Securities Fraud by lonyoo


									Securities Fraud

   Amber Abella
    Chapter 6
Ivan Boesky
   Born in Detroit in 1938
   The details of his life beyond that are a little shady.
   Boesky and others liked to say that he was brought up in
    poverty, but many say that he grew up in an upper-middle
    class family.
   He often lied about where he went to school stating that
    he graduated from an elite prep school called Cranwood,
    when in fact he graduated from and inner-city high school
    in Detroit. He also liked to tell the story that he graduated
    from Harvard but only gave them a large donation to get
    an honorary seat an advisory board. In reality he
    graduated from Detroit School of Law.
Boesky cont’d.
   After graduating from law school he had a difficult time finding a job,
    but was in no real hurry because he had married a very wealthy
    women who’s father owned many high end properties one being the
    Beverly Hills Hotel. His father-in-law nicknamed him “Ivan the Bum.”
   In 1966 Boesky and his family went to New York in search of making
    their own fortune. The Boesky’s fell on some hard times when Ivan
    was unemployed but were given a luxurious Park Avenue apartment
    by his father-in-law.
   Finally in 1972 Ivan landed a great job at Edwards and Hanly. He was
    in charge of their arbitrage department. Their he began his sketchy
    dealings and was once fined by the New York Stock Exchange and
    was given the new nickname of “Ivan the Terrible.”
   Arbitrage is when you buy a security from one company at a low price
    and then sell it to another at a higher price. Boesky was very good at
    his job and when Edwards and Hanly went bankrupt he started his
    own company and in five years earned $90 million.
Boesky cont’d.
   In 1980 Boesky sold his original company and started up a new one.
    Within a few years he wasn’t making the same returns as he once
    was. When he sold his company we was yielding 142% and in 1984 he
    was only yielding 7.7%. He craved personal fame and this made him a
    prime target for Dennis Levine.
   The two men struck up a deal in which Levine would supply Boesky
    with inside information and Boesky would give a percent of his profits
    to Levine. things went awry when Levine decided to cooperate with the
    SEC. Boesky knew he would go to jail so he decided to do the same
   In September of 1986, Boesky became a government agent and two
    months later the judge that heard his case fined him $100 and then
    three years of jail time.
   Before his trial the judge allowed Boesky to “liquidate” his holdings and
    they amounted to $1 billion dollars. It is estimated that other
    arbitragers lost anywhere between $1 and $2 billion dollars after
    Boesky’s trial.
Martin Siegel
   Brought up in an upper-middle class family in Boston. His
    father owned three shoes stores when he was growing up
    but they went bankrupt when Siegel was in his 20’s. This
    haunted Siegel for the rest of his life and its said that he
    was obsessed with saving money and had a great fear of
   In the 1980s, Siegel worked for the company named
    Kidder. They didn’t have an arbitrage department so He
    was dependent on Boesky for inside information about
    takeover information.
   The two met at the Harvard club in 1982, Siegel actually
    graduated from Harvard Business School. That night they
    made their pact to exchange inside information for a
    share of profits just like Boesky was doing with Levine.
Siegel cont’d.
   Siegel went to work for Boesky pretty much immediately.
    His first payment from Boesky was $125,000. It was
    delivered to Siegel in a suitcase in a public place by a
    courier that had a password. As time went on their
    meetings were always initiated by Siegel. By 1985, Siegel
    had been given anywhere from $575,00-$700,000 from
   This is when Siegel began to get nervous. After Boesky
    told him to get a foreign bank account he didn’t want to
    give Boesky anymore information.
   In 1986 Siegel moved to the company Drexel and it is
    said that Boesky became enraged. He didn’t need yet
    another insider at Drexel because he already had Levine
    in place there.
Siegel cont’d.
   After Boesky’s fine was announced, Siegel decided to
    cooperate as well. The government seized all of Siegel’s
    assets except for his two houses and his pension. He
    only got a prison sentence of two months. He was given
    this lenient punishment in exchange for testimony on any
    case the government thought would be relevant.
   The first person that Siegel helped to catch was Robert
    Freeman, an arbitrager for Goldman Sachs. The two had
    the same relationship as Siegel and Boesky had. The
    only difference between Freeman and the others was that
    Freeman refused to testify against anyone in court. He
    served four months in jail and was fined $2.1 million.
Michael Milken
   Born in Encino, CA in 1946. His father was an accountant.
    Michael graduated Phi Beta Kappa from Berkley and went to
    Wharton business school at the University of Pennsylvania.
    When he attended Wharton he worked for the company Drexel
    Harriman Ripley and after graduation they offered him a job at
