Who are the key players?
In this financial scam, Boesky is the key player. Boesky is the son of Russian
immigrants, and his father became the top restaurant owner in Detroit. Boesky entered
the University of Michigan before graduating, but he later received a law degree from
Detroit Law School (1964). After working as a legal clerk and accountant in Michigan
for a short time, he worked on Wall Street as a securities analyst in 1966. With the
help of his father-in-law, real estate tycoon Ben Silberstein, Bosch founded his own
arbitrage company in 1975.
Throughout the early 1980s, Boesky has been an arbitrage expert. He has
accumulated approximately $200 million in wealth by betting on company
acquisitions and mergers. Like other corporate financiers, such as T. Boone Pickens
and Sir James Goldsmith, Boesky uses the gap between public and private market
values to blitz corporate goals. As long as the target stock transaction is based on the
public’s knowledge of the upcoming acquisition, this approach is legal. In the mid-
1980s, the U.S. Securities and Exchange Commission (SEC) investigated certain
investments made by Boesky after he had received tips from company insiders about
potential acquisition targets. Based on these techniques, he has purchased securities in
multiple companies, often in bulk purchases a few days before the company publicly
announces the acquisition. When news of pending acquisitions was released, such
transactions brought substantial returns for Boesky. Although the use of inside
information for public securities transactions is illegal, the SEC has rarely enforced
the law in the past.
In November 1986, Boesky pleaded guilty to a felony of securities manipulation
and agreed to cooperate with the SEC in an investigation. In return for clemency, he
allowed the SEC to secretly record conversations with various company insiders and
acquisition experts (including spam trader Michael Milken). Boesky's cooperation
triggered an insider trading investigation by Milken and his company Drexel
Burnham Lambert. Both Drexel and Milken were subsequently pleaded guilty for
violating securities laws. Because of his plea agreement and cooperation with the
SEC, Boesky was sentenced to three and a half years in prison, fined $100 million,
and permanently prohibited from working in the securities industry. After serving two
years in a concentration camp at the Lompoc Federal Prison in California, Boesky
was released from prison.
What was the financial scam or scheme?
Ivan Boesky profited from the arbitrage of the company's stock to be acquired.
He will know that a company is about to be acquired, so he will buy the company's
stock before the transaction becomes public, and the stock price soars to the purchase
price. As long as all information has been made public, such transactions are
completely legal. However, Boesky wanted to gain an advantage, so he deceived and
weighed exclusive inside information. It is estimated that Boesky made $65 million in
1984 when Chevron acquired the Gulf of Mexico and Texaco acquired Getty. In 1985,
Philip Morris bought General Foods, and he also made about $50 million. The person
who knew LBOs best in the 1980s was Drexel Burnham's Michael Milken. Both
Milken and Drexel will underwrite debt for leveraged buyouts and use the transaction
to finance high-yield, high-risk, junk bonds for leveraged buyouts. Boesky usually
receives internal information about planned buyouts from junk bond dealers and
acquiring artists, and will conclude a deal with informants to obtain a certain
percentage of profits from their arbitrage transactions. Boesky raised more than $640
million in debt capital through Milken and Drexel, and used the money for arbitrage
transactions, many of which were bets on Drexel's acquisitions. In the heyday of
Boesky's success in the mid-1980s, he had more than $3 billion in capital in the form
of a limited partnership, mainly funded by debt. He usually holds positions in 75-100
stocks, hoping that as the merger announcement approaches, the price of a stock will
soar. In the 1980s, Seema and Ivan were worth more than US$280 million and were
listed on the Forbes list of the 400 richest Americans. Boesky does not follow the
usual 20% profit and 2% management fee that most hedge funds follow. He got back
50% of the huge profits.
In the mid-1980s, as the economic boom destroyed companies and communities,
the US government desperately tried to stop leveraged buyouts. Federal investigators
know that if Milken and Drexel Burnham fall, the entire junk bond market will freeze
and the era of leveraged buyouts will end. In 1986, investigators discovered Dennis
Levine, the managing director of Drexel Burnham, who had been distributing internal
information.
In May 1986, the month when Boesky delivered his famous "Greedy is Good"
speech at the beginning of Berkeley's establishment, Dennis Levine of Drexel
Burnham was arrested for insider trading. Soon after Levin fell as a federal
investigator, Boesky began to buy inside information from Drexel and Levin. In
September 1986, Boesky secretly reached an agreement with federal investigators to
prohibit him from trading securities and help destroy Wall Street's internal trading
network. He must also pay a fine of $100 million. Through Boesky's wire taps and
audio tapes, investigators were able to collect allegations of violations of securities
laws against 14 individuals and more than 5 major brokers. Michael Milken is one of
the biggest participants.
Boesky agreed to pay a $100 million fine, of which $50 million went to the U.S.
Treasury Department. In December 1987, Ivan Boesky, who was only 50 years old,
was sentenced to three years in prison at the Lompoc Federal Prison in Southern
California
What laws were violated? Or, if the scam is really old, what current laws
would have been violated?
Worries about insider trading dominated the early 1980s. The US Securities and
Exchange Commission and the Supreme Court reviewed how to control this issue.
The court’s decisions in Chiarella v. United States and Dirks v. SEC raised questions
about the definition of insider trading and the SEC’s limited authority. The Insider
Trading Sanctions Act of 1984 sought to clarify the law and further empower the SEC
to provide for three times the damages and increase the maximum criminal fine to
$100,000. However, it does not define insider trading; the SEC believes that doing so
will attract cunning traders to exploit loopholes. By using internal information to
manipulate the market for trading hours and cooperating with investors, Boesky and
Milken have committed violations ranging from 13D violations to conspiracy and
market manipulation. Therefore, Boesky seriously violated the Insider Trading Act of
1988 and the Securities Exchange Act of 1934, which regulated insider trading.
Additionally, Boesky’s case promoted and perfected the Insider Trading Act of 1988.
Boesky provided federal investigators with so much information about fraud in
the securities industry that he almost single-handedly ended the boom of the 1980s.
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