Money and Power (46 page)

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G
IULIANI’S
E
LIOT
N
ESS
moment had begun in earnest two days earlier, on February 10, when Doonan swore out a six-page complaint against Freeman based on information given to Doonan by “a person who is cooperating in this investigation and to whom I shall refer hereinafter as ‘
CS-1,’ ” and who quickly was revealed by the news media to be Marty Siegel. According to Doonan’s complaint, CS-1—Siegel—had provided Doonan with “very extensive details about an illegal insider trading scheme involving Kidder and Goldman in which CS-1 personally participated with the defendant Robert M. Freeman and other individuals during the period from about June 1984 through about January 1986.” Doonan had put his faith in Siegel and the “reliability and trustworthiness” of Siegel’s “information” not only “in light of the extensive details that [he] provided” and “in light of [his] admissions of [his] own participation in the above-described scheme” but also because Siegel had “agreed to plead guilty to two felony counts, one pertaining to the” alleged conspiracy with Freeman “and the other … related to another scheme involving the misappropriation and stealing of inside information.”

In other words, Siegel was a crook and had fingered Freeman, Wigton, and Tabor in exchange for leniency from prosecutors. Specifically, in his complaint, Doonan claimed Freeman and his “co-conspirators” at Kidder had twice used inside information to make illegal profits: In April 1985, Doonan claimed Freeman disclosed to Kidder, Peabody “non-public inside information material to the efforts of
Unocal Corporation to resist a hostile takeover,” information Freeman had supposedly gleaned from his fellow M&A bankers at Goldman who were helping Unocal craft its (ultimately successful) defense to keep from being taken over by corporate raider
T. Boone Pickens. According to Doonan, at the time Pickens announced his hostile takeover of Unocal, Kidder’s arbitrage department “had purchased a substantial amount of Unocal’s stock for its own account” to bet on whether or not the deal would happen. Soon thereafter, Doonan alleged, Freeman called Siegel at Kidder and disclosed “confidential, non-public details” about the defense strategy that Goldman had developed for its client whereby Unocal would buy back some but not all of its common stock and specifically would exclude the stock Pickens had accumulated in Unocal from the buyback. Freeman supposedly shared with Siegel specific details about how the buyback would work.

Armed with the valuable information from Freeman, Siegel, who was not in the office at the time, called Wigton and Tabor and discussed with them “possible ways that they could maximize Kidder’s profit on the situation.” The three Kidder executives then devised a plan to buy “
puts”—the right to sell stock at a specified future date for a specified amount—on Unocal’s stock, figuring that if Freeman was right and the company would only be doing a partial tender offer, only a portion of the Unocal stock Kidder owned would be bought out—at a profit—but the remainder of its holdings would trade at a lower price. Buying the puts would protect Kidder—in advance of the offering being made public—when the shares traded down after the tender offer was complete, and Kidder would make a fortune by having agreed in advance to sell its remaining stock at the higher, exercise price of the put options.

The other infraction, Doonan alleged, was that in a telephone call also in April 1985, Siegel had shared with Freeman “material, non-public information” about buyout firm Kohlberg Kravis & Roberts’s confidential planned takeover of
Storer Communications, a big cable company. At the time, according to Doonan, Siegel had been advising Kohlberg Kravis & Roberts on the Storer deal. In the alleged telephone call, Freeman had told Siegel that he had bought Storer stock for his own personal accounts after rumors started appearing in the press that it might be a takeover candidate. Freeman also allegedly told Siegel he intended to sell call options to hedge his Storer position, since this would allow him to pocket immediately the premium paid by the buyer of the call option. Siegel told Doonan that the information about KKR’s Storer deal allowed Freeman to “determine an appropriate price at which to sell such call options” to make sure he made money on them. Siegel also told Doonan that Freeman had told him there was no “conflict of interest” in Freeman trading for his own account “since he was permitted to do so if Goldman had finished taking its position.”

Doonan wrote in his complaint that he included “only a small portion of what
CS-1” had told him and that Siegel’s “reliability and trustworthiness” had “been amply established.” Among the more curious aspects of what Doonan revealed in his written statement was not only that Kidder, Peabody had an arbitrage department—something that was not then generally known on Wall Street—but also that Siegel was part of it at the same time that he was Kidder’s head of M&A. If true—and it turned out to be true—Doonan’s revelation was shocking and unprecedented: no other firm on Wall Street allowed its M&A bankers to also make principal bets on the outcome of deals. In any event, the next day, Siegel pleaded guilty to insider-trading charges. Observed Pedowitz
about the charges made by Doonan and the prosecutors, “
They screwed up the complaint something fierce.”

