THE BIRTH OF YUPPIEGATE
Nicholas von Hoffman on the
growing corruption of America's business insiders
New York THE other day in Los Angeles, FBI agents arrested a man for putting poison in non-prescription allergy pills sold widely across the United States by the Smithkline Beckman Pharmaceutical Company. The culprit was accused of moving through three or four major cities to inject his poison in the capsules sold by the tens of millions. The motive wasn't misanthropy or revenge against Smithkline for some fancied wrong. The government alleged that, prior to going on his poison spree, the accused had bought Smithkline stock options and stood to make a very large amount of money if the price of the company's securities was to swoon.
This represents the most lethal of a series of insider trading cases which have upset Wall Street in recent days. Under American law one may not profit from information not available to the general investing public. Using private tips to make a killing is not only against the law, it is a criminal offence which can and does get transgressors sent to the big house. Only last year, Paul Thayer, former chairman of the LTV corporation, a major arms manu- facturer and a former deputy secretary of defence, was forced out of office and sent to prison after being convicted of violating the insider trading rules and splitting the profits with his mistress. Indeed, the Reagan administration, ordinarily hostile to the enforcement of consumer protection legislation, makes a glaring exception in favour of stock and bond purchasers. They'll track you through time and space, even if they don't know who you are, to nail you on an insider trading violation. Giuseppe Tome knows about that. A fugitive from US justice in Europe, and before that a business consultant privy to the secrets of Seagram and Co., Tome is accused of using his foreknowledge of an impending takeover bid for St Joe Minerals to make a $1.4 million profit in a fast 24 hours of buy, sell and swap. To break through the walls of Swiss banking con- fidentiality in order to learn who had been doing all that buying of St Joe stock just before the takeover news was made public, an American judge threatened to fine Banca Svizzera Italiana in Lugano $50,000 a day and freeze the bank's American assets.
The best publicised of the recent trans- gressors of the trading code is Dennis (the Wall Street Menace) Levine, the 33-year- old sharpie who recently pleaded guilty to making $12.6 million by cashing in on his insider information while hiding behind nominees trading out of shady banks on small Caribbean islands. Until a few days ago Dennis was a managing director of the prestigious firm of Drexel, Burnham and Lambert (the last pronounced au francais). That, and an office full of oak wainscot- ing, is all it takes to be looked up to on the southernmost tip of Manhattan Island.
Drexel, Burnham and Lambert dropped Dennis as soon as what he was doing came out in the papers, but what did his super- iors think they were paying him a million dollars a year for if not to spy out informa- tion? 'Dennis's day consisted of sitting in his office, looking at the stock quote machine, talking on the phone, occasional- ly jumping up looking for a partner to chase the rumour with,' says one man who used to work in the same place as Dennis. Another recalls, 'He'd be off on the phone talking to the press, talking to the Arbs.' Ah, yes, the arbitrageurs, Wall Street's Frenchified name for stock speculators who make their millions every month by knowing, as if by magic, which companies' stocks will fly upward when the newest takeover bid is made public. Another one of his erstwhile colleagues remembers, 'Dennis would say, "We're hearing this from the Arbs, that from the Arbs." He had great Arb sources.'
Those great Arb sources are now under suspicion, for it is believed that in return for making like a canary and inculpating insider profiteers among the Arbs Dennis will be shown a dollop of leniency at sentencing time. But the story doesn't end with Dennis, who is described as a soulful person who, even in the midst of quick-got wealth, found little pleasure in life outside riding around late at night in his $100,000 Ferrari. They had no sooner taken Dennis's car away from him than the business pages were carrying stories about `Yuppiegate'.
Four men in their twenties, all dressed in dark suits with red ties, pleaded guilty last week to insider trading violations carrying a penalty of five to ten years in the penitentiary. Two of the young men said that they had passed on their illegally gained insider information to their super- iors at Drexel, Burnham and Lambert (yet again), and Marcus Schloss Company. Their superiors said it wasn't true but the case confirmed the belief that people who place wagers on Wall Street are betting against a rigged game. Every study of winners and losers in the stock market has shown that more than three quarters of those who play securities roulette at their brokers wind up net losers.
Even without a rigged pack, winning in the market is difficult enough for people able to devote their full time to studying the tout sheets. Thousands and thousands of companies are selling shares to the public and, though all are by law supposed to publish accurate and revealing informa- tion about the state of their businesses, it demands X-ray eyes and a rare, penetrat- ing intuition properly to evaluate the fu- ture prospects of a share or stock. The lore and legend of stock market capitalism have it that most of us are thus endowed and that, for us to prosper, we need but have 'a level playing field'.
The playing field is to be kept flat by making sure all would-be investors can get all relevant information at the same time. In the mid-1930s the Securities and Ex- change Commission, first headed by John Kennedy's father Joe, was created to be the government referee to keep the competition fair; but, if a society finds keeping material objects out of the wrong hands a ceaseless struggle, it is as nothing compared to keeping information out of the heads of commercial criminals. The American government has been made into wormwood by commercially motivated spies stealing military secrets kept under lock and key. You can imagine what goes on with business information handled by battalions of people who have access to the inside story before it's made public. In recent years not only have stockbrokers and members of boards of directors been convicted of violating the rules, but so have word processors, accountants, office mana- gers and proof readers. A Wall Street Journal reporter was sent to jail for 18 months for passing on advance information about what his newspaper was going to say about this or that company. For all the Securities and Exchange Commission knows, waiters serving lunch in mortgage brokers' private dining-rooms have been picking up more than table scraps. In the early 1950s, the Texas billionaire H. L. Hunt used to slip highly profitable stock tips to Senator Joe McCarthy as his way of saying thank you for running the Reds out of government.
Many a stock-jobbing firm has people on the payroll who have no other ostensible purpose in life but to ferret, flush and otherwise find information which can be converted into gold if you get it seconds before the rest of the world does. Often it is impossible to know what is illegal insider information which may not be passed along or used and what is legal information obtained by hard work and native shrewd- ness. A few years ago the Commission went after an investment counsellor who had given out that that there was rampant fraud on the books of an insurance com- pany. The adviser tipped his clients to sell their stock and only after that did he go public with the information, causing the company's shares to fall into the basement.
Given the intelligence-gathering activi- ties of the Arbs and others on the Street, some say there is no way that insider information can be kept inside. For them the overhanging, well publicised existence of the Commission only serves to mislead hundreds of thousands of small investors into thinking the field is level when actually they are playing on an acute tilt. They argue that, whatever the Commission thinks its work is, its actual function is to merchandise the products of the securities industry by telling the world that the trading is government-certified honest.
Whether or not that is so, let it be noted that no voices on Wall Street clamour for deregulation, nor cry out to close the Commission's doors. Right now there is little noise but the scuttering of small clawed feet as the industry waits for Mr Levine and the Yuppiegaters to name names and cause more finely attired men in three-piece suits to be brought in handcuffs for arraignment in Manhattan's Foley Square Federal court-house. As for the average investor — it's caveat emptor, just as it always has been, not that anyone with a dollar in his wallet and greed in his heart ever paid attention to that.
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