Fortune's Formula (30 page)

“B
OESKY’S COMPETITORS
whisper darkly about his omniscient timing,” a 1984
Fortune
article ran, “and rumors abound that he looks for deals involving Kidder Peabody and First Boston. Boesky vehemently denies using inside information…”

Press accounts of Boesky’s misdeeds commanded the attention of the new U.S. Attorney for the Southern District of New York, Rudolph Giuliani. Giuliani had quickly gained a reputation as a crime-fighter and particularly a foe of organized crime.

Giuliani himself came from a connected family. One of his uncles was a bookie and loan shark for the mob. His father, Harold, was an enforcer for the loan shark. Harold Giuliani was a big, pugnacious man with thick glasses and ulcers. He came of age in the Depression and never had much luck finding or keeping a job. On April 2, 1934, desperation drove Harold and an accomplice to hold up a milkman at gunpoint. Harold spent a year in Sing Sing for the crime.

In 1948 Harold’s brother-in-law Leo D’Avanzo started a restaurant and bar in the Flatbush section of Brooklyn. It was a cover for loan sharking and gambling. The place had a secret wire room in back where bookies and numbers runners worked. Leo offered Harold the first real steady paycheck of his life. With a four-year-old son to support, Harold accepted. He became the restaurant’s bartender and the loan shark business’s muscle. Debtors would slip up to the bar and hand Harold envelopes of cash. They were paying vigorish—compound interest—of 150 percent and up. When they failed to make a weekly payment, it was Harold’s business to find them. He was known for beating delinquent borrowers with a baseball bat.

But Harold did not want his son growing up in the mob. He quit his job with Leo and moved to Long Island, taking a job as groundskeeper for Lynbrook Public High School. Harold’s son not only grew up with a lawfully employed father but gravitated to a career in the law. In college, “Rudy” Giuliani told one girlfriend of his ambition to become the first Italian Catholic president of the United States. He idolized John F. Kennedy and his crime-fighting attorney general Robert Kennedy. At New York University, Giuliani had a dartboard in his room with a picture of Richard Nixon on it.

Giuliani graduated with honors in 1968. He began clerking for U.S. judge Lloyd MacMahon, who had prosecuted Frank Costello for tax evasion. Giuliani was smart and motivated, and his career advanced quickly. In January 1981, Giuliani was named associate deputy attorney general, the third highest position in Ronald Reagan’s Department of Justice. He had changed his registration to Republican only a month before.

Giuliani was thus working in Washington at the time the Supreme Court handed down a decision that would change his life. The case was the
United States v. Turkette
, and it concerned the organized crime law RICO.

RICO stands for Racketeer-Influenced and Corrupt Organizations. The author of RICO, Notre Dame law professor G. Robert Blakey, was a former aide to Robert Kennedy. The twisted syntax of the name was allegedly chosen so that the acronym would recall the name of Edward G. Robinson’s character (Rico Bandello) in the 1931 gangster film
Little Caesar
. RICO was ultimately a response to Longy Zwillman’s plan for the mob to go legitimate. Prosecutors had found it all but impossible to pursue corrupt companies in legitimate lines of business—even when those companies were funded by mob money and used threats of violence to gain market share. Passed by Congress in 1970, RICO made legal the dubious tactic that had once been used in the tax case against Zwillman. It allowed prosecutors to freeze the assets of a “racket” from indictment up until the verdict, effectively putting it out of business before a trial.

The scope of RICO broadened greatly with time. The tipping point was the 1981 decision in
United States v. Turkette
. The defendants were charged with drug dealing, arson, insurance fraud, and bribery. They offered the defense that since they did not operate under cover of a legitimate business, they were not a “racket.” Therefore, they could not be charged under RICO.

The Court rejected this defense. It ruled that RICO could apply to any enterprise, legitimate or illegitimate.

This ruling recognized a contradiction at the heart of the law. The 1970 Congress apparently thought it would be clear who the “racketeers” or “gangsters” are. The acronym itself suggests they were thinking of Italian Americans. The Court rejected a law singling out ethnically or culturally defined racketeers. RICO could apply to any organization committing the wide range of crimes listed in the law.

That ruling gave prosecutors broad discretion in applying RICO’s draconian penalties. Of those prosecutors, none made more of this power than Giuliani.

At about the time of
United States v. Turkette
, Giuliani read
Man of Honor
, the memoir of mafioso Joe Bonanno. Bonanno’s book gave a detailed description of the inner workings of the mob. Giuliani later wrote that “I dreamed up the tactic” of using RICO “to prosecute the Mafia leadership for being itself a ‘corrupt enterprise.’”

This may seem a strange comment today, when RICO is often understood to be a law for prosecuting mob bosses who never themselves pull a trigger. But RICO was initially intended for the rackets, not for patently illegal activities like drug dealing and murder for hire. According to biographer Wayne Barrett, “Rudy decided that RICO would be his Excalibur.”

