Money and Power

by William D. Cohan

  As part of his deal with the government, Siegel agreed to wear a wire and to work undercover. While he became a pariah on Wall Street, he helped to corroborate many of the events involving Boesky. He also provided the information to Giuliani and Doonan that resulted in the shocking arrests and indictments of Freeman and Siegel’s two colleagues in the secret arbitrage department at Kidder. In truth, though, Siegel’s specific allegations against Freeman and his two former Kidder colleagues were pure fiction. “The sole basis of the complaint on which Messrs. Freeman, Wigton and Tabor were arrested was totally uncorroborated information supplied by Martin Siegel as part of a plea agreement with the U.S. Attorney’s Office,” according to a document prepared by Freeman’s attorneys in his defense. “Siegel had been implicated by Ivan Boesky in a massive and blatantly criminal insider trading scheme in which Siegel sold clients’ secrets to Boesky in exchange for suitcases full of cash. Siegel’s tips had generated profits for Boesky in the tens of millions, if not hundreds of millions, of dollars.” But by the time anyone bothered to figure that out, Freeman’s career was over and Goldman was on the edge of another existential crisis.

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  ACCORDING TO FREEMAN, one of the cardinal rules of arbitrage at Goldman was that the firm could only invest in announced deals. “We didn’t play the rumor stocks,” he said. “Every one of them was after announcement. We were the most conservative arbitrageurs in the world. We did it one, because there’s the likelihood that if a deal got announced, we might be representing one side. So, it would look bad. Two, there were so many rumors going around, it wasn’t a great way to invest. It was good for Boesky, because he was getting inside information, but it wasn’t a good business, because stocks, rumors come up, and it was a different rumor every day.” Also, Freeman could not invest more than $50 million on Goldman’s behalf in any one deal. The whole portfolio of Goldman’s arbitrage positions at the time was $600 million. The firm targeted an annualized 25 percent return on its money. The typical arbitrage would be—once a deal was announced—to buy the stock of the company being acquired and sell short the stock of the company doing the buying. Goldman also bought the shares held by institutional investors that wanted to sell their stock in a company being acquired after a deal was announced rather than wait around the three or four months it took for a deal to close. “We were by far the number one player in that business,” Freeman said. In a world before the proliferation of hedge funds and private-equity funds, the place the Goldman partners would invest their money would be the firm’s arbitrage deals. “This was the proprietary account for the partners,” he said. And he, too, could invest his personal money in the same deals the firm was arbing.

  As soon as a deal was announced, Freeman said, his desk would open a file about the companies involved and get—and read—the public information filed with the SEC about the companies. Then the calls would start. “We would typically call the companies and/or the investment banking firms representing each side, which they had done since going back to L. Jay and Gus’s time,” Freeman explained. “Asking the sort of traditional questions: What is the antitrust situation? Is there an antitrust problem? What are the regulatory approvals? What do you think the timing is? Very boilerplate kinds of things.”

  As a result of various M&A deals over the years, he also spoke with Marty Siegel. But, ironically, he only met him once—when Siegel asked for a tour of the Goldman trading room in 1975—given that Siegel had become the principal accuser against Freeman. And Siegel said later he did not even remember meeting Freeman. Freeman was no wallflower. A graduate of Dartmouth College and Columbia Business School, he was aggressive about pushing other bankers to share information with him about pending deals. Ali Wambold, a banker at Lazard, used to tell the story of how Freeman berated him on the phone in an effort to get information. “I used to say, ‘You come in in the morning, you put on your uniform, and you compete and then at the end of the day you assume your more laid back style,’ but in the office I was pretty competitive, hard charging,” Freeman said. But he generally believed that he was calm under pressure, as was Rubin. “When everyone was running around crazily we tended to be pretty cool under fire,” Freeman said. “Everything about his persona was cool, calculating, lawyer-like.” They sat next to each other for eighteen years on the trading floor and had a symbiotic relationship; Rubin would focus on the legal aspects of a potential merger—the antitrust risk, for instance—while Freeman would crunch the numbers, even if using a slide rule was not his forte.

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  IN APRIL 1987, the grand jury handed up the indictments of Freeman, Wigton, and Tabor, with their arraignment scheduled for the following week. Each man’s attorney said his client was innocent, would plead not guilty, and would fight the charges in court. If the cases went to trial, they would have been the first ones to do so since whole insider-trading scandal broke with Levine’s arrest in May 1986. The other ten Wall Street bankers and lawyers caught up in the insider-trading scandal had pleaded guilty. At the arraignment, Judge Louis Stanton set May 20 as the day the trial was to begin.

  But within weeks of the arraignment, Giuliani’s office said that it intended to file a new “superseding indictment with broader charges,” which would delay the start of the trial. In mid-May, Giuliani’s office asked for a two-month delay because “of what it said were difficulties in bringing the new indictment,” the Times reported. At a hearing before Judge Stanton on May 12, John McEnany, an assistant U.S. Attorney working for Giuliani, conceded that the government had moved too quickly in arresting the three men in February. “Now, we know that the defendants have made much of the argument that they were arrested,” he told the judge at the hearing. “With the benefit of hindsight, I would have liked to have factored in another two or three months before commencing this case. We can be faulted with trying to proceed too fast.” (Giuliani himself acknowledged the error—on an August 18, 1989, “walking tour” along Forty-second Street. “It was a mistake to move with that case at the time that I did and—to that extent—I should apologize to them,” he said.)