As the shocking events surrounding Freeman’s arrest were percolating around the thirtieth floor at Goldman Sachs, Bob Rubin picked up the phone and called his partner Steve Friedman, who was on the beach in Casey Key on the west coast of Florida. “
That triggered a truly dreadful period of stress,” Friedman said. After digesting the news and talking the situation over with Rubin, John Weinberg, and Larry Pedowitz at Wachtell, Lipton (who was about to start a ski vacation when the news broke and had to cancel it), the Goldman leadership—chiefly Friedman and Rubin—made two important decisions. First, according to Friedman, “
We told the organization that we will come through this, that you all just run your businesses, we don’t need a committee of eight thousand people, whatever it was, working on this. We will handle it. Run your businesses, this too will pass.”

The second key decision the firm made was to stand behind Freeman with all the firm’s resources, both financial and political. “
I went to the lawyers,” Friedman recalled, “and I said, ‘Okay, I’m a big boy. Explain it to me. Give me the word here, worst-case scenario.’ And the worst-case scenario really was chilling. I don’t know how you would assess it in probabilistic terms or weight it but let me put it this way, it was deeply troubling in terms of the risks, exposures.” If Goldman had been criminally indicted along with Freeman, for instance, it would have been the end of the firm, since no company has ever survived a criminal indictment, let alone a private partnership where the partners had ultimate liability. “[B]ut we did not feel that Bob had done anything illegal,” Friedman continued. “We’re not saying that every judgment call was perfect, but we made the decision that we were not going to be abandoning him. And by the way, this wasn’t some tribal loyalty thing that, ‘Hey you were wearing our colors, no matter what you did, you’re our guy,’ because when we thought someone did something wrong, and we felt you’ve let us down and we’re damn upset about that, we’d come down like a hammer.” Freeman remained a partner at Goldman Sachs, and Goldman paid for his attorneys—Paul Curran, a former U.S. Attorney for the Southern District of New York and a partner at
Kaye Scholer, and Robert Fiske Jr., a partner at Davis Polk & Wardwell. Pedowitz remained Goldman Sachs’s lawyer in the matter.

Upon hearing the news of Freeman’s arrest, fellow arbitrageur Sandy Lewis called Rubin from overseas, where he was traveling. Rubin had been away from Goldman’s arbitrage business for years.
“In my daily
experience, there was nothing Bob Freeman knew that Bob Rubin did not know better,” Lewis said later. “I did not know what they knew. I just knew what they said. Bob Rubin said, the day Bob Freeman was arrested and escorted out, ‘There but for the grace of God go I,’ ” suggesting that any arbitrageur at the time could just as easily have been wrongly accused by the likes of a Marty Siegel. Observed Rubin, “I had enormously strong feeling about Bob, and I never thought Bob should be” arrested on the charges.

Freeman said it was wrong for Lewis to “try to drive a wedge between” him and Rubin. “I did nothing wrong,” Freeman said. “Bob Rubin did nothing wrong. People were saying, ‘Oh, Bob Rubin—you took the fall for Bob Rubin.’ I didn’t take the fall for Bob Rubin. None of us did anything wrong. But there are people who want to believe the worst and some Goldman Sachs people, to this day, think that, ‘Oh, well, you took the fall for Bob Rubin.’ Siegel lied about me to save himself. I did nothing wrong. I know I’m being redundant here. I just want to make the point. I did nothing wrong. Bob Rubin did nothing wrong.”

In his November 2003 memoir written with Jacob Weisberg, Rubin devoted one short paragraph to this sordid chapter in Goldman’s history and does not even mention Freeman’s name, an oversight he blamed on overzealous lawyers who, he claimed, were worried that he might offend Rudy Giuliani, who had gained national prominence as New York City’s mayor during the
September 11 attacks. (Nowadays, Rubin tells people Freeman deserves a pardon and, at the right time, will do what he can to make that happen.)

