Wall Street Crime And Punishment: Ivan Boesky Gives Greed A Bad Name - Chevron (NYSE:CVX)

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Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

In a 1985 article published in the Washington Post, Ivan Boesky was described retreating from his palatial office on New York’s Fifth Avenue by midday and heading for the Harvard Club, where he conducted meetings with staff and clients well into the evening.

“The club suits well the image that Boesky cultivates in interviews and public appearances,” the Post profile exclaimed. “It is a stately and comfortable place, suggestive of a quiet Victorian eminence not ordinarily associated with the ruthless, turbulent world of hostile corporate takeovers where Boesky has made his fortune.”

The Harvard Club is an independent social club that is not formally associated with its namesake university, although its alumni are the core of its membership.

The Post added a slightly sour post-script to its description: Boesky was not a Harvard graduate, nor did he ever complete his undergraduate studies.

Instead, the newspaper diplomatically noted his “main Harvard connection is a fellowship for journalists in public health studies that he has funded at the university." Or, to translate from politeness to cruelty, he bought his way into the Ivy League surroundings.

Some historians have compared Boesky’s ties to the Harvard Club to the alleged Oxford University ties promulgated by the title character of F. Scott Fitzgerald’s “The Great Gatsby.” After all, both were outsiders trying to force their way into an upper-class social sphere that was not entirely eager for their acquaintance.

But whereas Fitzgerald’s Gatsby was a tragic figure fueled by unrequited love, Boesky was a parvenu whose narcissism and recklessness took him on a journey of rags to riches to prison.

The Roots Of Bad Behavior: Ivan Frederick Boesky was born March 6, 1937, in Detroit, the son of Russian-Jewish immigrants. His father owned a network of delicatessens, restaurants and bars that were popular throughout the city.

When he was 12, Boesky enrolled at Cranbrook, a prestigious private school where he pushed his slight physical stature through excessive exercise to become a trophy-winning member of the wrestling team. He abruptly left Cranbrook in his sophomore year and enrolled at a public school.

Although he never spoke publicly of the change in schools and would always give the impression of being a Cranbrook alum, an unnamed family member, cited in a 1993 Vanity Fair profile of Boesky, insisted he was expelled for cheating.

Indeed, the young Boesky didn’t seem very interested in playing by rules. He drove an ice cream truck in his teen years, but kept staying out late into the evening and far beyond the curfew limit of his driving permit. After being taken to police stations to be bailed out by his father, Boesky simply borrowed the driver’s license of his sweetheart, Seema Silberstein — licenses in those days did not carry a photograph or gender identification and Boesky correctly guessed police officers would not realize Seema’s uncommon first name belonged to a girl.

Despite this behavior, she was deeply in love with Boesky and wanted to marry him. Her father, Ben Silberstein, was far less infatuated with his prospective son-in-law. For starters, Boesky lacked the educational foundation for a strong career — he took courses at Wayne State University, Eastern Michigan University and the University of Michigan, but never achieved a degree.

Boesky’s father had also become something of an embarrassment. His business operations waned during the 1950s until all that was left was a bar in a seedy neighborhood that transitioned into a strip club. One of Boesky’s many youthful jobs involving managing this unsavory establishment.

There was also the question of a hole in his timeline. Boesky disappeared for a year and relocated to Iran, living at the home of a former Cranbrook classmate. Boesky would later claim he worked as a CIA agent and as an English teacher for the U.S. Information Agency, but neither story has ever been verified.

Silberstein was also cognizant that Boesky’s interest in his daughter included his checkbook: Seema’s father was a prosperous real estate executive whose portfolio included California’s legendary Beverly Hills Hotel. When Boesky announced plans to attend Detroit College of Law, Silberstein feared that he would be paying the tuition — which, after Boesky wed Seema in 1962, he did. Silberstein would refer to his son-in-law as “Ivan the Bum” and avoided personal contact with him as much as possible.

Detroit College of Law did not require its students have an undergraduate degree, which enabled Boesky’s attendance. But his coursework was harder than he anticipated and he twice dropped out. When he finally graduated in 1965, he was unable to gain a position at any Detroit law firm, and Seema arranged for him to receive a clerkship under a relative who was a judge.

Boesky’s father died in 1964 and he closed down the strip club two years later. At that time, he reconnected with a Cranford classmate living in New York City who planted the idea of a career switch to financial services in general and arbitrage trading in particular.

Boesky and his wife left Detroit and relocated to a luxurious Park Avenue apartment in the heart of Manhattan — paid for by Boesky’s father-in-law.

A Financial Wizard Is Born, Sort Of: Boesky came to Wall Street with no discernible skills or talent, and it quickly showed. He was unable to maintain a job for more than a year, and he was fired from one position after engineering a $20,000 loss for his employer.

Incredibly, he was given a chance at the small brokerage firm of Edwards & Hanley and Boesky finally displayed an understanding for arbitrage. While many of his trades benefitted the firm, there was a sloppy short sale that introduced Boesky to the U.S. Securities and Exchange Commission — the regulator fined him $10,000 for playing loose with the rules.

Edwards & Hanley went out of business in 1975 and Boesky, realizing his track record worked against him for employment elsewhere, opted to go into business for himself. With $700,000 in start-up funds — donated, once again, from his father-in-law — he created his own arbitrage fund called Ivan Boesky and Company.

An arbitrage trader makes money by investing in shares of companies that an acquisition targets. When Boesky set up his own business, it was a niche within the wider Wall Street spectrum.

But, as luck would have it, he wound up in the right place at the right time — regulatory changes in the early 1980s enabled a new flurry of mergers and acquisitions where he could make a fortune.

