On August 17, Freeman pleaded guilty to one count of mail fraud involving Beatrice Foods. “I pleaded guilty not because I believed I was guilty,” Freeman explained, “but because I believed I could have been found guilty.” He also resigned as a Goldman partner. In his letter of resignation to John Weinberg, Freeman wrote that the decision to plead guilty was “surely the toughest one I ever had to make.” In his letter, Freeman said, “[I]t is important” that Weinberg understand why he pleaded guilty. “I want to assure you once again that I never conspired with Martin Siegel to swap inside information for either his or my personal benefit or for the benefit of Goldman Sachs or Kidder Peabody,” he wrote.
To continue the litigation, he wrote Weinberg, “would consume another year or more of my life, with even then no guarantees of finality. This, on top of the strains on me, Margo and our children for the past 30 months, would be just too much to bear. So, I have decided that the best thing to do is to end this matter here and now. I regret that I will no longer be able to work with some of my closest friends.… One final note: The loyal and caring support of my partners and colleagues at Goldman Sachs has been a crucial factor in helping me to cope with the events of the past two and one-half years. Margo and I will never forget it, and we will be forever grateful.”
Weinberg circulated the letter, which went into great detail about the Beatrice transaction and trades, to enable Goldman’s employees to “better understand the facts” that formed the basis of the plea.
On April 17, 1990, federal judge Pierre Leval sentenced Freeman to one year in prison and suspended eight months of the sentence, requiring him to serve four months. He also sentenced Freeman to a further two years of probation and community service of 150 hours a year. He fined Freeman $1 million and gave him a month to come up with the money. He also agreed to Freeman’s request to serve the time at Saufley Field, a federal prison in Pensacola, Florida. “The particular crime was a matter of a temptation, an indiscretion, all of which took place so far as I can see in a matter of minutes,” Judge Leval said. “It was the crime of trading on inside information.” Freeman “made a telephone call which is not proper to make,” the judge continued. “He made a telephone call seeking to learn from an inside source whether there was truth to the rumor of the problem [with the Beatrice deal]”—probably no different than thousands of such calls seeking information he and Levy, Tenenbaum, Lenzner, Rubin, Brosens, as well as younger arbs Tom Steyer, Daniel Och, Eddie Lampert, and others likely made at Goldman Sachs—“[a]nd although the answer that he received was couched in veiled language, it constituted illegal transmission of inside information.”
Judge Leval figured Freeman had profited by approximately $87,000 as a result of the information and that Goldman had profited by about $460,000, or a total of about $548,000 “of loss avoided by the placement of four orders shortly after the receipt of the tip.” The judge noted that in the plea hearing, Freeman told him he knew “full well that he was breaking the law in calling Siegel seeking from him confirmation of the rumors of problems and then making trades on that.” As a result, Leval could not fail to impose a prison sentence. (Freeman now says he did not believe that to be true and made that statement under duress, because if he didn’t make it, Judge Leval would not accept his guilty plea.) Moreover, the judge observed, “one of the unfortunate consequences of eminent power and wealth is that there are down sides. The defendant was trading for a very wealthy firm, a leader in the marketplace, in huge quantities to realize huge profits. I cannot pass a sentence that would give the world a message that when people in those positions violate the law, the court will treat it as trivial whereas when a common thief steals a few dollars’ worth, that calls for jail time.”
During Rudy Giuliani’s aborted 2008 effort to win the Republican Party’s presidential nomination, Goldman Sachs was the only large securities firm unwilling to host a fund-raiser for him, despite the firm’s well-established pattern of financially supporting powerful politicians. When Giuliani’s representative approached Goldman about why that was and to see if Goldman could be persuaded to host such an event, the representative was told “in no uncertain terms” that it would not happen because of what Giuliani had done to “our partner Bob Freeman.” He was told, “You do not understand. It is the Goldman Sachs DNA.”
