At one point, in June and July 1987—after the indictment had been dropped—Wigton waived his Fifth Amendment rights and spent four days being interrogated by Giuliani and his deputies. But the U.S. Attorney’s Office “was unable to elicit one bit of evidence against Mr. Freeman or one bit of evidence to corroborate Siegel,” according to Freeman’s attorneys. After the intense questioning, Wigton took a lie detector test, “which confirmed his denial of all of Siegel’s allegations.” Later, in 1989, “in an extraordinary move,” according to Freeman’s attorneys, Giuliani offered Tabor “complete immunity” in “exchange for offering anything that would corroborate Siegel’s allegations that he told Mr. Tabor that he was receiving inside information from Mr. Freeman.” Giuliani made this offer to Tabor despite the fact that he was “a man [the government] had arrested and indicted in 1987 on sweeping insider trading charges and against whom it conducted a grand jury investigation for two years.” Tabor rejected Giuliani’s offer, though, because he could not “corroborate Siegel’s lies” and “it was impossible for him to implicate Mr. Freeman by telling the truth.” Tabor refused to “lie, even if it meant he would gain freedom from further prosecution,” is the way Freeman’s attorneys put it. The trading records were getting Giuliani nowhere either, and so he subpoenaed Freeman’s college records and the records of an architect who built a home for the Freemans in 1984 and 1985 “in his desperation to find any scintilla of criminal activity.”
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NEVERTHELESS, GIULIANI CONTINUED to pursue Freeman, mostly through strategic leaks to Wall Street Journal reporters Daniel Hertzberg and James B. Stewart, both of whom would win Pulitzer Prizes in 1988 for their richly detailed and lyrical accounts of the insider-trading scandals. It would be difficult for readers not to be seduced by the portraits they painted. But Freeman and his attorneys insist—to this day—that the stories the two men were writing were largely inaccurate since they were based upon inaccurate information leaked by the prosecutors. “Trial by press release” was the way Freeman’s attorneys described Giuliani’s tactic. “Grand jury proceedings are never supposed to be public,” Freeman explained, “but it [is] well known that prosecutors leak grand jury material. It became so outrageous early in my case that my lawyers went to Judge Stanton to try to get it stopped. Giuliani, [Charles] Carberry, etc. leaked grand jury information to Stewart and Hertzberg throughout the case. Every bit of Stewart’s writings was from direct government leaks.”
This seemed to be the case right from the outset. For instance, within days of Freeman’s arrest, on February 17, Hertzberg and Stewart wrote a riveting narrative of Marty Siegel’s rise and fall, culminating in his guilty plea on two felony counts and his decisions to pay a $9 million fine, to forgo another $11 million in compensation due from Drexel, and to cooperate with Giuliani’s investigation. Siegel’s downfall was a “dream gone wrong” and his plea was “the biggest coup since the capture of Mr. Boesky.” Their Journal article also said that “it is known that Mr. Siegel is not the principal witness against Mr. Freeman but his testimony could be valuable corroboration if the government’s case against Mr. Freeman goes to trial,” although in the end the U.S. Attorney’s Office admitted that “Siegel had been the sole witness against Messrs. Freeman, Wigton and Tabor.” Dean Rotbart, a former Journal columnist and the founder of the Journalist and Financial Reporting, criticized as “shocking” Stewart’s failure in the Siegel story to disclose “his long-term symbiotic relationship” with Siegel, who, according to Freeman’s attorneys, Stewart used “as an anonymous source for stories concerning takeover battles and Siegel used Stewart to send the market messages that were beneficial to Siegel and his clients.”
