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Widening Scandal on Wall Street: Boesky's Rise and Fall Illustrate a

Compulsion To Profit by Getting Inside Track on Market
By Tim Metz and Michael W. Miller. Wall Street Journal, Eastern edition [New York, N.Y] 17
Nov 1986: 1.

Abstract (summary)
Ivan Boesky and the risk arbitrage movement he dominated transformed the takeovers game. And more
than any other person, Mr. Boesky and what he came to represent moved Wall Street's securities firms to
stress their trading operations over brokerage, and to seek global trading. Ivan Boesky's spectacular
success also helped turn Wall Street's investment bankers into aggressive deal makers rather than
consultants.
Mr. Boesky came East in 1966, a 28-year-old lawyer who had been turned down for jobs with several of
Detroit's top firms. As he built his fortune, he studiously affected the trappings of Wall Street prestige. A
graduate of the Detroit College of Law, he habituated New York's Harvard Club, his large donations to
Harvard having entitled him to club membership. He published a technical, ponderous volume on the art of
arbitrage. He adorned his resume with business school lecturing posts, which he seems to have
embroidered considerably.
Mr. Boesky's ability to protect his frequently huge investments is legendary, too. Late in 1984, when T.
Boone Pickens Jr. dropped a planned tender offer for Phillips Petroleum Co., the stock price collapsed,
leaving Mr. Boesky facing a heavy loss. It was said that Mr. Boesky repeatedly pressed investor Carl Icahn
to mount an effort to take over Phillips, which he did early in 1985. Mr. Icahn declines to comment on how
important Mr. Boesky's urgings were in his decision.

