I’ve had a personal bone to pick with Sir Rudolph Giuliani ever since he put me out of a job. I was working in New York for a firm called Drexel Burnham Lambert. Giuliani, who was the District Attorney for the Southern District of New York for most of the 1980s, prosecuted my employer into bankruptcy. I wasn’t the only one to find himself out on the street. There were about 10,000 of us, all told.
I wouldn’t have minded if Giuliani had been properly applying the law and serving justice. But there were several lapses of custom, and probably ethics, and maybe actual legality, and surely justice, in his long pursuit of Drexel. Taking Drexel down was good for his career and for Drexel’s bloodthirsty competitors, but not for us employees, nor for those other firms he damaged or destroyed along the way, nor for the many individuals he paraded as criminals whose charges were eventually dropped. Having seen him in action in those relatively early days, his behavior in recent years has come as no surprise. Nor is it shocking that he ended up working for Donald Trump. Birds of a feather, and all that.
Giuliani’s hunt was a long and complicated one. It mostly involved the practice, long dear to the prosecutorial heart, of climbing up the food chain. Each fish you catch is ‘persuaded’ to give you someone even bigger, until you reach the top—in this case, Drexel Burnham Lambert and its key employee, a financial prodigy by the name of Michael Milken.
Along with the other thousands of Drexel employees, I followed the progress of Giuliani’s prosecutions over the course of three or four years with great interest. First, there was the announcement in May of 1986 that Dennis Levine, a relatively small-fry investment banker at Drexel, had been charged with insider trading. He had been buying stocks and options on companies he knew were going to be subject to takeover bids. Although he worked at Drexel, most of his trades had been done before he had even arrived there. And he was frankly a bit of a clown. So it wasn’t by itself too alarming.
In November, however, it was followed by the indictment of Ivan Boesky, to whom Levine had been feeding information. This was a much bigger deal. Dennis Levine had only made a few million dollars, but Ivan’s plea deal included a payment of $100 million in fines and forfeited profits. That wasn’t the main worry, though. This was the heyday of the hostile leveraged buyout, and Drexel was the key source of finance for LBOs. When takeover artists were contemplating a hostile LBO, they almost all ran it by Drexel beforehand in the hope of lining up the necessary financing in advance. So a few people in Drexel would have advance knowledge. It would be surprising, given Drexel’s crucial role in these transactions, if most of Boesky’s successful bets had not been on target companies taken out with the aid of Drexel financing. Also troubling was that, earlier in 1986, Drexel had raised $660 million for a Boesky-managed limited partnership. Clearly, Boesky and Drexel were at least fishing in the same waters.
Giving credibility to these inferences, and more alarming still, was the revelation alongside Boesky’s indictment that Drexel and “several of its employees” had been subpoenaed in connection with the Boesky investigation. The unspoken part of Boesky’s plea deal was that it was contingent on his supplying other heads for the chopping block. Presumably, the more and the bigger they were, the more lenient the judge was likely to be. Officials from the SEC confirmed that ”Mr. Boesky is continuing to cooperate.”
There was an additional piece of ominous news: Anonymous “sources with knowledge of the inquiry” revealed that, after having been busted (by Levine) and assisting the authorities with their investigation, Boesky had worn a wire. There were tapes. Sources also revealed that the subpoenaed Drexelites included Michael Milken, the financial wizard responsible for Drexel’s pre-eminence, Martin Siegel, a recently hired investment banker, and Leon Black, a prominent corporate finance honcho. (Black has recently been in the spotlight because of ties to Jeffrey Epstein, ties whose impropriety Black has strenuously denied.)
Pretty much from this point forward, the rumor mill began to ramp up towards 100% of capacity, fueled largely by those “sources with knowledge,” which were to become a very frequent player in the drama. This is where the ethical lapses begin to creep in. Government investigators are not supposed to leak stories to the press. Whether it’s actually illegal or not is something of a gray area; it certainly is for Grand Jury proceedings; and it is forbidden under the Department of Justice Manual. Certainly, the American Bar Association Fair Trial and Public Discourse Standards include that “Law enforcement officers… should not disclose, cause to be disclosed, or condone or authorize the disclosure of information… relating to a criminal matter that [is] not part of the public court record.” Either way, it seemed to us poor Drexel sheep that almost every week “sources with knowledge” or “people close to the investigation” had more to tell, usually to the Wall Street Journal, and after a while we reluctantly coined the saying that “Every rumor eventually turns out to be true.”