  McEnany asked the judge to postpone the trial beyond May 20 or else the defense would have “an obvious tactical advantage” and that the “complexity of the purported crimes” required that the prosecutors have more time. He also said the government believed the stocks of nine companies—not two, as originally stated—had been subject to insider trading. But the judge denied Giuliani’s request for a delay, citing the requirement of the Sixth Amendment, which provides for speedy and public trials.

  The next day, following Stanton’s decision not to grant Giuliani a two-month delay in starting the trial, the U.S. Attorney’s Office stunned everyone and announced it was dropping the original indictment against the three men and would soon be filing a new indictment “containing a substantially greater number of counts,” according to Neil Cartusciello, another assistant U.S. Attorney. The four counts in the original indictment were “a mere small fraction of what this case is all about,” Cartusciello said. “The tip of the iceberg.” He reiterated the idea that nine stocks were involved, not two. “The evidence before the grand jury continues to grow,” he said. In an interview with the Times, Giuliani tried to spin the decision to drop the indictment as simply part of a growing conspiracy among the traders. “It would have been irresponsible to go to trial on that indictment,” he said, “given what we know now.” Not surprisingly, the defense attorneys were furious that the trial had been delayed by the government’s slick legal maneuvering. The motion was “a cynical and transparent evasion of a defendant’s right to a speedy trial …,” observed Wigton’s attorney, Stanley Arkin. “What they’re saying is that they made a grievous mistake in making the arrests. Now we’re going to do it another way.” He then elaborated: “My client was arrested in February without ever knowing he was under investigation, without ever getting a chance to tell his side of the story to a grand jury, on the say-so of one man, Marty Siegel. He was public
ly humiliated. He lost everything he built up over the years, and he wants a speedy trial. Usually, when the government says they’re going to drop an indictment, they’re saying they made a mistake and they’re going to drop the whole thing. Here they’re turning the whole thing on its head.”

  As the defense lawyers were quick to point out, Doonan’s complaint—which resulted in the arrests of Freeman, Wigton, and Tabor—had not been vetted by a grand jury. No subpoenas were served prior to the arrests. No documents were sought or produced prior to the arrests, and Giuliani’s office made no attempt to contact any of the defendants or their firms prior to the flamboyant arrests. What’s more, they said, “[a] subsequent investigation conclusively demonstrated that the complaint was blatantly false.” For example, Doonan alleged that, in April 1985, Freeman tipped Siegel about Unocal’s defense strategy—against T. Boone Pickens’s hostile offer—whereby the company would “announce an ‘exclusionary’ partial buy-back offer for its own stock,” that Siegel called Tabor and Wigton and told them what Freeman had allegedly just told him. Wigton and Tabor then “decided … to buy puts.”

  But, Freeman lawyers contended, “[t]hese allegations about an April 1985 conversation between Siegel and Mr. Freeman were utterly false. The alleged conversation and tip never took place and Kidder did not buy puts in April 1987. On the contrary, Kidder sold puts at the time alleged”—a big difference—“[and] Kidder’s first purchase of puts did not occur until one month after this alleged inside information about the self-tender had been made public.” When asked about this discrepancy, Siegel “sought to minimize the falsehood that caught him in his lie by suggesting that the error was nothing more serious than a clerical error,” according to Freeman’s attorneys. Siegel said that a federal agent had erroneously transcribed Siegel’s version of events, stating the puts were bought in April 1985, instead of May 1985.

  Likewise, in Storer, Freeman’s trading records—which Giuliani did not subpoena until the day after Freeman’s arrest—revealed that Freeman did the exact opposite of what Siegel claimed Freeman did based on the tip Siegel allegedly gave him. Siegel claimed that his tip to Freeman about Storer resulted in Freeman selling Storer calls. Instead of selling Storer calls and stock during April 1985—as Siegel alleged—Freeman and Goldman actually bought Storer stock and calls. The trading evidence showed that Siegel was wrong about the trades that Freeman and Goldman had supposedly made regarding both Unocal and Storer. “Quite simply, Siegel has been caught in two impossible lies,” Freeman’s attorneys found. “At this point, Siegel should have been exposed for the liar he was. The government, however, in order to justify the histrionic arrests, refused to admit they had been so blatantly conned by Siegel.”

  “In sum, the complaint was one big lie,” Freeman’s attorneys claimed. They believed that “the pressure on Siegel was enormous” and “if he ‘cooperated’ with prosecutors by implicating someone else, he might get a minor jail term and retain some of his assets. If he failed to implicate anyone else, he faced complete and total financial ruin and jail sentences totaling hundreds of years.” As a result, Siegel’s decision was “easy” even though “it meant that he had to implicate innocent persons.” Nevertheless, Giuliani in his “fervor to prove that [his] arrests had not been reckless or irresponsible, refused to abandon Siegel, who was responsible for those false arrests, and expose him for the liar he was.”

