Insider Journalism
Den of Thieves.
by James B. Stewart.
Simon & Schuster. 493 pp. $25.00.
Following Ivan Boesky’s guilty plea to insider trading in November 1986, articles began to appear in the Wall Street Journal under the bylines of James B. Stewart and Daniel Hertzberg which, over the next several years, created the impression of rampant criminality on Wall Street. Arming themselves with over 300 citations from unnamed government sources (“according to people familiar with the government’s investigation,” etc.), the reporters told of what Stewart would later call “the greatest criminal conspiracy the financial world has ever known.” Readers learned that a wide-ranging investigation was under way of an illegal scheme of insider trading, involving scores of people and aimed at profiting hugely from corporate takeovers. The investigation was proceeding with the aid of Boesky himself, who had agreed to have his phones tapped and to be wired for sound.
On December 5, 1986, Stewart and Hertzberg reported:
As government investigators continue to pursue the biggest insider-trading case in history, a major theme is emerging: in every instance known thus far to figure in the government’s investigation, the securities firm of Drexel Burnham Lambert Inc. played an important role and Ivan F. Boesky amassed stock positions in advance of significant news announcements.
On April 28, 1987, they wrote:
Government investigators have unearthed substantial evidence to support charges of criminal violations of securities laws by Michael R. Milken and Drexel Burnham Lambert Inc. . . . At the heart of any case against Milken and Drexel is the testimony of Mr. Boesky.
The pursuit of “junk-bond king” Michael Milken was under way.
Over the next two years the reporters, joined by Laurie Cohen after Stewart became the Journal‘s page-one editor in September 1988, duly channeled to their readers an incessant flood of leaks, all aimed at pummeling Milken, destroying his reputation, and frightening everyone involved with him. In March 1989, Milken was finally indicted on 98 counts of securities fraud and racketeering. As Milken continued to resist, hints were leaked of an expanded, “superseding indictment,” which, apparently, never existed.
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After years of such high drama devoted to the pursuit and capture of, supposedly, the greatest financial criminal in history, anyone who followed the case to its conclusion must have been greatly puzzled. Although Milken eventually drew a stiff ten-year sentence, the six picayune crimes to which he pled guilty were not even part of the 98-count indictment. Five of the six were technical violations, which derived their appearance of criminality from being linked in the sixth plea of “conspiracy.”
Conspiracy has a heavy sound, but the violations to which Milken entered his plea were of no material consequence and were not logically related to any conspiracy. None of the violations involved insider trading, stock manipulation, bribery, or racketeering. Milken pled to three securities-law violations, one mail fraud, and one tax count, and even these were nowhere near as serious as they sounded.
Two of the three securities-law violations involved Milken’s promises to cover losses if Boesky bought specific stocks and they declined in value. In one case, involving the purchase of Fischbach common stock, Boesky did not report in a filing with the Securities and Exchange Commission (SEC) his understanding that Milken had promised to cover such losses. In the other, involving the purchase of MCA stock, Milken’s promise to cover losses was not recorded on Drexel’s books.
In the former case, it could be construed that Milken was helping a takeover attempt of Fischbach by Victor Posner. But Posner did take the company over, apparently legally, so in context the violation was technical and immaterial; moreover, it was committed by Boesky, not by Milken, who pled only to “aiding and abetting.” In the latter case, Drexel may or may not have violated some accounting Or reporting rule, but if manipulation was intended it failed, because the price of the stock declined. Neither of these episodes supports the image of a man making a fortune through “financial crime.”
The third securities-law violation was an act of stock “parking.” Boesky sold Helmerich & Payne common stock to Drexel with a promise to buy it back, covering any losses. This gave Boesky cash with which to overstate his net capital, as reported to the SEC. Again, this was of no material consequence, and no one was defrauded of any money. Moreover, Milken did not arrange the stock parking, but later, when he learned of it, permitted the stock to be resold to Boesky. On this weak reed, Milken pled that he had “aided and abetted” Boesky’s overstatement of his net capital.
The mail-fraud plea stemmed from a “failure to disclose,” in invoices mailed to David Solomon, manager of the Finsbury Fund, a legal agreement Milken had made with Solomon to adjust by a fraction of a point within the bid/ask range the fund’s purchase and sale of high-yield bonds, in order to cover the commissions Drexel paid to representatives who sold the fund. In this case, had Drexel used Federal Express or hand-delivered its invoices to Solomon, instead of sending them through the U.S. mails, Milken would not have committed a “crime.” Drexel was under no obligation to pay the cost of marketing the fund, and in any event it was Solomon, not Milken, who had the duty of disclosure to the fund’s shareholders. Drexel’s transactions with the Finsbury Fund, moreover, were relatively few: Judge Kimba Wood, who sentenced Milken, was able to substantiate only $318,082 in undisclosed charges—again, hardly the foundation of a multibillion-dollar fortune.
Finally, Milken pled guilty to assisting David Solomon in filing a “false” personal income-tax return. In what appears to be a normal and widely practiced method of shifting tax liability from one year to another, Solomon had sold stock at a loss in one year and recovered his money in a profitable transaction in the next.