The next big name to fall under the Giuliani knife, as a result of Boesky’s cooperation, was the aforementioned Martin Siegel, who’d been subpoenaed in February 1987. Marty, as he was known, had been lured to Drexel from the firm of Kidder Peabody (long since defunct) based on his celebrity as a takeover specialist. Thirty-eight years old, handsome, charming, urbane, he was an ace practitioner, possibly the inventor, of the so-called “Pac-Man defense”—whereby a takeover target turns around and eats its would-be predator—and a specialist in the so-called “poison pill” defense designed to make a takeover prohibitively expensive for anyone but a board-approved acquirer. Although, again, Marty’s offenses had been committed while still at Kidder Peabody, the knife seemed to be pointing at us.
Almost simultaneously, and directly as a result of Marty’s cooperation, Giuliani proceeded to arrest three more Wall Street “arbitrageurs” (as those who bet on takeovers were known). The normal practice would have been to inform the suspects that they were to be indicted and allow them to turn themselves in, or merely to issue them subpoenas to appear. But Giuliani had a better idea. Instead, he made spectacular use of one of his favorite tools, the so-called “perp walk.” Richard B. Wigton, a 52-year-old trader with 20 years at Kidder Peabody, was photographed being marched, handcuffed and in tears, off the trading floor in front of his astonished colleagues—astonished, because “Wiggie”, as he was known, was apparently comically improbable as a criminal mastermind.
The second suspect, Robert M. Freeman, head of arbitrage at the establishment-pillar firm of Goldman, Sachs, was merely visited at his office and escorted off the premises unhandcuffed. The last, Timothy L. Tabor, being by that time unemployed, was picked up late in the afternoon at his apartment and, too late to get bail, spent the night at the Metropolitan Correctional Center, known colloquially as The Tombs, in downtown Manhattan.
These arrests made a profound impression on Wall Street. Indeed, as Giuliani knew from practice, a profound impression is pretty much what the perp walk (a term it is possible he actually coined) is designed to generate. Intimidation is a big part of the authoritarian game. The fact that the victims might be innocent seems, to someone of Giuliani’s sensibility, to have been neither here nor there. On the other hand, as one lawyer was quoted as saying by the New York Times:
”You don’t arrest the head of Goldman, Sachs’s arbitrage unit unless you think you have him cold.”
In the event, it soon became apparent that Giuliani had made an egregious mistake. The cases were so thin that he had to drop the charges against all three men not four months later. Or had it been a mistake? The perp walk had had its effect. Everyone was intimidated. No doubt Wiggie, back at Kidder Peabody, was too.
All this was particularly pertinent to me personally, because I had been offered a move to Drexel’s High Yield and Convertible Department in Beverly Hills. A big step up, to go and work on the same trading floor as the Junk Bond King. It would be an easy move there: hand over the house and car keys and take a limo to JFK, all at Drexel’s expense. But all the good finance jobs were on the East Coast. It might not be so easy to move back if Drexel should go down. The lure was strong, however, and I moved, with my young family.
Things were fairly quiet for a while, but a lot was happening behind the scenes. In April 1988, Milken was summoned to appear before a House subcommittee investigating the whole Boesky affair. He took the fifth. Not an encouraging sign.
In August, the next bomb dropped: Giuliani indicted five officers of a hedge fund by the name of Princeton Newport Partners. Also indicted was Bruce Newberg, a young trader formerly in Milken’s High Yield department. The most scary part, however, was that the indictment was made under RICO.
The Racketeer Influenced and Corrupt Organization Act had been passed in 1970 in order to make it easier for the Justice Department to go after mobsters. RICO focused on patterns of behavior rather than specific criminal acts, making it much easier to bring a case. All the feds had to do, really, was show a “pattern” of at least three suspicious acts centered on a particular “enterprise.” Prosecutors invariably cited “mail fraud” and “wire fraud,” meaning that anyone who used the mail, the telephone or a fax machine more than twice was involved in a “pattern” of criminal activity and could get RICO’ed. The potential penalties under this statute were much worse than for the individual felonies. RICO provided for civil penalties as well: anyone injured by such a “pattern” could sue for triple damages.
Maybe the most potent weapon in the RICO armory, though, was that it allowed prosecutors, with the cooperation of a judge, to freeze the defendant’s assets pending a trial—any assets, ill-gotten or not. So a financial services firm indicted under RICO might very quickly find its business wrecked, with banks pulling their credit and customers withdrawing their assets in order to avoid finding themselves second in line behind the government to retrieve their cash. It’s sort of analogous to triggering a bank run. In all likelihood, just the announcement would put them out of business: the case would never even get to court, and due process be damned.