On April 9, nearly two months after the original arrests, a federal grand jury in the Southern District of New York finally got around to indicting Freeman, along with Wigton and Tabor, and charged them with four felony counts, including conspiracy to commit securities, mail, and wire fraud and three counts of having committed securities fraud. Crucially, the grand jury did not indict either Goldman or Kidder, despite the two firms allegedly having benefited from the scheme. As did Doonan’s complaint, the nine-page indictment focused on the allegations that Freeman and Siegel—this time Siegel was named—conspired together to make illegal profits by sharing confidential, nonpublic information about both
Unocal Corporation and
Storer Communications. But the indictment abandoned several key accusations that Doonan had made: gone was the idea that Kidder had bought puts in April 1985 (since this had not happened, a check of trading records revealed) and the wrong-doing alleged about Storer was made exceedingly vague.
“A number of
lawyers involved in the case, criminal law experts and Wall Street executives said they were struck more by what was not in yesterday’s indictment than by what was included,” the
Times
reported.

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F
REEMAN’S ACCUSER,
Marty Siegel, was something of a whiz kid who made his name defending companies from
hostile takeovers. He was highly compensated by Kidder, Peabody, but apparently that wasn’t enough. He had become friends with the wealthy arbitrageur
Ivan Boesky, a relationship that involved Boesky paying Siegel enormous sums for inside information—once, $150,000 paid in $100 bills; another time $400,000—at the same time that Kidder was paying him millions more in salary and bonus.

Boesky had no qualms about paying Siegel, especially since Siegel’s information was worth many millions of dollars in profits to him. Boesky’s profile continued to rise on Wall Street, along with his wealth. He wrote a book,
Merger Mania,
about doing deals. He started to be written about in the media. A few of the articles about Boesky began to suggest that he seemed to have an unusually close relationship with Siegel and noticed that Boesky was making an awful lot of money on deals where Kidder was an adviser. These innuendos made Siegel extremely concerned, and so, after a $400,000 payment from Boesky for his services in 1984, he decided to stop sharing with him his inside information. Perhaps his transgressions could remain in the past, he hoped. (While miffed at Siegel’s decision, Boesky had by then lined up any number of other M&A bankers and lawyers willing to feed him a steady stream of illegal tips about deals.)

But while he eschewed the cloak-and-dagger activity with Boesky, Siegel could not do without the adrenalin rush he derived from illegal behavior. Against his initial instinct,
Ralph DeNunzio, a senior partner at Kidder Peabody, decided, in 1984, to set up a
secret arbitrage unit inside Kidder. He asked a couple of low-key, somewhat unseasoned Kidder traders—Tabor and Wigton—to be in the group, and he made Siegel their boss and the man in charge of arbitrage at the firm. DeNunzio instructed the group to keep its existence quiet. As if it were not enough of a conflict to have an M&A banker run an arbitrage department, which was to take large positions in the stocks of companies involved in Kidder’s M&A deals, Siegel made DeNunzio’s bad decision even worse by speaking regularly to other arbitrageurs on Wall Street, including Bob Freeman occasionally, but without sharing that he was arbing deals. The arbs thought Siegel was simply a senior M&A banker and the conversations were just the typical ones arbs had with bankers (as curious as that
practice was). In both 1984 and 1985, Kidder’s secret arbitrage department made some $7 million, making it one of the most important sources of profit at the firm in those years.

Kidder continued to reward Siegel—to the tune of $2.1 million in 1985—apparently oblivious to its star banker’s ongoing misdeeds. For his part, Siegel saw greener pastures. While Kidder and Siegel made a $7 million fee for advising KKR on its acquisition of
Beatrice Foods—the deal had been Siegel’s idea, which he brought to
Henry Kravis at KKR—Drexel had made
$50 million
by financing the acquisition. Siegel began considering a previous offer from CEO
Fred Joseph to join Drexel. And, of course, he was feeling—acutely—a need for a clean break from his still-hidden past with Boesky and the Kidder arbitrage department. He thought a move to Drexel, at triple his Kidder pay, would be the answer.

Joseph had first contacted Siegel about coming to Drexel in June 1985. The attraction for both sides was obvious: it was the opportunity to marry Drexel’s financing prowess, under the leadership of junk-bond king
Michael Milken (whom Tenenbaum had once recruited heavily to come to Goldman), with Siegel’s highly regarded M&A skills. The combination would be a powerful one in the marketplace. In February 1986, Siegel said his perfunctory good-byes to
Albert Gordon, one of Kidder’s founders, and to DeNunzio, and he left Kidder.