed as suicidal immediately post-Boesky.

Also a decade and a half post-Boesky, a group of hedge-fund managers concocted a scheme to rig mutual funds to steal from the unknowing little fellas.

A decade and a half later, a gang of white-collar thugs, men like Bernie Ebbers at WorldCom and Dennis Kozlowski at Tyco and Andy Fastow and Jeff Skilling at Enron and the Rigas boys at Adelphia, decided that the securities laws didn’t apply to them.

A decade and a half later, Martha Stewart would get two chances to admit to the Feds she made up a story about a stop-loss order to justify the selling of shares in Waksal’s company before it crashed.

A decade and a half later, CSFB’s Frank Quattrone would think he was untouchable even if he destroyed documents after learning he was a target of a federal securities investigation.

What happened in between these two eras that made it so today’s most powerful people of finance would repeat—and reinvent—the sins of the past?

Some of it was time. The passage of time. People just plain forgot. That’s Waksal and Stewart. Or they were ignorant—that’s Ebbers. Or they were too young—Fastow, Skilling, and the hedge-fund and mutual-fund managers who stole your net-asset values. They were in middle school when Boesky was busted.

Rigas, Kozlowski, Ebbers, and the others who are charged with looting their own companies? There I blame the Feds themselves. Not the Feds circa 1986 but the ones in the nineties, who lost their bearings and neglected to bring timely prosecutions of white-collar crimes. Five years ago, it was revealed that executives at Cendant committed the largest accounting fraud of the era, but the CEO of that company, Walter Forbes, has yet to be prosecuted (though he’s at least been indicted). “Chainsaw Al” Dunlap committed major accounting fraud at Sunbeam and got off with a fine for a fraction of the money he made. Both Forbes and Dunlap were caught up in chicanery every bit as ugly as the crimes we’ve recently seen. But the prosecutors gave them big fat passes that sent a bright green signal to those who were tempted to steal from their companies and the marketplace.

The combination of time and the breathtaking failure of securities regulators to show any toughness at all against white-collar crime created a world in which you could commit crimes and make a pretty good bet that you would get away with them.

So we have to crack down again, just like a decade and a half ago. And I can assure you that once again, it is working: The arrests and the perp walks and the indictments are having the desired effect.

Somewhere, though, in some high school or middle school, another generation is oblivious to the scandals and the crimes. A decade and a half from now, I suspect, we’ll be due for a new tsunami of crime, as these prosecutions fade in memory or fail to get embossed into the brains of those too young to pay attention.

Bad Boys, Bad Boys