The Predators’ Ball (50 page)

Then came Boesky. For years, other arbs, investment bankers and traders had talked among themselves and, occasionally, on a background basis with this reporter and others about Boesky's trading on inside information. The shock that seized the Street on November 14 was not at what Boesky had done—who had not surmised it?—but at his having been caught. His prescient trading patterns had sparked SEC investigation after investigation, but until there was a cooperating witness in the person of Levine the fortress had been impregnable. Now it was falling like a house of cards.

Suddenly, most of Wall Street seemed vulnerable. Boesky, the biggest arb on the Street by far, with hundreds of millions to bet, who lived and breathed the M&A game through all his frenetic, obsessive twenty-one-hour days, had been at that game's nerve center.
He had monitored it from his command post, where he stood for hours at a time, surrounded by computer screens flashing stock prices, manning a switchboard with 160 direct phone lines to stockbrokers, arbs and others. There was not a significant M&A player on Wall Street who had not gotten the hyperkinetic Boesky's calls. And at least one star player, Martin Siegel when he was at Kidder, had long been rumored to have provided Boesky the inside information he continually sought.

Now, like Levine, Boesky would doubtless offer up his Wilkises and Browns and Sokolows and Reiches. But just as Boesky had dwarfed them in Levine's trade, so would Boesky's ultimate target dwarf his middling ones. Because his ultimate target was the King.

Boesky had been doing business with Milken since at least mid-1983, when Drexel raised $100 million for the Boesky-controlled Vagabond Hotels, a subsidiary of the Beverly Hills Hotel Corporation. In 1981 Boesky had gained control of the lush Beverly Hills Hotel from his in-laws after their patriarch, Ben Silberstein, died. In that Vagabond offering—the proceeds of which were in part devoted to Boesky's risk arbitrage—Drexel in its time-honored tradition took as part of its fee a slug of warrants that gave it an equity stake in Vagabond (later renamed Northview Corporation).

Then, in April 1984, Drexel had done a $109 million private placement of junk bonds for Boesky's arbitrage partnership. While $109 million seems paltry compared to the $640 million that Boesky would raise just two years later, at that time it probably comprised roughly 50 percent of his capital. So Boesky was relying heavily on Drexel for his funds.

Interviewed in early 1984, Boesky's lawyer and close friend Stephen Fraidin of Fried, Frank had listed Milken as one of a handful of people, important to Boesky, who knew him well. This friendship—or, more likely, this relationship based on mutual exploitation, since few more purposeful people than Boesky and Milken exist in this world—had begun even before Milken became the full-fledged maestro of the takeover world. But the relationship—and its potential for abuse—must have intensified once Milken possessed so much of the information the omnivorous Boesky craved. According to one associate of the two men, Boesky (who made it a point of pride that he slept only three or four hours a night) would call Milken (who did the same) most mornings as soon as Milken arrived at his desk, between 4 and 4:30
A.M.

The relationship was fraught with a conflict-of-interest potential
that was extreme even for Milken., He, of course, would not have seen it as a conflict. It had, rather, the synchronicity of interest that he had long cultivated in his interdependent universe, where he underwrote debt securities, and owned them, and owned those issuers' equity as well, and placed others' debt with those companies. Here Milken (and Drexel) not only underwrote Boesky's debt and probably owned some of it but had profit participation in Boesky's arbitrage activities as equity holders. In those activities, Boesky was betting—in the kind of volume that could influence their outcomes—on the contests that Milken was strategizing and backing. They might be, if they so chose, perfectly complementary.

And they had been, as Boesky began telling the government, or at least it appeared so from stories in the press, mainly those written by James Stewart and Daniel Hertzberg in
The Wall Street Journal,
during the six months after Boesky Day.

Within the first two weeks Drexel was identified as the subject of an investigation by the SEC and also a federal grand jury. By early February 1987, the outlines of what was reportedly the government's case were being sketched in the
Journal.

