Boesky, Ivan - Wall Street Insider, model for G...
Ivan Boesky
Ivan Frederick Boesky is an American stock trader who is notable for his prominent role in a Wall Street insider trading scandal that occurred in the United States in the mid-1980s
THE CON: With tips from an insider at one of Wall Street’s biggest firms, Boesky grew a $200 million fortune. He knew about corporate takeovers before they happened – and bought and sold stock accordingly.
THE DAMAGE: $200 million, or about $344 million today.
THE OUTCOME: Drexel Burnham, one of Wall Street's biggest firms, folded. Nabbed in 1986, Boesky agreed to wear a wire tap and hand over the names of other speculators. He pointed a finger at five brokerage firms and more than a dozen individuals - and shined a light on Wall Street’s widespread culture of greed and corruption.
“Greed is healthy.”
A bull market roared on Wall Street in the mid-1980s and multimillionaires like Ivan Boesky thrived in the heady and merger-crazed atmosphere. Boesky’s area of expertise was in risk arbitrage, in which a trader buys stock at a discount from a company that might be on the verge of a takeover. The risk and potential rewards are huge; if the merger doesn’t happen, the trader sustains significant losses. If it does, he makes a bundle of money. For Boesky, this kind of trading was risk-free since knew exactly what to expect. Using insider tips, he’d buy tens of thousands of shares at a premium just before a takeover happened. Then he’d cash out.
One of Boesky's biggest tipsters was Dennis Levine, who handled merger and acquisitions at Drexel Burnham Lambert Inc. and passed along news of imminent takeovers. The two started working together in 1985 and sealed their partnership with a cool $2.4 million. But just a year after they made their crooked arrangement, Levine was arrested on insider trading charges; he pleaded guilty and turned his partner over. With Boesky, the Government had a golden goose – a person who was connected to everyone and knew exactly what was going on.
Ever the dealmaker, Boesky agreed to let investigators eavesdrop on his business transactions. By wearing a wiretap, he gave the Securities and Exchange Commission access to the big picture of corruption in the securities industry. In November of 1986, the SEC sent out a flurry of subpoenas – along with the shock wave that reverberated down Wall Street and beyond. Those who dealt in Boesky’s multibillion dollar world of mergers and takeovers were terrified that they'd be implicated. At the same time, investors across the country were furious to learn that crooks on Wall Street were stealing by trading secrets. In this wobbly atmosphere, the stock market tanked. On the day that first batch of subpoenas was issued, the Dow Jones index of 30 blue-chip industrial stocks fell 43 points, the fourth largest drop on record.
Countless investors lost money in that crash – exce pt for Boesky who, in the fashion of a true inside trader, unloaded $440 million in stocks before the subpoenas were issued. When it came out that he made that sale with the blessing of authorities, the outrage hit a new peak. In a statement, the SEC explained it gave Boesky a pass on the theory that the market would have sustained more damage had he liquidated the majority of his securities.
At the conclusion of Boesky’s highly publicized trial, he was sentenced to three years in prison and paid $100 million in penalties. At a news conference after the sentencing, U.S. state attorney Rudy Guiliani described the outcome as “balanced” and said the investigation into wrongdoing continued. Indeed, Boesky pointed a finger at five brokerage firms and about 14 individuals.
In 1990, just after Boesky was released, he appeared in court to testify in the securities fraud trial of John A. Mulheren. During cross-examination, the defense attorney discovered that Boesky had paid just half the $100 million of his settlement, as the total had been qualified as tax deductible. When asked if he had broken any laws since the settlement, Boesky admitted to just one illegal act: he had paid some guys in prison to do his laundry.