A March 6 Stewart article claimed that “[r]ecords seized by the Government from Goldman Sachs & Co. show that Robert M. Freeman, the firm’s head of arbitrage, engaged in massive trading in stocks that later became targets of takeover bids” and then described the records in detail. “This established the pattern for the whole case,” Freeman explained. “This was an egregious violation of leaking confidential grand jury information to discredit me and give credence to the prosecutors’ absurd ‘tip of the iceberg’ claim.” A May 14 article included an interview with Giuliani in which he explained that several witnesses had been granted immunity and were now “providing testimony and records that could lead to more charges against the three men and to the naming of additional defendants.” Giuliani also took to the airwaves himself to make his case. On February 22, he appeared on CBS’s Face the Nation. “You can be sure we would never arrest the head of arbitrage at Goldman Sachs if he was the only witness,” Giuliani said of Siegel. On May 17, he appeared on Business World, a TV show, and reiterated his “tip of the iceberg” comment. “Imagine how frightened I was,” Freeman said. “He was throwing out all these lies.” Freeman remains incredulous about the quality of the Journal’s reporting, specifically Stewart’s. He cannot understand to this day why Stewart and Hertzberg did not pull the 13D disclosure forms that investors must file with the SEC when buying public equity securities. “I think he’s absolutely dishonest,” Freeman said of Stewart. “I think he just published anything that they gave him, never checked out one thing. Never did one ounce of investigation. Most of what we put together, all this stuff we put together, much of it was based on publicly available information. We didn’t have subpoena powers in Boesky’s stuff. We relied on public information—all the SCA stuff, all the Disney stuff, the Storer stuff about Boesky, the Continental Group stuff, the St. Regis stuff. That was all publicly available. How hard is it to get 13Ds on anybody? Not very hard, is it?”
Of course, even though Freeman’s name was on the complaint and the indictment, Goldman Sachs was still very much at risk for the potential criminal behavior of its partner, especially since it was a private partnership where the liability to individual partners was unlimited. “As a matter of law, the firm was legally responsible for criminal activity,” Pedowitz said. “The law is that if you engage in criminal activity as an employee, even if it’s in violation of your firm policy, if you are doing it in part for the financial benefit of the firm, that’s sufficient to create criminal liability for the firm, for the corporate organization—in this case, a partnership. So the legal responsibility was there almost by definition.” Since charging the firm was something the prosecutors could do at their own discretion at any moment, Goldman and its lawyers were walking a fine line, where they were careful not to do anything too rash that might invite prosecutorial ire while at the same time making sure the prosecutors were aware how wrong Goldman thought they were about the facts. “Obviously, we cared deeply about Bob,” Pedowitz continued, “and obviously we cared deeply about Goldman Sachs. Our objective was not to sort of punch [Giuliani] back in the eye because the last thing in the world we needed was for them to get angry at Goldman Sachs. If at the end of the day they had a criminal case, I didn’t want it being brought against Goldman. It was bad enough that it might be brought against Bob, but the last thing we wanted to have happen is to have all of those people who were working at Goldman Sachs basically see their firm disintegrate.”
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FREEMAN’S TRAVAILS ONLY worsened. The prosecutors zeroed in on a brief conversation Freeman had had with Siegel, when Freeman was trying to ascertain if KKR’s previously announced $6.2 billion acquisition of Beatrice Foods was in trouble. Freeman had earlier spoken with Bernard “Bunny” Lasker, an arbitrageur, close friend of Bob Rubin’s, and former chairman of the New York Stock Exchange, who said he had heard rumors the deal was in jeopardy. In January 1986, when Freeman asked Siegel, KKR’s M&A banker, about this, Siegel replied, “Your Bunny has a good nose,” which went on to become one of the most infamous lines in Wall Street history, and soon enough the crux of Giuliani’s crusade against Freeman. While Freeman did sell his and Goldman’s Beatrice shares after the conversation with Siegel—thereby saving Goldman (and himself) a large amount of money—he and his colleague in the arbitr
age department, Frank Brosens, had received information from other sources, too, indicating the deal was in trouble.
The initial charges against Freeman and the two Kidder arbs referred to trading in Storer and Unocal. Now, on the one-year anniversary of Freeman’s arrest, the Journal reported that from time to time both Goldman and Freeman personally had allegedly profited from trading in the stocks of companies such as St. Regis Corporation, SCA Services Inc., and Beatrice Foods based on insider information. In the case of St. Regis, the Journal article stated that Freeman knew that St. Regis was on the firm’s “gray list” of stocks that could not be bought or sold because the firm possessed inside information about the company and what might happen to it. While the claim in the Wall Street Journal against Freeman for trading in St. Regis stock and passing information about it to Siegel was a bombshell, and extremely damaging to Freeman’s reputation and to Goldman’s, it was—unfortunately—not true. St. Regis was not on Goldman’s gray list and “thus both Goldman Sachs and Mr. Freeman were free to trade the stock” and “both did” without “the benefit of confidential information.” Freeman’s “individual trading was completely in compliance with Goldman Sachs’s internal rules,” his lawyers wrote.