The centerpiece of that case against Milken and others at Drexel appeared to be a $5.3 million payment made by a Boesky entity to Drexel in March 1986. As reported by Stewart and Hertzberg, that payment was questioned by Boesky's auditors at the accounting firm of Oppenheim, Appel, Dixon and Company. Boesky had told his auditors that it was for “consulting.” Unable to produce documentation explaining the payment, Boesky had then called Drexel's Beverly Hills office and obtained a letter—signed by Lowell Milken and Donald Balser, a member of “the Department”—stating that the payment was for “consulting and advisory services.”

Stewart and Hertzberg, however, quoted sources “familiar with the government's case” who said that the payment appeared to be the settling of differences in a series of profits and losses incurred by Boesky and Drexel, respectively. These profits and losses apparently had resulted, sources said, from Boesky's having bought and “parked” stock at Milken's behest, and Milken's having done a similar favor for him. “Parking” refers to one investor's holding stock for another, in order to conceal the true ownership of the stock—and it typically involves the holder's being guaranteed against losses. In some instances, these sources said, it appeared that Milken had not only agreed to protect Boesky from loss on the stock purchase
Boesky made for him, but had promised him a percentage of the profits on the eventual sale of the stock. Thus, to arrive at the $5.3 million, Boesky totaled the losses and profits from the stock positions he had been parking for Drexel, and subtracted the percentage he was allowed to keep.

If this were true, prosecutors would have a multitude of potential violations of the law to draw upon for indictments: failure to disclose these arrangements in SEC filings; net capital violations; violation of prohibitions against market manipulation, of tender-offer regulations, of record-keeping requirements, of prohibitions against falsifying documents, and of antifraud provisions of the securities laws; and conspiracy to commit any or all of these offenses. Beyond all this, if Boesky had parked stock for Drexel in the context of a coming takeover about which Drexel officials had inside information, then Drexel might be subject to triple damages under the insider-trading act for all or part of its profits.

There are numerous ways that such a reciprocal parking arrangement could have worked to Boesky's and Milken's mutual advantage. Boesky, who was always straining his net-capital requirements with his gargantuan appetite, could have disguised the true magnitude of his holdings by parking them with Milken. Or he might not have wanted to make the required public 13D filing stating that he had acquired over 5 percent of a company's stock, if he were contemplating an acquisition. (Boesky had said, in early 1984, that he intended to expand from arbitrage into “merchant banking.”) Or he might have been buying stock on the basis of inside information about a coming deal, and he would have wanted to disguise his purchases so as to avoid SEC investigation.

For his part, Milken might have wanted to park stock with Boesky if it were stock that Drexel was restricted from buying because of its knowledge of a coming deal. Or Milken might have wanted to seem not to own stock but have it on call to pressure a targeted hostile takeover subject as in, for example, the Wickes situation. Or he might have wanted, as was allegedly the case in Victor Posner's acquiring control of Fischbach, to have freed Posner to act via a stock purchase—one he was unable to make himself. For Milken—deftly moving his players across the board, strategizing many moves ahead—the potential uses for disguised stock purchases were myriad.

Fischbach was among the eight stocks that Stewart and Hertzberg
listed, in articles in the
Journal,
as allegedly having been involved in the $5.3 million payment. (The others were Gulf + Western, Unocal, Transworld, Phillips Petroleum, Diamond Shamrock, Lorimar-Telepictures, Harris Graphics.) According to Drexel executives, it was Fischbach that the government in depositions appeared to be focusing on the most.

Indeed, in April 1987 when Boesky would take his criminal plea (having agreed to a consent decree regarding the SEC charges earlier), he would plead guilty to a criminal information that charged him with conspiring to make false statements to the SEC in the context of a conspiracy to gain control of Fischbach, an engineering company. The document charged that a conspirator had instructed Boesky to acquire Fischbach stock, and that Boesky was later reimbursed for losses as “part of an attempt to reconcile other outstanding money differences.” According to sources quoted by Stewart and Hertzberg, that conspirator was Milken, and that settling of differences was part of the $5.3 million payment.