Full Text
No one on Wall Street ever flew as high or crashed as hard as Ivan F. Boesky.
Ivan Boesky and the risk arbitrage movement he dominated transformed the takeovers game. And more
than any other person, Mr. Boesky and what he came to represent moved Wall Street's securities firms to
stress their trading operations over brokerage, and to seek global trading. Ivan Boesky's spectacular
success also helped turn Wall Street's investment bankers into aggressive deal makers rather than
consultants.
Ivan Boesky's story -- his rise from modest roots as the son of a Russian immigrant delicatessen owner in
Detroit to wealth on Wall Street beyond ordinary measure, and his scandalous collapse -- will surely
become one of American business history's epical dramas.
He is a latter-day Great Gatsby -- the self-made Midwesterner struggling to fit in with the East Coast
financial establishment -- whose compulsion to accumulate a prodigious fortune brings him down.
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Mr. Boesky came East in 1966, a 28-year-old lawyer who had been turned down for jobs with several of
Detroit's top firms. As he built his fortune, he studiously affected the trappings of Wall Street prestige. A
graduate of the Detroit College of Law, he habituated New York's Harvard Club, his large donations to
Harvard having entitled him to club membership. He published a technical, ponderous volume on the art of
arbitrage. He adorned his resume with business school lecturing posts, which he seems to have
embroidered considerably.
And he continued to make tens of millions of dollars at an obsessive pace, long after he had become one
of America's richest men. "It's a sickness I have in the face of which I am helpless," he once told an
interviewer. At the crest of his career, this "sickness" apparently drove him to seek still more profits with
Dennis Levine through the baldly illegal insider-trading scheme to which he pleaded guilty last Friday.
"I don't know what his devils were," said one arbitrager who knows Mr. Boesky well. "Maybe he's greedy
beyond the wildest imaginings of mere mortals like you and me," he said. "And maybe part of what drives
the guy is an inherent insecurity that was operative here even after he had arrived. Maybe he never
arrived."
Mr. Boesky, a wrestler in his high school years, worked long hours standing up in a sleek room filled with
elaborate high-tech equipment. In his offices, he trained video cameras on many of his employees and
tracked their movements on a bank of monitors on his desk.
Intimates of Mr. Boesky say he vacillated between being loud, harsh and aggressive to mellifluously softspoken, charming and courtly, and that the changes could come abruptly. Gaunt and flashing a spectral
smile, he appears far older than his 49 years.
Colleagues describe his zeal in the pursuit of information about a transaction as overwhelming. "When
somebody got an edge on something, he would go bananas," recalls one arbitrager who worked with him.
"We would often grab the tender papers from the printers, but if someone else had a friend at the
printers and got them first, he went wild."
Stories about Mr. Boesky's Byzantine trading and information-gathering strategies abound. Some may be
apocryphal, but they reflect the mystique that surrounded him.
His traders on the stock-exchange floor, for instance, were closely watched for clues about Mr. Boesky's
investments, and would then be imitated. In response, his former traders say, Mr. Boesky often laid a
false trail. For instance, he might order his traders to sell a stock that he actually was accumulating heavily
through other traders, both here and abroad.
According to one former close associate, Mr. Boesky frequently ordered up research on stocks he had
been tipped off about to make those purchases appear more routine than they actually were.
Others on Wall Street had conducted arbitrage long before Mr. Boesky came on the scene. But he played
the game on a breathtaking scale. While others would settle for tens of thousands of shares of a
takeover target, Mr. Boesky sometimes bought millions.
The size of his position, along with his growing mystique on Wall Street, gave him unrivaled access to both
corporate executives and investment bankers. One of his traders once boasted that Mr. Boesky could get
any chief executive in America out of the bathroom to talk to him at 7 a.m.
Investment bankers involved in takeovers sometimes sought advice from Mr. Boesky, too. One, Joseph R.
Perella, a First Boston Corp. deal maker, told a reporter shortly after client Wheelabrator-Frye's Inc.'s
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successful 1980 takeover of Pullman Inc. that he had sought Mr. Boesky's advice on an appropriate price
for the offer.
Mr. Boesky's ability to protect his frequently huge investments is legendary, too. Late in 1984, when T.
Boone Pickens Jr. dropped a planned tender offer for Phillips Petroleum Co., the stock price collapsed,
leaving Mr. Boesky facing a heavy loss. It was said that Mr. Boesky repeatedly pressed investor Carl Icahn
to mount an effort to take over Phillips, which he did early in 1985. Mr. Icahn declines to comment on how
important Mr. Boesky's urgings were in his decision.
In recent years, Mr. Boesky has striven to be seen as a kind of statesman. He has become active in
political and philanthropic causes. This year, he was appointed special adviser for Jewish affairs to the
Republican National Committee's chairman and finance director of a Republican Jewish lobbying group.
Earlier this year, Mr. Boesky was one of a group of Jewish leaders invited to the White House to discuss
the proposed sale of American missiles to Saudi Arabia. He was the group's only public supporter of the
proposal.
Mr. Boesky became an active contributor to Republican political campaigns. This year, he helped
underwrite the legal bills of Nevada Sen. Paul Laxalt.
He also thrust himself into prominence at many cultural and educational institutions, donating millions of
dollars. He became a trustee of New York University, the Jewish Theological Seminary and the American
Ballet Theater, among others.
This year, some of his charitable donations were questioned in lawsuits filed by his sister-in-law and
members of her family. The plaintiffs are minority owners of the Beverly Hills Hotel, which Mr. Boesky and
his wife control. The suits charge that Mr. Boesky in 1985 caused the hotel to donate $750,000 to the
United Jewish Appeal in what the suits called personal self-aggrandizement and misallocation of corporate
assets. The suit further alleged that Mr. Boesky didn't personally make any other contributions to the
group, but took credit for the hotel's donation.
At the time of the suits, Mr. Boesky didn't return calls for comment on the allegations. Mr. Boesky's
attorney, Harvey Pitt of Fried, Frank, Harris, Shriver & Jacobson, said Friday that his client had resigned
from all his philanthropic and cultural posts.
Now, speculation is focusing on what will happen to Mr. Boesky and his firms, with holdings of more than
$1 billion of securities and approximately 100 employees. The financial and legal consequences for him are
formidable, but not catastrophic. Mr. Boesky has made himself unavailable for comment since Friday
afternoon's announcement that he had admitted to illegally profiting from the scheme.
The SEC and Mr. Boesky's lawyer say the record $100 million civil penalty he must pay in returned profits
and fines represents the bulk of his net worth. Others on Wall Street suspect that he may have double
that much money, or even more.
The SEC agreement, however, doesn't allow for Mr. Boesky's tax liabilities, Mr. Pitt noted. Mr. Boesky will
have to pay "millions" of dollars in capital gains taxes out of the funds he has left over, he said.
Therefore, it isn't clear whether Mr. Boesky will be able to hold on to his lavish real estate holdings. They
include a luxury apartment in an east-side Manhattan hotel and a 163-acre, four-home estate in Mount
Kisco, N.Y. The estate is said to feature lanes named "Wall Street" and "Broad Street."

