The Predators’ Ball

by Connie Bruck

  In an SEC deposition in 1982, during another investigation, Milken testified that he had about five hundred phone conversations a day. And in a deposition in September 1986 he said he participated in “potentially one thousand transactions every day.” But this superhuman acceleration was not without its cost. “If you talk to Michael for three or four minutes,” said one associate, “he can grasp what it may take other people hours or even a week to learn. But when you take three or four minutes down to two minutes, his reliability starts being worse. But he still wants to be in the decision process. Then he gives you forty seconds, and his decisions are bad, made on too little input. Add to all that his imperialness and sense of his own infallibility.”

  Out of about thirty or forty conversations that this associate had with Milken on a given bond issue, he said they did not have “more than two or three half-meaningful discussions. Most of those conversations lasted about thirty seconds, conversations where you’re on the phone with him and you don’t know if he’s listening to you or talking to someone else, covering the mouthpiece. You’re talking, you finish making your point, and then he says (one of his most often-used expressions), ‘I’m back.’ ”

  By 1986, he concluded, Milken “never had enough information. His retentive powers were amazing—but then that phenomenal repository got filled up, wasn’t retaining any more.”

  Some thought that Milken was increasingly out of touch, not only because he was operating at such velocity, but also because in his somewhat calmer moments off the trading floor he had succumbed to hubris. He had always cultivated a personal style that was modest, deferential. He liked to think that he appeared even humble. But years of rarely being challenged, of seeing his influence skyrocket, of having his acolytes and clients hang on his words, had taken their toll. So many treated him as though he were the oracle—and Milken began to act as though he were.

  Throughout 1985 and 1986, the chairmen of American companies—not the Fortune 500, but sizable, $300 million companies—had been making the trek to Beverly Hills to pay homage. Milken would see almost no one during the trading day, so he scheduled these appointments before the market opened (starting at 4:30 A.M.) and after its close. And there, in his throne room, he would finally forsake the thirty-second bursts and segue into monologues on macroeconomics, on the state of the world, on whatever came into his imperial mind.

  On the final morning of the Tokyo bond conference in November 1986—the inaugural of Milken’s effort to target Japan, having already captured so much of the domestic territory—Mike Mansfield, the crusty eighty-seven-year-old U.S. ambassador to Japan who had been a luncheon speaker at the Drexel conference, invited Milken to a private breakfast meeting at the embassy. It was without specific purpose, a formal, courtesy visit. Such meetings have their own protocol: polite conversation, filled with give-and-take, not overextended. Milken, however, reportedly held forth for close to an hour in a monologue that barely allowed Mansfield to get a word in edgewise. Off and running, he is said to have pontificated until the visit’s end on the economy, bonds, world politics, currency rates, macroeconomics. The gospel according to Milken. He had long been the fiscal evangelist, but now there was a self-importance which was blinding him, certainly to social conventions—and probably to much more.

  15

  Boesky Day

  DREXEL EXECUTIVES had just returned from the Tokyo bond conference in November ’86, flushed with the success of that international inaugural, when—at the market’s close on Friday, November 14, 1986, the day that they would thereafter refer to darkly as “Boesky Day”—the announcement came across the tape that Ivan Boesky had pleaded guilty to insider trading and had agreed to pay the largest fine ever, $100 million. He would, moreover, be cooperating with the government in its ongoing investigation of insider trading on Wall Street. At Drexel in New York, the leatherbound volumes of the $640 million much-disputed Boesky underwriting done in the spring of 1986 had been delivered that day to the office of Stephen Weinroth, the main investment banker on the deal, who would typically add these volumes to those of his other deals on his office shelves. Weinroth was not in the office. Hearing the news, his secretary put them in the closet.