The Fischbach saga, which had been partially told (minus the alleged Milken-Boesky parking arrangement) by reporter Allan Sloan in the December 1985
Forbes,
certainly looked like a classic Milken orchestration. It had begun back in 1983, when Victor Posner—then still a client in good standing at Drexel, and one of Milken's circle of high-rollers—was being thwarted in his desire to gain control of Fischbach. Posner had entered into a standstill agreement with Fischbach in 1980 which prohibited his buying more than 24.9 percent of the company unless someone else acquired more than 10 percent. In December '83, Fred Carr of First Executive converted his Fischbach convertible bonds to stock, which gave him a 13.1 percent holding in the company. In January '84, Fischbach bought Carr out at the market price.

In April '84, Posner sued Fischbach, claiming that Carr's holding had voided the standstill. Also in April, Boesky began acquiring Fischbach stock. By the summer, Boesky had acquired 13.4 percent. Posner—who now could argue that the standstill had been doubly voided—increased his stake in Fischbach to 28 percent and sought antitrust clearance to acquire more than 50 percent. Fischbach gave up the fight and agreed to give Posner control, once he had bought 51 percent of the company's shares.

In February 1985, Drexel raised $48 million for Posner's Pennsylvania Engineering. Also in February, Boesky sold all his Fischbach
stock for $45 a share in London, when Fischbach was trading in the high thirties in New York. Boesky also sold Fischbach convertible debentures in the over-the-counter market at a premium over their face value. The same day, Pennsylvania Engineering purchased the identical number of shares, for $45 each, in the over-the-counter market, and the same amount of convertible debentures that Boesky had sold. The bulk of the $48 million Drexel raised for Pennsylvania Engineering was used to purchase these securities. Ultimately, Posner bought more than 50 percent of Fischbach's stock. He became chairman of the company in October 1985.

The Pennsylvania Engineering underwriting occurred while Posner was struggling to raise money to take over National Can—and several months after Drexel executives said they had decided to raise no more money for Posner. One Drexel executive said, “It's true, we
had
made that decision. But the Pennsylvania Engineering underwriting was for the Fischbach stock, and that whole thing had started before we made that decision, although it happened afterwards.”

It is true that Posner's Fischbach machinations predated the firm's decision to raise no more funds for him—but that would in itself have been no reason for Milken and his investment-banking colleagues to rescind their decision, unless they were already involved. If the government is right in what it is alleging in the criminal information, of course (and assuming the conspirator
is
Milken), then they were.

According to the criminal information, and as agreed by Boesky in his guilty plea, Boesky was assured by the conspirators that he would be made whole on any losses resulting from his Fischbach stock purchases at the outset. Boesky also confirmed that the conspirators arranged for the purchase of the Boesky holdings at the above-market price. Boesky took a loss on Fischbach—but it would have been much greater if he had not been able to sell to Posner at about 20 percent above market. With the Pennsylvania Engineering underwriting, Posner got the money to acquire the company, and Milken got a way of cutting Boesky's losses, which he had allegedly guaranteed.

Remember Milken's maneuverings (scouring the country for a buyer, finally settling on Peltz when no one else was willing, raising all the money for the acquisition) to rescue Posner from the trap he found himself in at National Can, and the government's Fischbach
scenario becomes utterly credible. It is, in fact, vintage Milken: at the controls, fine-tuning here, adjusting there, advancing his players, using them to pressure some reluctant party, moving one to help another—fiercely intent, always, on expanding his scope, and maintaining the delicate equilibrium of the interconnected whole.

Ironically, all the machinations were for no profitable end. The Pennsylvania Engineering debt, raised at rates of 17 percent to 22 percent, coincided with a slump in that company's main business, making the interest payments crippling. Fischbach's construction business suffered at the same time, so that it was unable to help with those interest payments. Profitable when Posner first targeted it—Fischbach's earnings were $26.7 million in 1983, its peak year—Fischbach lost $29 million in 1986. And by mid-1987 the downward spiral of Posner's empire had accelerated, accentuating the wisdom of Drexel's decision in the fall of '84 to do no more financings for him—a decision that Drexel executives must fervently wish they had adhered to.