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Earlier this year, the Boesky-controlled Beverly Hills Hotel was put up for sale and is expected to fetch
about $125 million.
Mr. Boesky's guilty plea to a single criminal count last week put him in line to serve as many as five years
in federal prison. But no one doubts that the Justice Department could have mustered many more criminal
counts against him, and many reckon that his agreement to implicate others in the government's
continuing investigations will at least reduce any prison time he eventually may serve.
The lifetime bar from working at any registered securities firm wouldn't prevent him from continuing to
operate as a private investor. The only significant additional cost to Mr. Boesky as a private investor would
be the commissions he would have to pay others to put through his trades.
Whatever the fate of the Boesky companies, nothing seems likely to happen imminently, given the 16
months allowed Mr. Boesky to effect his exit from the securities business under his agreement with the
government. Mr. Boesky stressed this point in internal meetings with employees on Friday, his attorney
said.
In 1975, Mr. Boesky set up his first arbitrage firm, with initial capital of $700,000. While his performance
has been uneven, the most recent data available show that from his start-up through March 1985, his
average annual return on investment was almost 26%. While that return is impressive, some more
conservative investors have done even better.
But Mr. Boesky sometimes charged near-confiscatory management fees. For example, a 1985 Boesky filing
disclosed that investors in the original Boesky partnership, which was dissolved in 1980, were assigned
45% of the profits, but 95% of any losses. That left Mr. Boesky with 55% of the profits and just 5% of
losses. Nevertheless, the filing says, a limited partner who stayed in the partnership through its full fiveyear life got an average annualized rate of return equal to 43%.
The Boesky family of concerns includes IFB Management Corp., a New York Stock Exchange member firm,
and Farnsworth & Hastings Ltd., a Bermuda securities company named for the Detroit streets that
intersected at his family's deli. His controlling interest in London-based Cambrian & General Securities PLC
has been transferred to the U.S. Treasury in partial settlement of the civil penalty. Mr. Boesky's attorney
estimated the value of his Cambrian & General ordinary share holdings at $14 million, his capital shares at
$33 million and his stake in Northview Corp., a motels concern, at $3 million.
Of the total $100 million penalty he must pay, $50 million will be set aside for the benefit of investors who
sold stock to Mr. Boesky in trades involving inside information.
A year ago, Mr. Boesky was touring the country to promote his book, "Merger Mania." The book jacket and
the brochure circulated earlier this year to promote his new arbitrage fund say that he serves as adjunct
professor at Columbia University's Graduate School of Business and New York University's Graduate
School of Business Administration. Columbia says Mr. Boesky has never been an adjunct professor there,
and NYU says he hasn't been an associate adjunct professor there since early 1984.
Mr. Boesky's father, William, was a native of Ykaterinoslav, Russia. He ran Boesky's delicatessen, which
became a well-known Detroit establishment. The name of the deli, like that of the senior Boesky, was
pronounced with three syllables: bow-ESS-kee. Ivan Boesky truncated the name into two syllables.
He dedicated his book to his father: "His life remains an example of returning to the community the
benefits he had received through the exercise of God-given talents . . . . May those who read my book
gain some understanding of the opportunity which exists uniquely in this great land."
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Mr. Boesky considered arbitrage an art form and considered himself its supreme practitioner. "It is not
something given to everyone," he told an Atlantic Monthly interviewer. "How many have read Hamlet? I
mean, as Gielgud has, really read Hamlet?"
But his passion was money. Speaking of the sum of $500 million, he told the Atlantic interviewer: "Imagine
it in one-dollar bills, or better yet, in a pile of silver dollars. I wonder how tall that would be . . . . It would
be like Jacob's ladder, wouldn't it? A Jacob's ladder of silver dollars. Imagine -- wouldn't that be an
aphrodisiac experience, climbing to the top of such a ladder?"
"I can't predict my demise," he told another interviewer in 1985, "but I suspect it will occur abruptly."
--Also contributing to this story was John D. Williams.
(Revised WSJ Nov. 19, 1986)
Credit: Staff Reporters of The Wall Street Journal
Copyright Dow Jones & Company Inc Nov 17, 1986

Indexing (details)
Title

Widening Scandal on Wall Street: Boesky's Rise and Fall

Illustrate a Compulsion To Profit by Getting Inside Track
on Market

Author

By Tim Metz and Michael W. Miller

Publication title

Wall Street Journal, Eastern edition

Pages

Number of pages

Publication year

1986

Publication date

Nov 17, 1986

Year

1986

Publisher

Dow Jones & Company Inc

Place of publication

New York, N.Y.

Country of publication

United States

Publication subject

Business And Economics--Banking And Finance

ISSN

00999660

Source type

Newspapers

Language of publication

English

Document type

NEWSPAPER

ProQuest document ID

398068505

Document URL

http://search.proquest.com/docview/398068505?
accountid=38148

Copyright

Copyright Dow Jones & Company Inc Nov 17, 1986

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