The intricacies of Giuliani’s use, or misuse, of RICO were ably described in 1990 by L Gordon Crovitz, an editor at the Wall Street Journal. Congress had intended this “killer statute” to be used against the mob, whose grip on America at the time the law passed had been difficult for prosecutors to loosen. True, there was a last-minute provision to include securities fraud in the list of violations covered—because the mob had been dabbling in Wolf-of-Wall-Street type pump-and-dump schemes, not because Congress had doubts regarding the ability of existing securities laws to cover Wall Street offenses.
In the case of Princeton Newport, RICO proved every bit as effective as Giuliani could have wished. In October, Princeton Newport’s assets were frozen. In December, before the case ever came to trial, the company announced it would liquidate and let go its 80 employees.
Lawyers for two of the defendants commented:
”The Government has now accomplished the goal it stated when it commenced this investigation—cooperate or be destroyed.”
The outcry was such that the Justice Department revised its guidelines to limit the use of RICO in such cases, even before the Princeton Newport officers were tried. But by that time, Giuliani had left SDNY and moved on to his first mayoral bid.
The Princeton Newport defendants and Bruce Newberg were sentenced about a year later. The sentences were light enough to suggest to knowledgeable observers that the judge regarded the offenses as tax crimes rather than racketeering. And, indeed, in June of 1991, an appeals court reversed the RICO decisions. But that was too late for Princeton Newport. Too late, also, for Newberg’s clerical assistant at Drexel, Lisa Jones, who had been caught lying to the Grand Jury, perhaps out of a misguided sense of loyalty to her boss. She was a sweet-natured young woman from a rough background, popular on the trading floor because of her cheerful disposition. We had lunch a day or two before she reported to jail. (Bruce Newberg was sentenced to three months, but never actually served time).
By the time of the Princeton Newport indictment, things were looking quite bleak for Drexel. Bruce Newberg and another Drexel equity trader had implicated the firm to some extent. The rumor mill, fueled by “sources close to the investigation”, slowly ground down morale on the trading floor and throughout the firm. The leak, particularly, that Michael Milken had made $550 million in 1987 caused a certain amount of bitterness among people who had thought their two or three million was pretty good sugar. Several Drexelites turned state’s evidence.
Finally, in December 1988, Giuliani issued Drexel an ultimatum. If they didn’t settle, he would bring a RICO indictment. Most of the grassroots were for giving him the raspberry. The board of directors, however, took the perhaps saner view that it would be better to forego the due process of a trial and settle for the survival of the firm. Just before Christmas, the company agreed to pay a $650 million fine and plead guilty to six felonies.
Milken himself was charged in March of 1989 with 98 counts of racketeering and fraud. He was eventually fined $600 million and sentenced to 10 years in prison, after pleading guilty on five minor counts and conspiracy to commit those five. His sentence was reduced to two years after he agreed to testify against a former colleague, Alan Rosenthal, in the knowledge that his truthful testimony would actually help rather than hurt Rosenthal’s defense. (In the event, Rosenthal was acquitted of the charge in question and was given probation on the other counts of which he was accused.)
Drexel did not long survive its plea deal with SDNY, and the firm filed a bankruptcy petition in February 1990. As for Giuliani, he seemed to go from strength to strength, culminating in his star role, after 9/11, as “America’s Mayor.” That was peak Giuliani, however. As veteran New York reporter Jack Newfield argued in a classic take-down a couple of years before he died, “Rudy Giuliani was a C-plus Mayor who has become an A-plus myth.”
Few recall that Giuliani began his political life working for the election of Robert F. Kennedy. The evidence from then onward suggests that moral principle is not what drives him. He switched to Independent before getting a job in the Ford administration, then segued into full Republican mode one month after the election of Ronald Reagan, and a year or two before becoming first an Associate Deputy Attorney General, and then US Attorney for the Southern District of New York in 1983. It’s no surprise that he has spent the last couple of years desperately (and unsuccessfully) trying to find dirt on Joe Biden, while feverishly defending every moral failing of his new boss, Donald Trump.
For me, perhaps, the biggest irony came in February of this year, when Donald Trump pardoned Michael Milken. Don’t get me wrong: I think Milken was badly mistreated, not least because of the low tactics Guiliani et al. used in getting him to plead. The irony is in who was lobbying Donald Trump to give the pardon. Can you guess?