  Over the next four months, Weinroth, who like several others is said to have argued against doing the Boesky underwriting, was responsible for its unwinding. In the end, the bondholders were made whole on their investment; it was Boesky’s equity partners in his arbitrage fund who suffered losses, and who sued Boesky, Drexel, and Fried, Frank, Harris, Shriver and Jacobson, the law firm that was counsel to Boesky in this and most other matters. When the unwinding was completed, in mid-March 1987, Drexel commemorated it not with the traditional deal paperweight, a Lucite-encased miniature prospectus cover, but with a giant pink eraser, bearing the amount of the ill-fated offering in parentheses ($640,000,000).

  The Boesky-Milken relationship, however, was not so erasable. Within minutes of the announcement of Boesky’s plea, the SEC issued subpoenas seeking information about trading in a dozen securities and the role in those transactions of Michael Milken, Carl Icahn, Victor Posner, Boyd Jefferies of the Los Angeles-based brokerage firm of Jefferies and Company, and others. Drexel executives knew then that their worst fears at the time of Dennis Levine’s arrest in May, which had receded amidst the euphoria of the summer and fall of ’86, had been realized.

  When Levine was arrested, the quick consensus at Drexel was that he would do anything, say anything, to save himself. He had been at Drexel for only a little over a year, however, and his colleagues in corporate finance in New York didn’t think he had been close enough to Milken and his group to know much about what really went on in the Wild West. But what if he knew just a little? Or what if he made it up? Or what if he squealed on someone who did know?

  Through the summer, those whom Levine had earlier convinced to trade information with him, and whom he now was trading to the government, emerged to take their pleas: investment bankers Ira Sokolow from Shearson Lehman Brothers; David Brown from Goldman, Sachs; Robert Wilkis from Lazard Frères; and lawyer Ilan Reich—Martin Lipton’s protégé—from Wachtell, Lipton. With each successive revelation, however, the scandal seemed to move farther away from Drexel, becoming more and more the Wall Street scandal; and the Levine ring, moreover, appeared to have been comprised of second-tier M&A players. There was no hint of its touching the figure at the apex of that world.

  Then came Boesky. For years, other arbs, investment bankers and traders had talked among themselves and, occasionally, on a background basis with this reporter and others about Boesky’s trading on inside information. The shock that seized the Street on November 14 was not at what Boesky had done—who had not surmised it?—but at his having been caught. His prescient trading patterns had sparked SEC investigation after investigation, but until there was a cooperating witness in the person of Levine the fortress had been impregnable. Now it was falling like a house of cards.

  Suddenly, most of Wall Street seemed vulnerable. Boesky, the biggest arb on the Street by far, with hundreds of millions to bet, who lived and breathed the M&A game through all his frenetic, obsessive twenty-one-hour days, had been at that game’s nerve center. He had monitored it from his command post, where he stood for hours at a time, surrounded by computer screens flashing stock prices, manning a switchboard with 160 direct phone lines to stockbrokers, arbs and others. There was not a significant M&A player on Wall Street who had not gotten the hyperkinetic Boesky’s calls. And at least one star player, Martin Siegel when he was at Kidder, had long been rumored to have provided Boesky the inside information he continually sought.

  Now, like Levine, Boesky would doubtless offer up his Wilkises and Browns and Sokolows and Reiches. But just as Boesky had dwarfed them in Levine’s trade, so would Boesky’s ultimate target dwarf his middling ones. Because his ultimate target was the King.

  Boesky had been doing business with Milken since at least mid-1983, when Drexel raised $100 million for th
e Boesky-controlled Vagabond Hotels, a subsidiary of the Beverly Hills Hotel Corporation. In 1981 Boesky had gained control of the lush Beverly Hills Hotel from his in-laws after their patriarch, Ben Silberstein, died. In that Vagabond offering—the proceeds of which were in part devoted to Boesky’s risk arbitrage—Drexel in its time-honored tradition took as part of its fee a slug of warrants that gave it an equity stake in Vagabond (later renamed Northview Corporation).