  ——

  THE EDITORIAL PAGE of the Wall Street Journal quickly caught Giuliani’s errors. In a May 21 editorial titled “Rudolph the Red-Faced,” the editorial writer stated that the dismissal of the indictment “adds to the impression of grandstanding in the frisk-and-cuff arrests of the suspects back in February.” With the prosecution said to be working on a new indictment, the Journal wrote it has discovered “it can’t win on these trades, so a new indictment is going to be about different trades entirely.” The Journal suggested that “Mr. Giuliani has a pressing need to make up lost face.”

  What’s more, Siegel and Giuliani had accused the three men of having a “virtual conspiracy,” since none of them had ever met or even knew one another. “Never well conceived to begin with,” Christopher Byron wrote in New York magazine, “the case against the trio began to crumble as soon as defense lawyers got a look at its details. Here was a virtual conspiracy of strangers: Tabor didn’t know Freeman, and Freeman didn’t know Wigton. Moreover, instead of subpoenaing the men’s trading accounts to see whether Siegel’s assertions were true, the prosecutors had simply arrested the men. When they finally did get around to checking the documents, the information in them proved nothing.” And, of course, Freeman had only met Siegel once, and Siegel didn’t remember the meeting.

  Siegel and Freeman did speak regularly about deals on the phone—the Journal would later report that the two men spoke on the phone 240 times during the period of the alleged conspiracy. But Pedowitz—the Wachtell lawyer who represented Goldman—argued that there was nothing untoward in that relationship between one of the Street’s leading arbitrageurs and one of the Street’s leading M&A bankers, especially since Freeman had no idea—and passed lie detectors tests to prove it—that Kidder had an arbitrage department. “While there was clearly a phone relationship with Siegel,” Pedowitz explained, “it was not much different from Bob’s many such relationships with arbitrageurs, wealthy investors, buyout firms, corporate officers, investment bankers, and lawyers. The phone at the time was the essential tool for those who made their living trying to gather ‘market color’ information so that they could trade profitably.” The remarkable admission from Pedowitz was not that Siegel and Freeman often spoke on the phone but in how close to the edge arbitrageurs, such as Freeman, needed to be on a daily basis “so that they could trade profitably.” It’s no wonder, then, that a number of M&A bankers, lawyers, and arbs crossed the line.

  As for the near obsession that the arbs had for “making the calls” and trying to glean whatever shreds of information they could in order to gain an information advantage in the marketplace—a practice that certainly nowadays has the whiff of insider information—Pedowitz found the practice “common” among arbs generally and that the arbitrageurs at Goldman felt “free to ask questions about publicly announced deals and would only be supplied with information that the companies felt was in their interest to share and that the companies wanted the arbitrageurs to know.” Wachtell allowed that “seeking out information of this sort in this manner seemed consistent with insider trading case law as it existed at that time, and the practice of freely asking questions and fishing for information was common across the industry. During that period, companies would often find it advantageous to communicate information in one-on-one conversations with reporters and market participants.” (Now, of course, with the SEC’s issuance of Regulation FD, these sidebar conversations are supposedly no longer permitted, and no one market participant can have information unless everyone has it.)

  Pedowitz kept Weinberg, Rubin, and Friedman and the rest of the Goldman Management Committee apprised regularly of his findings. “They knew our view that the firm’s trading appeared to be proper,” he observed. “They knew also that the arrest complaint was riddled with errors and that the charges in the dismissed indictment seemed extraordinarily contrived. They also learned that the trading records of both Goldman and Kidder undermined the numerous suggestions of tips that were coming from Siegel. They also knew that both Wigton and Tabor were adamant that they, too, had done nothing wrong.” As a result, Goldman “fully supported” Freeman throughout the case, paying for his separate legal advice and keeping him as a partner, although he was moved eventually into the firm’s merchant banking division and out of arbitrage. In reality, Freeman spent most of his time on his defense and trying to clear his name. “I was, basically, in an icebox up in the merchant banking, which was very small at that point,” Freeman said. “I was isolated, almost never talked to people in the trading room because the next day, they might be subpoenaed and
be asked, ‘What did you and Mr. Freeman discuss?’ ”

  Yet, as convinced as Team Goldman was that Siegel and Giuliani had fingered Freeman irresponsibly and unfairly, the U.S. Attorney’s investigation of Freeman continued, even after the abandonment of the original indictment. More than ninety document and witness subpoenas were issued, and more than sixty witnesses were interviewed or appeared before the grand jury during the ongoing investigation. Many Goldman partners and associates recalled being very nervous when asked to appear before the grand jury as witnesses shortly after Freeman was arrested. “I was uneasy …,” recalled one former partner. “It was frightening. The thought that they could indict the firm—that would be life-threatening. I never dreamed I’d be going to a grand jury.” Bob Rubin and Steve Friedman also appeared in front of the grand jury, as did nearly every senior Goldman partner except for John Weinberg.