    their Wall Street office.
   Milken gravitated towards the bond-trading department there
    and really began to excel in selling what it is said he himself
    termed “junk bonds.” These bonds were sub-investment, deep-
    discount bonds. In the 70s there wasn’t much want for junk
    bonds, but Milken kept at it. In 1973 he had $2 million in capital
    and was getting returns of 100% and bonuses totaling $1
    million dollars a year.
   In 1975 Milken was allowed to set up his own department of
    bond-trading at Drexel. By 1977 his unit controlled 25% of Wall
    Street’s entire high-yield bond market. Most of Milken’s success
    can be attributed to the very lax regulation of the market. Milken
    convinced his company to begin taking 3-4% in underwriting
    fees which was an insane jump from the customay 7/8 of 1%
Milken Cont’d.
   In 1978, Milken decided to go back to LA so he wouldn’t have to be on
    such a short leash to Drexel’s management. They didn’t like this very
    much but it was clear to them that Milken was responsible for 100% of
    their profits and they needed Milken to even be in business.
   Milkens first client in LA was Steve Wynn. Wynn bought the Golden
    Nugget in Las Vegas in the early 70s, fixed it up and increased its
    annual profits from $1.1 million in 1973 to $7.7 million in 1978. Wynn
    wanted to open a Golden Nugget in Atlantic City and his best bet to
    get the $100 million was Milken. By 1980, Drexel had raised $160
    million for Wynne. In 1986, Wynn was able to sell the Golden Nugget
    for $440 million.
   In 1980 there was a recession and many underwriters were hit with
    hard times. Not Milken. In 1983 the “junk bond” business was bigger
    than ever. Milken was given the nickname “The King.”
   In 1981, Milken made a friend in Ivan Boesky. Boesky needed capital
    to buy his father-in-laws company. In 1983 Milken arranged $100
    million for the deal.
Milken cont’d.
   Over time Milken and Boesky became very close. They
    began “parking” stock together which was illegal.
   In 1985, plans were drawn up for the biggest arbitrage
    organization in history. Boesky was to dissolve his
    company and raise $220 million dollars and it was
    Milken’s job to raise $660 million with junk bonds. This
    would allow Boesky to raid any company he wanted. After
    the money was raised Milken owned Boesky’s soul.
   Milken had many other parking arrangements going on at
    the same time. In 1986, he set up The Wickes
    Corporation with a new lease on life after they struggled
    to get out of bankruptcy, but this was all to benefit
Milken cont’d.
   In 1987, after Boesky decided to cooperate with the government he set
    up a meeting with Milken at the Beverly Hills Hotel. Boesky had
    obviously been coached on where to lead the conversation but Milken
    had heard rumors about Boesky so he made sure to be tight lipped.
   When the news hit that Boesky had been cooperating Milken was glad
    for his caution because it was obvious that he and the company Drexel
    were the two biggest targets for Boesky to take down.
   By 1988 Boesky was in jail and the case against Milken had been
    sidetracked, so Milken decided to circumvent the bad press that was
    sure to ensue with good press. He did many charitable things during
    this time in hopes of becoming a better man in the eyes of the
    American people. Later in that same year Milken’s top seller went over
    to the government and in 1989 Milken was indicted on 98 felony
    counts and RICO charges. The junk bond market collapsed months
Milken cont’d.
   In February of 1990, Drexel filed for bankruptcy
    and the harshest punishment was saved for
    the last man standing. Milken agreed to plead
    guilty to six counts and pay a record breaking
    $600 million fine. In November of 1990, he was
    sentenced to 10 years in prison.
   The sentence was later reduced to two years
    and after his release he went teach a business
    class at UCLA.
   Ways to Control Insider Trading
      Reduce Profit-
        •   Warren Buffet, a very successful capitalist, came up with one way of controlling
            insider trading and that is for the government to have a tax of 100% of the
            profits made on the sale of any stock owned for less than a year.
        •   The only probem with this is many of these ideas are thought up by multi-
            billionaires that don’t have a problem with liquidity like the common man does.

• Increase the risk-
   -This is reflected in harsher sentences and fines for those that break the
       law and are convicted
   - The problem with this is that many people arent deterred by the threat
       of jail time and high fines, making copious amounts of money is
       enough for them to break the law.
Front Running
   Front running is when managers buy
    stock for themselves before they buy it
    for their funds or one broker tipping off
    another about an upcoming transaction
    and in return they get a kickback of
    some sort. They then get a sure profit
    when the stocks rise after a takeover.
    This is highly unethical and illegal.

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