In June 1983 Giuliani accepted a new job as U.S. Attorney for the Southern District of New York. Covering Manhattan and the Bronx and thus the nation’s media capital, this district has the highest profile of any. At thirty-nine, Giuliani was the youngest ever to hold that job. He inherited a number of ongoing investigations in New York. One of them already reflected the post–
U.S. v. Turkette
interpretation of RICO. By a weird coincidence, it had to do with the Fortune 500 company that had grown from one of the Zwillman mob’s rackets.

In 1973 a stockbroker named Leonard Horwitz walked into Warner Communications’ Manhattan offices with $50,000 cash in a paper sack. Horwitz wanted to get Warner to invest in the public offering of Westchester Premier Theatre. The yet-unbuilt theater was to bring Vegas-style acts to suburban Tarrytown, New York.

The offering was in trouble. Horwitz’s big bag of cash was an inducement for Warner to buy a block of stock. Horwitz was immediately referred to Solomon Weiss. In personal life, Weiss was a quiet, fatherly man and a meticulously observant Jew. In professional life, he was an expert at concealing cash flows on a company’s books. Weiss had done books for the Kinney parking lots, which had been involved in labor union and government payoffs for years.

Horwitz and Weiss struck a deal where Warner got the cash; in return, Warner issued checks to buy stock in the theater. Horwitz was told that Warner always had a need for cash.

Why did a big and legitimate corporation need cash? The answer may have had to do with blackjack. Steve Ross habitually vacationed with a group of family and friends. When the vacation spot had casinos, Ross would often ask his companions to name something they wanted. Then Ross would go to the blackjack tables, alone. Hours later, he would emerge from the casino with enough chips to buy the named gifts.

Friends suspected that Ross simply
bought
the chips. Ross was known as a man who enjoyed showering largesse. There was evidence that Ross was far from invincible at the blackjack tables.

Ross had a credit line at Caesars Palace, Las Vegas. On June 1–3, 1973, Ross lost $40,000 in cash playing blackjack. The timing and amount of that loss was provocative because it was shortly after Horwitz had delivered the $50,000 in a paper bag.

Ross told Warner’s internal audit committee that he had a briefcase in his office to store his gambling winnings. He said he regularly won $60,000 to $90,000 at blackjack through card-counting. But when the government asked Ross why he had not reported any blackjack winnings on his income tax forms, Ross explained that “I felt at the end of the year that I had netted out.”

Leonard Horwitz cooperated with the government and supplied evidence against Solomon Weiss. The U.S. Attorney’s office charged Weiss with racketeering, mail fraud, and perjury under RICO. It was the first time RICO had been used against a major corporation. The use of RICO was justified by Warner’s prehistory as a “racket” and the fact that the company was literally partnering with the Cosa Nostra. It was learned that Westchester Premier Theatre was a joint venture of the Columbo and Gambino crime families—and later the Genovese family as well.

The name “Kimmel” kept popping up in the Weiss prosecution. After Weiss was held in contempt of court for refusing to produce his diaries, a suspicious fire broke out in the attorney’s office where the diaries had been sent for safekeeping. It was hard to believe that the fire was a coincidence. Another coincidence: Manny Kimmel had another son, Charles, nicknamed “the Torch.” Charles reportedly got that name because he owned restaurants in New Jersey that burned down.

Weiss was convicted. Throughout the case, the prosecution hinted that the real culprit was Steve Ross and that a further indictment might be in the works.

There was more trouble for Warner. Now
The Wall Street Journal
ran a story alleging Warner’s ties to organized crime. Bizarrely, it involved a chain of “Looney Tunes” character-themed family restaurants.

This was Caesar Kimmel’s new pet project. His original idea was to entertain diners with robotic versions of Bugs Bunny, the Tasmanian Devil, and Marvin the Martian. The robots were dropped as impractical after Warner had gone to the expense of buying a plant in Connecticut to manufacture them. Neither Kimmel nor his associates had restaurant experience. They rented locations on the second floor of malls—
death
to a sit-down restaurant.

Kimmel spent an astonishing $70 million opening eleven restaurants. None of them remained in business beyond three years. The scale of the cost overruns suggested organized crime to a
Journal
reporter. He did some digging and found that Kimmel’s partner in the venture, New Jersey attorney Robert Petrallia, had been charged with mail fraud.

In 1984 Caesar Kimmel took early retirement. He had inherited from his father a love of thoroughbred racehorses and became a well-known breeder whose trademark was funny or risqué names. He named one of his horses Flat Fleet Feet so racetrack announcers would have to struggle with it.