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One has to wonder about the competence of federal prosecutors, having spent several years amassing a highly publicized 98-count indictment of the putative leader of the greatest financial conspiracy in history, who would then accept such a paltry plea bargain. Judge Wood must have wondered, too. She called a special sentencing (“Fatico”) hearing in order to allow the government to present its strongest counts against Milken (apart from those he had already pled guilty to). Reaching deep into its arsenal of insider-trading, racketeering, bribery, and stock-manipulation charges, and armed with the advantages of a lower burden of proof and lower evidentiary hurdles than in a genuine trial, the government still failed to convince the judge that Milken’s crimes exceeded his plea. (The sentence she proceeded to impose left legal commentators shocked.) As for Boesky, by the time of the hearing he had proved to be such an unreliable witness that the government did not dare call him to testify. The entire Boesky-related case of insider trading and racketeering had evaporated.
One has to wonder, too, about the competence or the integrity of a reporter who, in 1991, after all these events had become known, would publish a book that provides no explanation of the vast difference between the 98-count indictment and the picayune six-count plea. Instead, in Den of Thieves—which takes its title from the passage in the New Testament where Jesus cleanses the Temple of the Jewish moneychangers—James B. Stewart retells the Milken story in terms of the same unsubstantiated leaks that made up the 98-count indictment which the prosecutors lacked the confidence to take to trial. Having been used as a conduit by the prosecutors, Stewart now assumes that the leaks planted on him were true. He writes his account in the form of a historical novel, affecting to know what was going through the minds of the protagonists as the purported events unfolded, as well as what was spoken by the parties when no witness was present. Milken’s every word and action he interprets, naturally, in the worst possible light, as expressions of greed and megalomania.
In his prologue, Stewart writes that Milken’s “crimes were far more complex, imaginative, and ambitious than mere insider trading.” Yet Stewart’s own understanding of high finance amounts to this: a bunch of crooks used a fraudulent financial instrument to steal money from trusting investors. Stewart sees high-yield or “junk” bonds as the instrument of a “crime wave,” by means of which Milken and his cronies enriched themselves while wrecking companies that were household names, crippling others, and destroying thousands of jobs by loading companies with debt in order to reap wealth from ruin, never failing to seize an opportunity to violate “the sense of justice and fair play that is a foundation of civilized society.” At the very least, this leaves unexplained today’s flourishing “junk-bond” market—to say nothing of the way Milken created great value by providing financing for companies which lacked investment-grade credit ratings, and helped to forge a market for a financial instrument that allowed badly managed companies to be put into more capable hands.
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Stewart claims that “this story shows how the nation’s financial markets were in fact corrupted from within, and subverted for criminal purpose.” Yet the reader has to make his way deep into this book before encountering much about Milken’s purported wrongdoings. And even then, Stewart artfully weaves in Milken with Ivan Boesky and other figures in the Wall Street investigations like Martin Siegel and Dennis Levine. His picture of Milken is particularly dependent on the version of the alleged conspiracy given by Boesky, who in his own sentencing was under pressure from prosecutors to produce bigger fish.
Milken was a vulnerable target. He was an upstart financier stepping all over “white-shoe” Wall Street toes. He had made huge amounts of money, for himself and others, by activities the ordinary person could not understand. He struck fear in the hearts of the corporocracy, ever allergic to entrepreneurs and their risk-taking ways. U.S. Attorney Rudolph Giuliani and SEC officials knew that Wall Street and the Fortune 500 would not come to Milken’s defense. Neither would politicians and journalists convinced that debt was the nation’s undoing.
The government used the vague securities laws, and the press, especially Stewart, as instruments of terror. The aim was to convince Milken’s associates to help the government build a case against him; in exchange, they themselves would escape being charged—for what, they knew not. The government also indicted Milken’s younger brother Lowell, and wielded the bludgeon of the Racketeer Influenced and Corrupt Organizations Act (RICO), which permits the government to seize all of a defendant’s assets prior to trial.
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Stewart never tells his readers that to this day the SEC has resisted defining insider trading, on the grounds that doing so would be detrimental to the enforcement of the law. Obviously, undefined crimes can be employed as a weapon against anyone; the fear of trial expenses and ruined reputations calls forth witnesses who will search anxiously for what prosecutors want to hear. The upshot, as in the case of Michael Milken, is that a defendant is forced to provide the government with a case against himself by coming forward with a plea.
Federal indictments cannot be trusted when the ambitions of prosecutors take precedence over their concern for justice. The public cannot rely on journalists when their reporting is such a large part of the prosecution, much less when, as in Stewart’s case, it is a principal instrument of the prosecution.
If I were the publisher of the Wall Street Journal, I would be concerned that three shoddy reporters helped overreaching prosecutors, who themselves violated the law by leaking grand-jury testimony, to send an innocent person to jail, and I would assign reporters to reopen the case and inform the public of the truth.