  Then, in April 1984, Drexel had done a $109 million private placement of junk bonds for Boesky’s arbitrage partnership. While $109 million seems paltry compared to the $640 million that Boesky would raise just two years later, at that time it probably comprised roughly 50 percent of his capital. So Boesky was relying heavily on Drexel for his funds.

  Interviewed in early 1984, Boesky’s lawyer and close friend Stephen Fraidin of Fried, Frank had listed Milken as one of a handful of people, important to Boesky, who knew him well. This friendship—or, more likely, this relationship based on mutual exploitation, since few more purposeful people than Boesky and Milken exist in this world—had begun even before Milken became the full-fledged maestro of the takeover world. But the relationship—and its potential for abuse—must have intensified once Milken possessed so much of the information the omnivorous Boesky craved. According to one associate of the two men, Boesky (who made it a point of pride that he slept only three or four hours a night) would call Milken (who did the same) most mornings as soon as Milken arrived at his desk, between 4 and 4:30 A.M.

  The relationship was fraught with a conflict-of-interest potential that was extreme even for Milken., He, of course, would not have seen it as a conflict. It had, rather, the synchronicity of interest that he had long cultivated in his interdependent universe, where he underwrote debt securities, and owned them, and owned those issuers’ equity as well, and placed others’ debt with those companies. Here Milken (and Drexel) not only underwrote Boesky’s debt and probably owned some of it but had profit participation in Boesky’s arbitrage activities as equity holders. In those activities, Boesky was betting—in the kind of volume that could influence their outcomes—on the contests that Milken was strategizing and backing. They might be, if they so chose, perfectly complementary.

  And they had been, as Boesky began telling the government, or at least it appeared so from stories in the press, mainly those written by James Stewart and Daniel Hertzberg in The Wall Street Journal, during the six months after Boesky Day.

  Within the first two weeks Drexel was identified as the subject of an investigation by the SEC and also a federal grand jury. By early February 1987, the outlines of what was reportedly the government’s case were being sketched in the Journal.

  The centerpiece of that case against Milken and others at Drexel appeared to be a $5.3 million payment made by a Boesky entity to Drexel in March 1986. As reported by Stewart and Hertzberg, that payment was questioned by Boesky’s auditors at the accounting firm of Oppenheim, Appel, Dixon and Company. Boesky had told his auditors that it was for “consulting.” Unable to produce documentation explaining the payment, Boesky had then called Drexel’s Beverly Hills office and obtained a letter—signed by Lowell Milken and Donald Balser, a member of “the Department”—stating that the payment was for “consulting and advisory services.”

  Stewart and Hertzberg, however, quoted sources “familiar with the government’s case” who said that the payment appeared to be the settling of differences in a series of profits and losses incurred by Boesky and Drexel, respectively. These profits and losses apparently had resulted, sources said, from Boesky’s having bought and “parked” stock at Milken’s behest, and Milken’s having done a similar favor for him. “Parking” refers to one investor’s holding stock for another, in order to conceal the true ownership of the stock—and it typically involves the holder’s being guaranteed against losses. In some instances, these sources said, it appeared that Milken had not only agreed to protect Boesky from loss on the stock purchase Boesky made for him, but had promised him a percentage of the profits on the eventual sale of the stock. Thus, to arrive at the $5.3 million, Boesky totaled the losses and profits from the stock positions he had been parking for Drexel, and subtracted the percentage he was allowed to keep.

  If this were true, prosecutors would have a multitude of potential violations of the law to draw upon for indictments: failure to disclose these arrangements in SEC filings; net capital violations; violation of prohibitions against market manipulation, of tender-offer regulations, of record-keeping requirements, of prohibitions against falsifying documents, and of antifraud provisions of the securities laws; and conspiracy to commit any or all of these offenses. Beyond all this, if Boesky had parked stock for Drexel in the context of a coming takeover about which Drexel officials had inside information, then Drexel might be subject to triple damages under the insider-trading act for all or part of its profits.

