Authors: William D. Cohan
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
.
——
N
EARLY 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.
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.”
A
s 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.”