After Kimmel’s retirement, Ross took another gamble. He requested that Giuliani issue a statement saying that Ross was no longer a target of a racketeering investigation. That would help Warner’s stock value. Giuliani made a counteroffer.
If
Ross would submit to a private interview by prosecutors, and
if
his answers raised no further suspicions, then Giuliani would make a statement.

Ross did the interview. In February 1985, Giuliani announced that the investigation of Ross was closed. There was “insufficient evidence” to indict Ross. That was not much of a character reference. It was enough to clear Ross’s name, more or less, and let him get on with running the company.

G
IULIANI WAS MORE OCCUPIED
with the so-called Commission case. The “Commission” was the successor of the old Combination. It was by then all Italian. Giuliani used RICO to go after eight of the most powerful Cosa Nostra families in the New York area.

From 1983 to 1985, the FBI recorded conversations of Genovese family members taking place at two mob hangouts in East Harlem, the Social Club and the Palma Boy Social Club. The agency’s primary target was Anthony (“Fat Tony”) Salerno, whom
Fortune
magazine rated the wealthiest gangster in America.

The evidence on the FBI tapes helped Giuliani to prosecute Salerno in 1986. Salerno was given a hundred-year sentence and spent the rest of his days behind prison walls. This and the other Commission prosecutions greatly weakened the grip of organized crime in New York.

On one of the FBI tapes, Salerno said, “We
own
Kinney.” He was talking about Kinney parking lots, and the “we” was the Genovese family.

This was not the conventional view of things. After the 1971 spin-off, Warner remained a majority shareholder of Kinney National. In 1978 this stake was sold. Then, in a 1986 leveraged buyout, Kinney National was sold again to a group of investors.

Manny Kimmel had been a friend of Salerno’s. In late 1986, Vincent Cafaro, who turned government witness, explained that the Genoveses controlled Local 272 of the International Brotherhood of Teamsters. The parking lots paid a bribe of $2,000 to $5,000 to the local. In return the Teamsters didn’t make trouble about the use of nonunion labor.

This and other evidence of union corruption led Giuliani to file a RICO suit against the Teamsters in July 1988. He charged that the union had made “a devil’s pact with La Cosa Nostra” and described the RICO suit as a “careful, surgical action.” Despite the union’s reputation for tough negotiating, the prospect of having its assets frozen rattled the union management. The Teamsters gave in to Giuliani’s demands. The leadership was turned out, replaced in a government-supervised union election in 1991.

It seemed, in short, that RICO was an all-powerful weapon against the bad guys. Criminals and their attorneys, who had been contemptuous of the glacial pace of justice, were humbled and brought to the bargaining table. RICO got results now, rather than later.

This of course put great responsibility on the prosecutor. In later life as New York mayor—before 9/11 made Orwellianisms commonplace—Giuliani was quoted: “Freedom is the willingness of every single human being to cede to lawful authority a great deal of discretion about what you do and how you do it.”

The quick results had a political advantage. Within a few years as U.S. Attorney, Giuliani was probably the nation’s best-known crime-fighter since J. Edgar Hoover. That was due both to how many important convictions he secured and to his genius for promoting them. Though Giuliani expanded the U.S. Attorney’s office to 132 assistants, he presented himself as the iconic figurehead of that office. His assistant Denny Young “would review press releases like they were indictments. He’d cross out assistants’ names and put Rudy’s in.”

One former aide told
New York
magazine: “He wanted to achieve the Thomas Dewey identity, the gangbuster, the Eliot Ness crime fighter…on the running boards with Tommy guns blazing—it’s Rudy, Rudy, Rudy…So every time the FBI, whose people really did the grunt work, brought in a case with a big bow on it, he would insist on taking the lead. If anyone else held a press conference, he’d go nuts. Nuts. This man does not do a duet, he only does a solo.”

Giuliani followed the rumors of Ivan Boesky’s misdeeds carefully. His security fraud head, Charles Carberry, began looking into the claims. Like adultery, insider trading is not a sin that can be committed alone. The prosecutors began making a diagram of the suspected insider traders and their interconnections. There were about twenty names.

They were struck by how similar the social networks of the Wall Street people were to the Commission case people. Each group saw itself as an elite, apart from the rest of society. They were linked by bonds of friendship, power, money, and information. They traded tips and attended each other’s weddings, bar mitzvahs, and funerals. They would rather go to jail than violate the code of silence.

Giuliani’s people came to the conclusion that Michael Milken was the most important person in the diagram. Milken was a node in the social network, and his power was then at its height. He was involved in a plurality of the biggest leveraged buyouts. This meant he had the most information of value to unscrupulous traders. Milken was also deceiving his own clients by collecting stock that was supposedly a needed premium to help sell bonds, but which actually went into his own accounts.