CHAPTER 12
MONEY
As if the arbitrage desk didn’t already have enough to contend with in the face of the tsunami of publicity that accompanied Freeman’s arrest and ongoing ordeal, it suffered serious losses when the stock market crashed on October 19, 1987. The next day, Rubin stopped by the desk—now being run by Frank Brosens, a vice president—and after inquiring about the extent of the losses, which had nearly wiped out everything the group had made year to date, he then sought to reassure the group, Brosens among them. “I understand you guys may have lost a little money yesterday,” Rubin joked with them. He reported that the Management Committee had “100 percent confidence in you as a team and in the way you run your business. So, if you want to double up on your business, go right ahead.” Brosens took Rubin’s comments as permission to be bold, while other firms were licking their wounds and stayed “worried for months and months.” Brosens’s aggressive stance produced record profits for the arbitrage group in 1987, turning around the losses quickly. “I determined right then that I was going to stay at Goldman Sachs as long as Rubin was there,” Brosens said. “His words that day meant the world to me.”
According to Steve Friedman, the 1987 stock market crash—when the Dow Jones Industrial Average lost 22.6 percent of its value in one day—did not threaten the firm’s survival, but it once again pointed out the flaws in Goldman’s plumbing and communication systems. “On the day of the crash, I was walking around the fixed-income floor,” Friedman recalled, “and someone came up to me and said, ‘Do you realize that the firm sent a rather large check’ to the such and such [commodity] exchange in Chicago?” as part of a settlement payment Goldman owed the firm. The idea was that most of the monies paid would come back to Goldman in the next few days—as long as the firm in question did not itself go bankrupt in the interim. Friedman said he hadn’t been aware the payment had been made “because it wasn’t my world”—the payments part of the business was considered routine—but he determined in the wake of the crash “to make it his world.” “We weren’t threatened,” he said about Goldman’s post-crash future. “But if the Chicago exchange had gone down, everyone would have had a hell of a problem.”
The stock market plunge also tagged Goldman with an after-tax loss of between $17 million and $20 million as a result of having just launched a large underwriting of the shares of British Petroleum. Following through on an underwriting in the middle of a seismic financial calamity is every investment bank’s worst nightmare, since it undoubtedly means that it will have to make good on its commitment to a client to buy stock at a certain price, even though the underlying market for the shares has collapsed. The BP underwriting was just that disaster, writ large. The four U.S. underwriters on the deal—which amounted to the last of the privatization of the British government shares in the company—were Goldman, Morgan Stanley, Salomon Brothers, and Shearson Lehman Brothers, with Goldman being one of two firms selected as global coordinator of the offering. After years of investment in London, BP’s selection of Goldman—over its traditional banker, Morgan Stanley—was a coup for sure.
The market crash, though, was making the coup very expensive indeed. The four American firms were staring down a loss of $330 million on the offering, or $82.5 million each, the largest underwriting loss ever. “By a malign coincidence,” observed Nigel Lawson, the chancellor of the exchequer, “the world’s largest-ever share sale collided with the world’s most dramatic stock-market crash.” Some at the various underwriting firms, including Goldman, believed that the crash had been an act of God and could provide a much-needed legal escape hatch. But Weinberg would have none of that thinking. As painful as it wo
uld be to absorb the loss, he knew Goldman had worked too hard for too long to try to get out of the underwriting using a claim of force majeure. He decided this was the moment to take the pain and prove to the world that Goldman was a firm of honor, a firm that would stand by its commitments. “We bought it and we own it,” he told his partners. “If we cut and run away on BP, we won’t underwrite a doghouse in London.” Traders in the London office gathered around the internal squawk box to listen as Bob Mnuchin, the head of equity, blew out Goldman’s position in BP. “It was over very quickly,” explained David Schwartz, then a Eurobond trader, in London. “It was painful but over very, very quickly. We traded in and out of the security on the secondary market.” And that was that.
On November 20, 1987, a month after the crash, and while the firm was still grappling with the fallout from Freeman’s arrest, Weinberg named Rubin and Friedman vice chairmen of Goldman, effectively anointing them as his successors, although Weinberg still refused to say so. “They’re both capable guys,” Weinberg said, “but I’ve made no commitment to anybody. I haven’t named my heir apparent and I never will until I’m ready.” He then added, “I’m going to work till I’m ninety-nine.” In the internal memo distributed throughout the firm, Weinberg reiterated his intention “to remain with the firm as chairman, senior partner and chief executive officer for many years” and wrote that his health was “fine.” Despite the loss from the BP underwriting, Weinberg said 1987 would be “one of the best years” in the firm’s history.
