Authors: William D. Cohan
Oddly, though, their presentation landed with a thud. “
The presentation made to the partners that Saturday has been described as, at best, uninspiring and weak,” according to Endlich. “Others have called it haphazard and half-baked, emphasizing that its quality was far below that of presentations the firm routinely gave its clients. Most agree that it was an amateurish effort; what was presented was little more than a concept.” Partners were given a document that outlined the new structure whereby they would become “managing directors” whose stock would be worth around three times more than what they paid for it originally. Furthermore, many of the numbers didn’t add up, and the investment bankers in the audience were busy trying to reconcile them. Emotions ran high. Chaos reigned. “By afternoon, an impassioned debate had erupted …,” Endlich continued. “Partners screamed and cried … it was a cathartic experience.”
Soon enough, it was clear that the new partners had little interest in going public since they had not yet had a chance to build up enough value in their Goldman stock to benefit sufficiently from an IPO, while the investment banking and M&A partners were indifferent to the idea because their businesses required very little capital to operate and were already world leading and extremely profitable. Many wondered who really owned the firm—the present generation lucky enough to be around to cash out when the firm went public, or the future generations for whom the present generation was just a steward? And why should the current partners get filthy rich as a result of the work done by the thousands of people who came before them in the previous 117 years? Eleven years later, Weinberg reflected back on the 1986 partners’ meeting: “
I always felt there was a terrific risk, and still do, that when you start going that way you are going to have one group of partners who are going to take what has been worked on for 127 years and get that two-for-one or three-for-one. Any of us who are partners at the time when you do that don’t deserve it. We let people in at book value, they should go out at book value.”
The partners’ meeting lasted through the day and ended inconclusively. That night, the partners reassembled for a black tie party at
Sotheby’s. “Each partner was engaged in a balancing act,” Endlich recounted, “an internal struggle to weigh the different factors that would affect his vote. Personally most partners wished the firm to remain a partnership; yet a judgment needed to be made as to whether the firm
required a larger and more stable capital base in the near future. And then there was raw self-interest, a very personal calculation of the optimal way to enhance one’s wealth.” Regardless, the final decision would be made the next day through a vote of the partners.
But when the partners reconvened at 85 Broad that Sunday morning, it was clear that both of Sidney Weinberg’s sons—John, the senior partner, and his brother, Jimmy—were against the idea. John Weinberg had not said much of anything on Saturday—which spoke volumes—but when Jimmy Weinberg got up to speak, his words carried immense weight, if only because of the partners’ respect for the Weinberg name. According to Endlich, “Jimmy told the group the proposal made no sense. Goldman Sachs had a heritage, and he was on the side of preserving it. He reminded the partners of their stewardship, of their responsibility to the next generation. He would feel uncomfortable reading about the partners in the newspapers, of having details of their financial situation made available for public consumption. People stared in amazement.” And that was that. There was no vote. Jimmy Weinberg “
had a real aversion, if not allergic reaction, to anything public,”
Peter Weinberg explained about his father. “He’s really, really focused on that.” Goldman would not be going public, at least in 1987. “Guys cried …,” one unnamed partner told
Institutional Investor
nine years later. “[John Weinberg] didn’t want to ram it through.” The time was not right. “We were not psychologically ready to be a public company, with all that entailed,” Boisi recalled. “I found it ironical, being an adviser to corporate clients on equity offerings, our own blindness to what the impact was going to be on our own culture.” The next day—Monday—John Weinberg circulated a memo throughout the firm, under his signature: “The partnership will continue to review all appropriate financing structures and alternatives which will continue to allow us to be a leader in the global investment banking arena.”
T
wo months later, the question of a public offering for Goldman Sachs anytime soon was moot. On the morning of February 12, around eleven thirty,
Thomas Doonan, a United States Marshal and an investigator in the U.S. Attorney’s Office for the Southern District of New York, entered the Goldman building at 85 Broad Street in search of a senior partner, Robert Freeman.