The environment also turned on a switch in Boesky’s personality that wasn’t activated since the slight youth at Cranford engaged in a frenetic workout regimen to become an unstoppable wrestler. Boesky pushed workaholic behavior to new levels, existing on as little as three hours a day while spending much of his time in search of the next big arbitrage deal.

The Washington Post’s 1985 coverage found Boesky on “a perch before an impressive bank of high-technology equipment: video terminals, news wires, stock ticker tapes, and 160 telephone lines connecting him with his staff, brokers and stock exchange floor traders. He does not sit. All day, he stands.”

Boesky thrived on this high-pressure world he created for himself, and while he estimated that 85% of his deals were profitable — a 1982 deal involving Cities Services, a forerunner of Citgo, reportedly cost him $60 million — his successful deals made him immensely wealthy.

He pocketed roughly $65 million in 1984 with Chevron Corporation's CVX acquisition of Gulf and Texaco’s purchase of Getty Oil. Boesky followed those one year later with a $50 million haul after Philip Morris International Inc. PM acquired General Foods.

Ten years after starting his business, the Associated Press reported Boesky to be the highest-paid trader on Wall Street, overseeing an investment fund with more than $3 billion in assets while carrying more than $200 million in net worth.

He also earned a place on the Forbes 400 list of America’s wealthiest people, but his wife Seema would later recall that coverage embarrassed him because he felt his ranking was far too low.

The Need For More: While the Harvard Club membership gave Detroit-born and ill-educated Boesky the sense of being on equal footing with the East Coast elites, it seemed that his wealth and success were never enough.

Boesky craved a wider adulation for his achievements and hired a public relations representative to plant positive stories about him — including the aforementioned Washington Post piece — and to locate a ghostwriter to help him author “Merger Mania — Arbitrage: Wall Street’s Best Kept Money-Making Secret.”

His publicist also arranged for speaking engagements, including a 1986 commencement address at the University of California Berkeley’s School of Business Administration that gained national attention for its unlikely mantra.

“Greed is all right, by the way,” he told the surprised graduating class. “I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.”

Assuming Boesky was being playfully facetious, the audience applauded his speech, which was widely reported in positive news coverage. It would be the last round of public applause he would ever receive.

Downfall: Boesky would defend himself to the Washington Post by insisting his arbitrage success was a victory of detailed study.

“In any deal, there are certain things that are either going to happen or not happen,” he explained. “Most of those issues are identifiable. And once identified, they can be analyzed and predicted with probability.”

What Boesky omitted from that definition was the timing of when deals were identified. Under federal regulations, this information needed to be public knowledge — having details on the deal before it went public was a major no-no.

At the time when Boesky was preparing his Berkeley speech, federal investigators arrested Dennis Levine, a managing director at Drexel Burnham, for insider trading. Levine began naming names of those who benefitted from his inside information, and in November 1986 Boesky found himself answering to investigators after Levine admitted his tips helped Boesky earn $50 million in his arbitrage trading.

Not unlike Levine, Boesky was eager to cooperate to spare himself the full brunt of the law. He named Martin Siegel, an investment banker at Kidder, Peabody & Co., as a source for insider information that he parlayed into $33 million in profits between 1982 and 1986.

But Boesky had an even bigger name for the investigators: Drexel Burnham executive Michael Milken, Wall Street’s king of the junk-bond traders.

In exchange for a plea deal, Boesky spelled out how Milken’s junk-bond-fueled leveraged buyouts were triumphs of insider trading and stock manipulation.

While Boesky was negotiating his plea deal, the SEC permitted him to sell $440 million in stocks before his indictment was publicly announced.

While the news of Boesky’s indictment created shock waves on Wall Street, word of the SEC’s actions infuriated both the financial sector and many elected officials in Washington. John Shad, SEC chairman, insisted the sale did not violate any law and was permitted to avoid a market panic.

Boesky settled the SEC charges of illegal insider trading with a then-record $100 million fine — $50 million for reimbursing his illegal profits and $50 million penalty for the government — and agreeing to a lifetime ban on securities business participation within the U.S.

He also pleaded guilty to a single charge of making false statements to the government and sentenced to three years in Southern California's Lompoc Federal Prison, a minimum-security facility often referred to as “Club Fed” for its prison population of wealthy white-collar criminals.

Aftermath: Boesky was released after less than two years behind bars. His wife Seema had sold her ownership in the Beverly Hills Hotel and part of her art collection to help pay for Boesky’s legal fees, but their post-prison reunion was troubled and they divorced in 1991.

Boesky ended his marriage the way he began it, by taking money from his spouse: A court settlement required Seema to pay him a one-time settlement of $23 million and annual alimony of $180,000 for life.

In later years, Boesky would discreetly make inquiries about restarting his arbitrage trading business in Europe and Asia, but he was unable to find anyone willing to partner with him. Rumors about Boesky studying at a rabbinical seminary, hosting wild orgies and living a reclusive existence percolated in the media.

In reality, Boesky remarried the Spanish-born Ana Serrano and lives in La Jolla, a wealthy suburb of San Diego. The couple has been generous arts patrons and hosted fundraising events at their home, with Boesky’s most recent public appearance being at a costume party last Halloween.

Before his fall from grace, Boesky ruminated in an interview with The Atlantic on a Biblical-worthy climb to the peak of possible wealth.

“Imagine $500 million in one-dollar bills, or better yet, in a pile of silver dollars,” he stated. “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?”

Perhaps if Boesky flipped a few pages further into his Bible, he might have found the warning of Proverbs 22:1 that would have saved him a world of grief: “A good name is more desirable than great riches; to be esteemed is better than silver or gold.”

(Photo of Ivan Boesky from the cover of his 1985 book "Merger Mania," published in accordance with the "fair use" provisions of Section 107 U.S. Copyright Act.)

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