In fact, 1987 did turn out to be the firm’s second-best year in its history. “Think about it,” David Schwartz said. “The partners can sit around the table. Forty partners sit around a table, and slap high-fives for having come through one of the biggest financial crises the firm had faced. They shut down the trading floor because everything was being processed by paper! They were just completely flooded. They locked the doors. People stayed overnight to process every trade. The firm emerged unscathed and had the second-best year in its history!” As in the more severe crises of 2007 and 2008, Goldman managed to thrive while others on Wall Street went under—and the general public suffered. At the end of 1987, Goldman had 7,500 employees—one-third of whom had MBA degrees—in eighteen offices around the world, six of which were overseas. The firm’s capital stood at $2.3 billion, the sixth largest on Wall Street.
The October crash and Freeman’s troubles weren’t the only issue the firm faced at that time. Within weeks of Freeman’s decision to plead guilty to a single charge of mail fraud, Weinberg found himself having to explain to Goldman’s employees and to the press the bizarre “psychosexual drama” involving partner Lewis M. Eisenberg, Freeman’s Dartmouth classmate and close friend of Henry Kravis. Eisenberg was then the head of Goldman’s institutional equity sales division—the block-trading business—and a stone’s throw from being on the Management Committee.
The golden future evaporated for Eisenberg, then forty-seven and the married father of three children, in August 1989, when two uniformed policemen entered 85 Broad Street and headed to the twenty-ninth floor, looking for him. (What was it about law enforcement officials and Goldman’s twenty-ninth floor?) When they found Eisenberg, they served him with a criminal-harassment complaint filed by his longtime assistant Kathy Abraham, thirty-seven, with whom Eisenberg was having a seven-year consensual affair that had turned nasty—and very public. It quickly became another embarrassing situation for Weinberg, Rubin, and Friedman.
Both Abraham and Eisenberg were placed on administrative leave. By Halloween, though, Goldman had fired Abraham. Then, a few days before Thanksgiving, Weinberg sent around a memo to Goldman’s employees saying that Eisenberg had resigned.
The tale was nothing if not sordid, and journalist Dorothy Rabinowitz recounted it in fine detail in a long article in New York magazine. According to Rabinowitz, Abraham was a divorced mother with a young daughter. Her family had left Hungary in the 1950s. She attended a yeshiva in Queens, graduated from Queens College, and settled down with her with new husband in Kew Gardens Hills, a neighborhood with a large Orthodox community. She started working at Goldman Sachs in 1976. Her marriage ended five years later. By that time, she was working for Eisenberg. He was from Chicago, where his family owned a seed-processing company. He had graduated from Dartmouth in 1964 and then received his MBA from Cornell, joining Goldman soon thereafter and moving to Rumson, New Jersey. He became a partner in 1978.
After Abraham’s divorce, Eisenberg “became an increasingly important source of comfort” to her, according to New York. Their affair began one evening after work, when Eisenberg asked Abraham to join him and a few work colleagues for a drink. That same night, they had dinner together and Eisenberg drove her home to Queens. Soon thereafter, Eisenberg reportedly announced to Abraham that he wanted her to be his mistress. “Just like that, ‘I want you to be my mistress,’ ” she told Rabinowitz. Tuesday was their meeting night. He arranged to have a suite for them at the Vista International Hotel, in lower Manhattan. “For a while at the beginning, I really didn’t mind too much,” she said. “I mean this was an important person to me. I had feelings for him—of course I had feelings for him, at first.”