Freeman, then forty-four years old, was the head of Goldman’s hugely important risk arbitrage department on the twenty-ninth floor, having taken over the day-to-day management from Rubin, his friend, boss, and mentor. On that cold February day, Freeman’s assistant told her boss that Doonan was waiting for him in his small office, just off the trading floor. When Freeman walked in, Doonan closed the door and pulled down the shades. Doonan, who at first mispronounced Freeman’s name, told him he was under arrest for
insider trading and a breach of federal securities laws. “I don’t know why I did this,” Freeman recalled many years later. “Maybe it’s my tenacious half, I don’t know. I said, ‘Well, the least you can do is get the name right.’ And the guy came right up to me, put his nose up to me, and then he backed off.” They calmed down and took seats.
In shock and disbelief after hearing Doonan’s words, Freeman opened the door to his office slightly and asked his secretary,
Bernadette Smith, to call
Lawrence Pedowitz, a lawyer at Wachtell, Lipton, Rosen & Katz whom Goldman had hired the previous November when Freeman’s name first surfaced as someone the government was tracking as a result of the arrests—also for insider trading—of the arbitrageur
Ivan Boesky and two
Drexel Burnham Lambert executives,
Dennis Levine and
Martin Siegel. Two months earlier, in September,
David S. Brown, a vice president in Goldman’s investment banking group, pleaded guilty to two counts of insider trading for selling tips—for thirty thousand dollars—
about two pending mergers to
Ira Sokolow, a Shearson
Lehman Brothers banker, who passed the tips on to Levine, who made $1.8 million from them.
Now, just as the firm was recovering from the Brown embarrassment, one of its most senior partners was under arrest, also on insider-trading charges. “
Bob, you gotta be kidding,” Pedowitz said to him. Pedowitz, who had been a criminal prosecutor in the United States Attorney’s Office for the Southern District of New York before joining Wachtell, asked Freeman to put Doonan on the phone. “Look, Bob Freeman’s a very good guy,” Pedowitz told Doonan. “Please don’t handcuff him in the office.”
Doonan obliged, and a humiliated—but uncuffed—Freeman was led across the trading floor, in front of all his Goldman colleagues, to the elevators and then was taken down to Broad Street. Once outside, he was handcuffed, put in a van, and taken to the federal courthouse in Foley Square to be arraigned. Doonan also took with him a bunch of deal files from the firm. When Freeman got out of the van, Goldman’s head of security,
Jim Flick—a neighbor of Freeman’s from Rye, New York—threw a raincoat over Freeman’s wrists, and the assembled press snapped pictures of the Goldman partner heading into the courthouse. He was photographed and fingerprinted. His passport—which had to be retrieved from his home—was confiscated. So frazzled was Freeman that when asked his Social Security number, he could not remember it. “Something was happening to me and I was sort of outside of myself observing,” he said. His bail was set at $250,000—he thinks Goldman whisked the money out of his Goldman account—and he was released to a life that would never be the same. “
Wall Street went into shock,”
Fortune
reported, capturing well the sentiment at the time. “Goldman Sachs has long been perhaps the most respected of the big investment banking houses. If anyone seemed beyond suspicion, it was Goldman, and Freeman was well known on the Street as one of its most highly prized partners. For them to be caught up in this sleazy affair seemed almost beyond belief.”
Also arrested that morning a few blocks away from Goldman was
Richard B. Wigton, fifty-two, a vice president at Kidder, Peabody and a senior arbitrageur who had worked with
Martin Siegel at Kidder before Siegel went to Drexel. The previous evening, another Kidder vice president,
Timothy L. Tabor, thirty-three, was arrested at his East Side apartment and then jailed overnight at the Metropolitan Correctional Center. Like Freeman, Wigton and Tabor were charged with insider trading that had produced million of dollars of illegal profits, according to federal
prosecutors, led by Rudolph W. Giuliani, the U.S. Attorney for the Southern District of New York. Freeman alone was charged with having profited personally from the insider trading since he—allegedly—had done some of it in his personal Goldman account, which Goldman had allowed, in a long-standing departure from an early rule against partners even taking out loans.
Even though he knew his name had been mentioned in the paper three months before and suspected, as he said, that “one day I might hear from the government,” in the hours after his arrest, “I was totally shocked,” he said. “It wasn’t one hundred percent a surprise that some day, I was going to hear something from the government. But, usually, these things, there’s an investigation and they subpoenaed documents, none of that.”
