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The Fall of an 'Inside' Trader : Ivan Boesky: Prominence Led to Scrutiny, Charges

November 16, 1986|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — For most of his career, Ivan F. Boesky has basked in an aura of pre-eminence. For more than a decade he has been foremost among the aggressive speculators whose stock trades have fueled the merger craze afflicting corporate America.

It was his unbridled speculation that made traders such as himself a force for corporate raiders and company managements to reckon with. He was the richest and most successful takeover speculator of all and seemed the most rigorously scholastic researcher.

Today, his career can still be described in superlatives, but they are negative ones.

On Friday the Securities and Exchange Commission labeled Boesky, 49, history's biggest illegal insider trader. The SEC said the key to Boesky's profits on at least seven major takeovers since March, 1985, was not his own brilliant analysis but inside tips from Dennis B. Levine, the former investment banker at Drexel Burnham Lambert who pleaded guilty this summer to making $12 million through insider trading. In all, Boesky made $50 million from Levine's tips, the SEC said.

The commission extracted a record-setting agreement under which the trader will pay $100 million, including the $50 million in illegal profits, will plead guilty to a federal felony count and will submit to a permanent prohibition from participating in the U.S. securities business, except as a private investor using his own money.

That last item may be the biggest blow of all, for Boesky has built his own fortune atop the shoulders of other investors' stakes. He incorporated private firms and contributed to them his fabled talent for spotting takeover candidates. The investors contributed the capital. The result was a personal fortune that some have estimated to be worth as much as $200 million.

Whether he has enough left after paying his penalties to remain an important individual player in the stock market is hard to gauge. Certainly his information-gathering techniques will remain under close scrutiny. Some investment professionals believe that he may shift his operations to London, where he has a growing investment interest.

Boesky's holdings include controlling stakes in a number of public corporations as well as private partnerships he founded as investment vehicles. One holding is a substantial stake in the Beverly Hills Hotel, which was recently put up for sale.

Boesky's profession, known as risk-arbitrage, has grown in controversy as it has played an increasing role in the corporate takeover wave of the 1970s and 1980s.

Assume Risk

After takeovers are announced, small shareholders or conservative investors often wish to sell their stock for fear that the deal might fall through, sending their stock's price lower. So arbs step in and assume that risk, hoping to benefit if the deal goes through.

But corporate management has grown to mistrust the arbs, reasoning that their only interest is to see a deal consummated, not to participate in a company's long-term future. In time, the arbs' interest in a stock came to signify that a company was destined to be taken over.

Arbs like Boesky further irritated managements and pleased Wall Street deal-makers by buying the stock of likely takeover candidates in the absence of any announcement, effectively sending a signal that they would welcome and support a takeover bid. Among the companies in which Boesky played a controversial role were CBS and Phillips Petroleum.

To this day the Boesky mystique provokes envy and animosity among those who were his competitors or students. "He's a common criminal," one arbitrageur said Saturday with satisfaction. "This is a development that's just without precedent in my business. I went out and bought six copies of the newspaper this morning to send to my kids."

Imperial Countenance

In person Boesky gives off an imperial air derived from more than his habit of referring to himself with the royal "we." Dressed in his customary dark three-piece suit, his neck cinched in a high collar, the skin of his face drawn taut beneath close-cropped silvery hair, he resembles old pictures of Woodrow Wilson.

"I think we've made a strong impression" on the stock market, he said in a 1984 interview with The Times, sitting in a high-winged chair in an upstairs room at the Harvard Club. (He was not an alumnus, but a major contributor.) "We tried to demonstrate that securities arbitrage was an enterprise all to itself. It was not really known as an investment technique."

Boesky glorified the mystique of tireless work. He himself needed only a few hours of sleep a night. "We get up earlier and tend to go to bed later at night," he said. "Like all disciplines, when you apply a great deal of energy and work effort and careful judgment, then you have a greater chance of success."

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