But Abraham quickly grew tired of the Tuesday routine (to say nothing of the stress of then having to work for Eisenberg the rest of the week). “If I said I didn’t want to meet him, he would become enraged,” she said. “And life at the office that day would become intolerable.” She was rapidly losing her self-esteem and her dignity. “I felt humiliated,” she said, “and I was humiliated. Going to that hotel, always the hotel. And there I would be leaving the office carrying this bag with my overnight things. He would leave for the hotel a half-hour before me. When I got there, I would have to call my mother—this was the night my child stayed with her father—so that my mother wouldn’t call and not find me home. So much lying.” She kept kosher and, not surprisingly, the Vista International did not have the most robust menu selection for her. She usually would order a bagel with lox and eat it as slowly as possible to delay the inevitable.
After dinner, where Eisenberg would talk about himself, they would head upstairs to watch X-rated videos. “I was so bored I would fall asleep,” she said, “and then he would become upset.” According to Abraham, Eisenberg preferred to watch as she masturbated. “That’s why I stopped using birth-control pills,” she said. “Why risk your health when there was no reason for them?” The dismal plot thickened when Eisenberg would often articulate his desire for Abraham to have sex with some of his Goldman partners. Apparently, this was more than just a fantasy. “And he began to nag me about it at work,” she said. “One day when he was doing this, I ran out of his office crying, and then he stopped.” In April 1989, Eisenberg moved with his family to the Upper East Side and demanded to see her more often, including at her house in Queens. “I know there are women that would have been stronger than me,” she said. “But I didn’t have the strength. He understood that very well. Those times I would try to tell him that I didn’t want to meet him—when he would be in a rage at me at the office—I was the one who always ended up having to apologize to him.” She said she wanted to end the affair. “But he wouldn’t,” she said. “He had an obsession, and I was it.”
A more complex and debilitating situation would be hard to fathom, but when, in early 1986, Abraham met Gary Moskowitz at the synagogue in Kew Gardens Hills—and fell in love with him at first sight—things got completely out of control. Like Abraham, Moskowitz was an Orthodox Jew. He was also a New York City police officer, one of the very few religious Jewish officers on the force. After Abraham met Moskowitz, she told Eisenberg the affair was over. Her determination held for two months, until Eisenberg demanded she meet him after a Goldman party at the Plaza Hotel, where he had rented a room. She refused and instead went out with Moskowitz that night. “He was furious,” she said.
At the office the next day, Eisenberg told her he had sat in a parked car in front of her house so that h
e could see who she was coming home with. “That’s when the grilling really started,” she said. “Then he found out Gary’s name and who he was. Lew would call me up on the weekends and ask, ‘Are you seeing Gary?’ I actually used to make up the names of friends I was supposed to be seeing.” On the weekends, Eisenberg would sometimes track her movements. One Monday morning, he asked her how her weekend had been and she lied and said she had visited her mother. “No, you didn’t,” he said to her. “I saw your car parked in front of Gary’s house. The two of you walked out of his apartment at 1:40 in the afternoon.” Eisenberg was right; they had come out of Moskowitz’s apartment at that time.
During the summer of 1989, Moskowitz figured out who Eisenberg was, called his home, and left a message with his wife. “The call alarmed Eisenberg,” Rabinowitz wrote. He arranged to meet with Moskowitz on June 28 at a diner in Flushing. He drove up in a limousine. “In that neighborhood in Queens, we don’t see too many stretch limos,” Moskowitz said. The conversation did not go well. “He was worried about his family, his job,” said Rabinowitz, “but he also kept telling me, ‘Kathy and I have a beautiful relationship.’ Then he tells me, ‘You’re just a peon cop—what do you know about anything?’ Do you hear that? A peon cop.” After this meeting, the situation deteriorated further, with much personal acrimony, implied threats, traps set, and promises made and broken. It was very ugly.
In mid-August 1989, Abraham filed her criminal-harassment complaint against Eisenberg. She charged Eisenberg with threatening “to fire her if she did not submit to his sexual advances” and that he tried to “annoy and alarm” her by “staring at her, walking around her desk, [and] going into her garbage for the past three years.” Moskowitz also filed a complaint against Eisenberg, claiming he had harassed him, too. “If you go to the authorities, I will have to protect myself by making charges against you …,” Moskowitz claimed Eisenberg told him. “I’m going to have you taken care of … even cops have accidents.” But Manhattan district attorney Robert Morgenthau declined to prosecute the cases against Eisenberg.
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