Despite these flawed assertions made by Stewart and Hertzberg—and there were still others involving Storer Communications, one of the original stocks mentioned in the complaint and the indictment—what really caught Freeman’s attention as he read the Journal’s anniversary story in Snowmass, Colorado, was what the reporters wrote about Bea-trice Foods in the last eight paragraphs. Nothing about Beatrice had been mentioned in the original complaint or in the indictment. But Freeman had to take seriously what the article was saying about Beatrice, if for no other reason than he figured Stewart and Hertzberg had a direct line to Giuliani’s office. Stewart and Hertzberg had portions of the story but not all of it. For instance, they did not know about—or did not put in the paper, anyway—Freeman’s conversation with Richard Nye, another arbitrageur, or about his conversation with Bunny Lasker, which was the basis of Siegel’s comment and explains why the paper printed the phrase with a lowercase “b” rather than an uppercase “B”; the reporters didn’t realize Siegel was talking about Bunny Lasker, not a bunny rabbit. The new allegations in the front-page anniversary article stung both Freeman and Goldman deeply. But Goldman had not lost faith in the plethora of facts that Wachtell, Kaye Scholer, and Davis Polk had been digging up about what Freeman may or may not have done in each of these deals. “We are not going to respond to what are blatantly improper leaks to the press,” Fiske and Curran wrote in a statement to the Journal.
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NEARLY TWO YEARS after he had been arrested, and then handcuffed as he left 85 Broad Street, Freeman was still in prosecutorial limbo, despite Giuliani having said at the time he dropped the original indictment that new charges would be filed against Freeman, Wigton, and Tabor “in record-breaking time.” On January 10, 1989, Freeman’s purgatory took on a whole new character when Giuliani announced his resignation as U.S. Attorney for the Southern District of New York, effective at month’s end, amid speculation that he would try to ride his record of prosecutorial success in to the New York City mayor’s office. (Giuliani did end up running for mayor in 1989 but lost to David Dinkins; he did become New York’s mayor four years later.) At his final press conference as U.S. Attorney, he was asked about the nearly unprecedented arrests of the three arbitrageurs in February 1987, and he said he wouldn’t have approved the arrests of the men “if we had known all the things that we subsequently learned.” He declined further comment because, he said, the case was still pending and the investigation continuing. The further prosecution of the case, if any, was left to Benito Romano, a Giuliani colleague and his hand-picked interim successor until September 4, when Otto Obermaier was sworn in to succeed him. Romano, “it was becoming abundantly clear,” according to Freeman’s attorneys, was “unlikely to further embarrass Giuliani by dropping the investigation against Mr. Freeman.”
Indeed, some members of the media were beginning to question not only Giuliani’s aggressive behavior that had led to the arrests but also his failure to bring charges against the men after two years of limbo. And now he was leaving his office to run for mayor. Writing in Manhattan, Inc., in April 1988, Edward Jay Epstein suggested that the charges Stewart made in the Journal could only have come from prosecutors with access to supposedly secret grand jury proceedings, a violation that Stewart was well aware of because in an earlier book, The Prosecutors, he had written that “grand jury proceedings … are required by law to be kept secret.…” Concluded Epstein, “[T]he public flailing of Freeman [by prosecutors and reporters] breaking their public trust, cheat us all out of our confidence in justice.”
Throughout this long slog, the U.S. Attorney’s Office kept a federal grand jury impaneled to hear witness testimony, and from time to time bankers and traders from Goldman Sachs, and other firms, were asked to appear before it to testify. During the spring of 1989, Frank Brosens appeared before the grand jury for many hours. As his testimony was nearing its logical conclusion, the prosecutors asked Brosens a general question—something along the lines of “Can you remember any situation in which you heard about a conversation that Bob Freeman had with Marty Siegel in which there was a suggestion that Marty Siegel provided material nonpublic information to Bob Freeman?” At that moment, Brosens said he was “flummoxed” and asked to step outside the grand jury room to talk to his attorney, Robert Morvillo. Ever since the anniversary article appeared more than a year earlier mentioning the bunny quote, Brosens and Morvillo, as well as Pedowitz, figured a question like this was coming. He had no choice but to answer the question honestly; the failure to mention the bunny conversation could have meant facing charges of having lied to a grand jury. In the brief conversation outside the grand jury room, Morvillo, Pedowitz, and Brosens concluded that although the prosecutors had not asked directly about Goldman’s trading in the Beatrice Foods deal, when he returned to the grand jury room, he should share with the jurors the story of Goldman, Freeman, Siegel, and Beatrice, including Siegel’s parting comment to Freeman: “Your Bunny has a good nose.”