  There are numerous ways that such a reciprocal parking arrangement could have worked to Boesky’s and Milken’s mutual advantage. Boesky, who was always straining his net-capital requirements with his gargantuan appetite, could have disguised the true magnitude of his holdings by parking them with Milken. Or he might not have wanted to make the required public 13D filing stating that he had acquired over 5 percent of a company’s stock, if he were contemplating an acquisition. (Boesky had said, in early 1984, that he intended to expand from arbitrage into “merchant banking.”) Or he might have been buying stock on the basis of inside information about a coming deal, and he would have wanted to disguise his purchases so as to avoid SEC investigation.

  For his part, Milken might have wanted to park stock with Boesky if it were stock that Drexel was restricted from buying because of its knowledge of a coming deal. Or Milken might have wanted to seem not to own stock but have it on call to pressure a targeted hostile takeover subject as in, for example, the Wickes situation. Or he might have wanted, as was allegedly the case in Victor Posner’s acquiring control of Fischbach, to have freed Posner to act via a stock purchase—one he was unable to make himself. For Milken—deftly moving his players across the board, strategizing many moves ahead—the potential uses for disguised stock purchases were myriad.

  Fischbach was among the eight stocks that Stewart and Hertzberg listed, in articles in the Journal, as allegedly having been involved in the $5.3 million payment. (The others were Gulf + Western, Unocal, Transworld, Phillips Petroleum, Diamond Shamrock, Lorimar-Telepictures, Harris Graphics.) According to Drexel executives, it was Fischbach that the government in depositions appeared to be focusing on the most.

  Indeed, in April 1987 when Boesky would take his criminal plea (having agreed to a consent decree regarding the SEC charges earlier), he would plead guilty to a criminal information that charged him with conspiring to make false statements to the SEC in the context of a conspiracy to gain control of Fischbach, an engineering company. The document charged that a conspirator had instructed Boesky to acquire Fischbach stock, and that Boesky was later reimbursed for losses as “part of an attempt to reconcile other outstanding money differences.” According to sources quoted by Stewart and Hertzberg, that conspirator was Milken, and that settling of differences was part of the $5.3 million payment.

  The Fischbach saga, which had been partially told (minus the alleged Milken-Boesky parking arrangement) by reporter Allan Sloan in the December 1985 Forbes, certainly looked like a classic Milken orchestration. It had begun back in 1983, when Victor Posner—then still a client in good standing at Drexel, and one of Milken’s circle of high-rollers—was being thwarted in his desire to gain control of Fischbach. Posner had entered into a standstill agreement with Fischbach in 1980 which prohibited his buying more than 24.9 percent of the company unless someone else acquired more than 10 percent. In December ’83, Fred Carr of First Executive converted his Fischbach convertible bonds to stock, which gave him a 13.1 percent holding in the company. In January ’84, Fischbach bought Carr out at the market price.

>   In April ’84, Posner sued Fischbach, claiming that Carr’s holding had voided the standstill. Also in April, Boesky began acquiring Fischbach stock. By the summer, Boesky had acquired 13.4 percent. Posner—who now could argue that the standstill had been doubly voided—increased his stake in Fischbach to 28 percent and sought antitrust clearance to acquire more than 50 percent. Fischbach gave up the fight and agreed to give Posner control, once he had bought 51 percent of the company’s shares.

  In February 1985, Drexel raised $48 million for Posner’s Pennsylvania Engineering. Also in February, Boesky sold all his Fischbach stock for $45 a share in London, when Fischbach was trading in the high thirties in New York. Boesky also sold Fischbach convertible debentures in the over-the-counter market at a premium over their face value. The same day, Pennsylvania Engineering purchased the identical number of shares, for $45 each, in the over-the-counter market, and the same amount of convertible debentures that Boesky had sold. The bulk of the $48 million Drexel raised for Pennsylvania Engineering was used to purchase these securities. Ultimately, Posner bought more than 50 percent of Fischbach’s stock. He became chairman of the company in October 1985.