The U.S. Attorney’s office orchestrated its actions with a number of law enforcement agencies. The chain of events began on May 12, 1986, when the Securities and Exchange Commission charged trader Dennis Levine with making $12.6 million through insider trading. Levine worked in Drexel Burnham’s New York office. He had little or no contact with Milken in Beverly Hills. Levine’s undoing was that he bragged about his inside trades to friends. “There’s a lot of money to be made in information,” he said.

Faced with the evidence against him, Levine decided to cooperate. Levine had been passing inside tips to Boesky for 5 percent of the profits. Levine implicated Boesky.

In May 1986, Boesky gave a famous commencement speech at Milken’s alma mater, the Berkeley business school. His message was, “Greed is all right.” Within days of the talk, Boesky was being subpoenaed to supply virtually every piece of paper connected with his business activities. By August, Boesky too began cooperating with the government. Boesky implicated Martin Siegel.

Two days before Halloween, Siegel received a mysterious phone call from someone named “Bill.” The caller asked if Siegel had received his letter.
What letter?
Siegel asked. Bill said he knew all about Siegel’s relationship with “the Russian.” Siegel told Bill never to call again or he would call the police.

“I doubt that,” Bill said.

Siegel drove to his Connecticut home and found that he had received a letter signed “Bill” asking for money. The letter said, “I know.”

A few days later, having also been subpoenaed, Siegel decided he couldn’t live this way. He sent his lawyer to Giuliani’s office to cut a deal. Siegel admitted guilt and agreed to cooperate. He implicated Robert Freeman of Goldman Sachs.

On February 12, 1987, Thomas Patrick Doonan, a seasoned investigator for the U.S. Attorney’s office, arrested Freeman in his twenty-ninth-floor office. Doonan handcuffed Freeman and paraded him past his incredulous colleagues.

Thomas Doonan had also been “Bill.”

The day before, Giuliani had approved the handcuffing of Freeman without argument. He felt it was important to send the message that white-collar criminals would receive no special treatment from his office.

Then the string of indictments stalled. Freeman refused to make a deal or implicate anyone. He vowed to fight the charges.

The evidence against Milken was still sketchy. Giuliani did not want to indict Milken until he had a strong case. In October, the government had a very nervous Ivan Boesky wear a “wire” under his suit during a meeting with Milken at the Beverly Hills Hotel. Boesky told the Feds he was afraid of being found out because Milken had friends in the casino business who might kill him. The agents told Boesky it was okay to run if Milken discovered the wire.

Boesky was supposed to get Milken to talk about a $5.3 million payment Boesky had made to him for inside information. Mentioning that the SEC was “breathing down my neck,” Boesky told Milken he wanted to make sure that they both had the same story about the check.

“Well, my guy doesn’t remember anything,” Milken said. “Does yours?”

Boesky understood this to mean,
destroy the evidence
. Milken said nothing explicitly incriminating during this meeting. It was as if he suspected something was up.

“You’ve got to be careful,” Milken told Boesky. “Electronic surveillance has gotten very sophisticated.”

Martin Siegel recounted for the government a March 1985 conversation with Robert Freeman about Storer Communications. Freeman told Siegel that a private investment firm called Coniston Partners was accumulating Storer stock for a takeover attempt. Siegel asked how Freeman knew this. “I’m very close to the people buying the stock for Coniston,” Freeman said.

This created a loose end in the government’s diagram. It implied that Freeman had another source(s) of inside information besides Siegel. Giuliani’s people set about determining who the people buying for Coniston were. They found that the trades had been done through a firm called Oakley-Sutton Management.

The government uncovered another six-degrees-of-separation coincidence. One of the partners in Oakley-Sutton, James Regan, had been Robert Freeman’s Dartmouth roommate.

And James Regan and Edward Thorp ran a hedge fund called Princeton-Newport Partners. The U.S. Attorney’s office had already gathered some Princeton-Newport trading records in connection with the Freeman investigation. While examining the records, they identified some suspicious trades by William Hale of Princeton-Newport. It looked like Hale might have made trades based on inside information. They investigated Hale further and discovered he had been fired from Princeton-Newport Partners.

Charles Carberry had retired. His successor in security fraud, Bruce Baird, knew that a good way to get the scoop on an organization is to talk to a disgruntled ex-employee. The government subpoenaed Hale. He refused to talk. A plea bargain deal was proposed, and he still refused.

Finally, the government called Hale before a grand jury. He showed up for questioning in November 1987. He was another Dartmouth man, young, tall, and blond. The government granted him immunity. This prevents a witness from invoking the Fifth Amendment.

In the course of not-especially-productive questioning, Baird asked Hale why he’d left Princeton-Newport Partners.

“I didn’t leave,” Hale corrected. “I was fired.”

“Why?”

“I couldn’t stand all the crimes they were committing.”