This proved to be the pivotal moment in the floundering case against Freeman and, accordingly, one of the pivotal moments in Freeman’s life. Soon after Brosens testified, the prosecutors began to latch on to the Bunny testimony and to think that the phrase, coupled with Freeman’s subsequent trading and profits, would be persuasive evidence against him before a criminal-trial jury. The prosecutors began to conceive of a way to perhaps bring their ongoing embarrassment in the case to a rapid close by using the existence of the Bunny testimony—which of course was not part of the original complaint or indictment and was not even a phrase Siegel remembered uttering—against Freeman.
After two years of behaving like the Keystone Kops, the prosecutors began to wise up. Shortly after Brosens testified, Laurie Cohen, an investigative reporter at the Wall Street Journal and a protégée of both Stewart and Hertzberg, wrote a “legal perspective” column below the headline “RICO Law Keeps Insider Trading Case of Goldman Sachs’ Freeman in Limbo.” Her article, which all but said the government’s prosecutors were seriously considering charging Freeman under the RICO statutes, scared Freeman to death. Cohen’s article suggested a new indictment against Freeman was imminent and that he would likely be charged under the RICO statutes because one of the alleged charges of insider trading against Freeman supposedly involved a tip Freeman had given Siegel more than five years earlier about Continental Group, Inc. RICO statutes allow prosecutors to stay the statute of limitations as long as other alleged crimes occurred within the five-year period. The RICO statutes also allow prosecutors to ask a judge to freeze a suspect’s assets and to seek treble damages in a civil suit.
Once again, Freeman had no advance warning of the article or of the fact that prosecutors were considering using the RICO statutes as part of a new indictment. What made
the combination of the Brosens testimony and the Cohen article particularly painful for Freeman was the fact that he and his lawyers had been beginning to think, with Giuliani’s departure, that Romano might be willing to drop the case.
Pedowitz said Freeman was faced suddenly with a life-or-death choice. The prosecutors were telling Team Goldman’s lawyers, “ ‘We can resolve the case based on Beatrice or your guy is going to get indicted for RICO,’ ” Pedowitz said. “ ‘We’re going to throw a whole bunch of things up against the wall and see which ones stick.’ Bob was faced with an arbitrage for his life, which was, Do I run the risk, do I take this case to trial? And at the end of the day they convict me of a RICO violation and I go to jail for a long, long time and find any personal wealth that I have disappear? Or do I resolve the case based on the thing they think they’ve got—Beatrice—and have a minor financial settlement that leaves me, and my family, secure for the rest of our lives? It was a heartbreaking choice that he had to make: Do I fight this or do I resolve it?”
But settling—by pleading guilty to a felony—was a major step for Freeman to take, especially since he believed he had done nothing wrong, an idea reinforced by the legal opinions of both his and Goldman’s lawyers. What’s more, Freeman’s guilt or innocence was quickly becoming one of just several considerations for him and his attorneys, and maybe not even the most important one any longer. Even if he was innocent, would he be able to convince a jury of that fact? Freeman’s attorneys had commissioned jury research and discovered—not surprisingly—that investment bankers were held in very low esteem. “Investment bankers were about as popular then as they are today,” Pedowitz said. “Investment banks were perceived as problems.” Then there was simply the complexity of the facts regarding arbitrage in general and the nuances of puts, calls, options, and the like. And the coup de grâce was the daunting statistic that the government, to that point, had won approximately 90 percent of the criminal trials it prosecuted. If Freeman lost at trial, under a RICO statute, the implications for both his freedom and his fortune would be devastating.
Money and Power Page 38