When he got the call from Freeman, Pedowitz thought it was a joke. “
I thought he was pulling my leg,” Pedowitz said. “But he made it clear he was not pulling my leg.” After spending three months reviewing the trading records and interviewing Goldman traders and bankers, he was convinced Freeman should not have been mentioned in the same breath as Siegel, Boesky, Levine, and the rest of the motley crew of insider traders. At worst, he thought it might be possible the SEC might bring a civil action against Freeman or Goldman. “The very first insight we had that there was going to be a case as opposed to just the rumor mill generated by the article, was Bob’s arrest,” he said. “I was totally shocked. I thought it would likely be an SEC case. I had no idea that the U.S. Attorney’s Office was involved or that he would be arrested.” Pedowitz was aware of Boesky’s allegations and had studied Goldman’s trading records for the Boesky deals. He knew there was big money involved. “
Goldman was super sensitive,” he said, “not only to the fact that Boesky might touch them, but also that reputationally, this could affect their investment banking business, which in those days was a huge portion of their revenue too. They really wanted to understand this. The anxiety about Bob was not huge because people basically believed he had done his business appropriately with a huge amount of research.”
At a 1:00 p.m. press conference an hour or so after the arrests of Freeman and Wigton, Giuliani said that none of the three men had been given an opportunity to cooperate with the government or even knew that they were specifically being investigated and were arrested so publicly and without warning because he feared they might have fled the country if they had become aware the government was closing in on them. Hence Giuliani’s decision to also take their passports from them. “It’s not at all unusual for us to arrest people for federal felonies,” Giuliani said at the
press conference. The three men’s appearance before U.S. district court judge
John F. Keenan was preliminary and no pleas were made. Indeed, there had been no indictments handed up of the three men because a grand jury inquiry was still under way. Goldman released a statement in Freeman’s defense, claiming that Pedowitz’s internal investigation showed that “there has been no wrongdoing by the head of our arbitrage department or our firm.”
After his arraignment, Freeman went back to Goldman, this time to the thirtieth floor to meet with the
Management Committee. Freeman saw Rubin and told him, “It’s not true, Bob. It’s just not true. I didn’t do this. I’m innocent of it.” All these years later, Freeman still remembers the moment as “surreal” and “unbelievable” but happening nonetheless. “One minute I am a person with an impeccable reputation and then I become something that was a complete lie,” he said in an interview. “All of a sudden, I’m in this—I’ve often made the analogy to Dorothy—tornado flying in the wind to the yellow brick road. That’s what it felt like.” Even though Freeman lived on a private road in Rye, television crews, cameramen, photographers, and reporters staked out his home. At one point, his wife and youngest son had to leave for a friend’s birthday party. Freeman’s wife “did not want to subject” their son to the media scrum, so the Freemans’ gardener, who also was a police detective in town, arranged for a police cruiser to come by the house and disperse the news media. “You become a caricature,” Freeman said. That night, he was on the national TV news.
In the days following his arrest, Freeman voluntarily took
five
lie detector tests during a two-day period—all paid for by Goldman—and passed them all. He was scared as hell to take them. “Bob Rubin said to me, he said, ‘Bob, you’re probably the only arbitrageur here on Wall Street who can pass a lie detector test,’ ” Freeman recalled. Freeman and his lawyers had two objectives for taking the tests. “One was used to show that Siegel was caught in the lies in Doonan’s complaint so that the government would go back to Siegel and say, ‘Look, you lied. This guy took a lie detector test. What’s the story here?’ and that they would confront him for the liar that he was,” Freeman said. “But, I also believe, and I have no confirmation of this, I also believe that it gave further assurance to Goldman Sachs that in backing me to the hilt, that they were doing the right thing.” As for Doonan, the author of the complaint and his arrester, Freeman said, “My impression of him was that he knew nothing. What is still incredible to me is that the arrests were made solely on the uncorroborated allegations by Siegel, an incredible denial of due process. Had the prosecutors done even a superficial prior investigation it would have
been overwhelmingly obvious that Siegel was lying. My and Wigton’s lie detector tests after the arrests only reinforced that Siegel was lying. Why didn’t Giuliani insist that Siegel take a lie detector test?”