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Why Boesky Insider Trading Case Rocked Wall St.

December 01, 1986|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK On Nov. 14 , the Securities and Exchange Commission stunned Wall Street by announcing that it had charged stock speculator Ivan F. Boesky with having illegally traded on inside information for more than a year, starting in February, 1985.

Boesky agreed to pay a penalty of $100 million, encompassing $50 million in allegedly illegal profits and a $50 million fine. He was also permanently barred from the U.S. securities industry except as a private investor and he will plead guilty to a federal felony charge carrying a sentence of up to five years in prison. He did not specifically admit or deny guilt.

As the story has unfolded, many questions have arisen over the nature of Boesky's business, his offense, its impact on the stock market and the SEC's pursuit.

Here is a summary of these questions and the best answers available.

Question: Who is Ivan Boesky?

Answer: For more than 10 years, Ivan F. Boesky has been Wall Street's leading speculator in takeover stocks, a trade he practiced so heavily and with such a large following that his trading itself became a major factor in the takeover market, often affecting the outcome of merger transactions.

Q: What was he charged with?

A: From February, 1985, to April, 1986, the Securities and Exchange Commission charged, Boesky accepted illegal inside tips on impending mergers from Dennis B. Levine, who at the time was a mergers and acquisitions specialist for the investment firm of Drexel Burnham Lambert. In addition to tipping Boesky to Drexel deals, the SEC said, Levine also passed on tips he received from his own contacts at Goldman, Sachs and other firms. Boesky used Levine's information to buy or hold at least seven stocks that were subject to takeovers or were undertaking takeover defenses.

Q: What is insider trading?

A: By the SEC's own definition, insider trading is using "material non-public information" to trade a security, whether it is a stock, bond, or stock option. This category of information could include a corporation's yet-unpublished earnings reports or confidential merger plans. In one celebrated case, the SEC managed to extend the definition to include advance information of the contents of the Wall Street Journal's influential "Heard on the Street" column, a digest of market opinion and gossip.

Those who have been successfully prosecuted as illegal inside traders include corporate executives and directors, lawyers, investment bankers, a reporter for the Wall Street Journal, and a professional printer who cracked the code used for early printings of corporate takeover documents.

Civil penalties for violations of the rules include return of the illegal profits, or "disgorgement," and a fine of up to three times those profits.

Q: Why is this case so important?

A: Beyond being the biggest insider trading case of all time in terms of disgorgement and fine, the Boesky case exposes what appears to be a network of Wall Street professionals trading information with one another at close to the highest levels of the takeover field. It is conceivable that some takeover bids were even inspired by the prospect that participants could turn an illegal side profit.

Q: Who else is involved?

A: No one has yet been charged in the case other than Boesky, Levine and some of Levine's associates. SEC and Justice Department subpoenas have been issued to several other market professionals, however. These include Carl C. Icahn, the corporate raider, and Boyd L. Jefferies, a Los Angeles stockbroker whose business was assembling and trading huge blocks of stock for professional investors who often included Boesky and assorted takeover raiders.

Q: What is the role of Drexel Burnham Lambert?

A: Considerable attention has focused on this aggressive Wall Street investment firm, which employed Levine, helped finance Boesky and played an indispensable role in many of the largest mergers of the last few years. Drexel's renowned "junk" bond unit, headquartered in Beverly Hills, provided financing for many top takeover entrepreneurs by assembling syndicates of investors willing to put up billions of dollars to back hostile takeovers.

Among Drexel executives who have been served with subpoenas in this case are Michael Milken, the creator of the modern junk bond market, and Martin A. Siegel, a former Kidder, Peabody takeover specialist who recently joined Drexel. Sources have told The Times that as many as five Drexel executives are currently seeking legal representation in the case.

Q: How much did Boesky make illegally?

A: The SEC in its formal complaint said Boesky made at least $50 million in illegal profits in slightly more than a year on tips he got from Levine alone. Estimates of his total illegal profits attributable to Levine run as high as $200 million, but the SEC says much of that would include money Boesky earned legitimately in stocks he also traded illegally.

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