Circle of Friends by Charles Gasparino Page A

SEC’s pursuit of Dirks, but not at the Supreme Court. Neither Dirks nor his initial tippee had stolen the information that Equity Funding was a fraud, because, the court ruled, it’s impossible to actually steal information that a company is a fraud. In other words Dirks wasn’t a criminal, just a stock analyst who uncovered criminal activity and made his clients a lot of money from it. Case closed.
    Well, not quite. The tortured history of what constitutes insider trading had become even more tortured following Chiarella and Dirks. The SEC continued to push for as wide an interpretation as possible, and based much of its efforts going forward on a dissenting opinion of Chief Justice Warren Burger in the Chiarella case.
    Burger pointed out that the Court would have been forced to uphold Chiarella’s conviction had the SEC not argued that Chiarella was an insider with an absolute duty to either refrain from trading or alert the world of the information. It would have been on stronger ground if it simply said “the defendant had misappropriated confidential information obtained from his employer and wrongfully used it for personal gain,” or Chiarella had stolen something, in this case confidential information that didn’t belong to him.
    With that, the misappropriation theory became the SEC’s latest, albeit imperfect, weapon to democratize information and criminalize insider trading.
    T he 1980s’ boom and burst of stock market scandal would later be declared the Decade of Greed by future president Bill Clinton. (No matter that his wife had allegedly earned big sums of money at the time trading in the futures pits, where insider tips and circles of informed friends have been known to run rampant.) The corporate crime wave of the mid to late 1980s would be defined by the illegal activities of a high-level circle of friends, people like the famed arbitrageur Ivan Boesky, white-shoe lawyer/investment banker Martin Siegel, Dennis Levine, the journeyman deal maker who finally found fortune at Drexel Burnham Lambert, or his boss, Drexel’s junk-bond king, Michael Milken—all of whom spent time in jail for their various crimes involving the markets as they related to insider trading.
    Milken was never directly convicted of insider trading, although he would spend time in jail for securities fraud involving his role in what prosecutors believed was a string of dubious corporate takeovers at the center of the largest insider trading scandal in recent history. As any judge or mobster will tell you, fraud involving the U.S. postal system or conducted over the telephone, known as “mail and wire fraud,” is far easier to prove than demonstrating that information from a confidential source is illegal, and that proved to be Milken’s downfall.
    The trading of Boesky, Levine, and Siegel was clearer cut, particularly due to the cooperation of all three when confronted with proof of their various misdeeds. (Boesky and Siegel would wear wires to help the feds make cases against their business partners, including Milken.) They faced civil insider trading charges from the SEC, and various criminal charges from the Justice Department that landed each in jail.
    The convictions were big news because they showed that insider trading occurred at the highest levels of the Wall Street food chain. And the details were pretty sordid. Siegel, a white-shoe attorney turned investment banker, admitted to handing bags of money to Levine, a midlevel Drexel banker, in exchange for tips about upcoming mergers and acquisitions that Drexel and Milken were financing.
    The convictions made the careers of the federal law enforcement officials at the heart of the case, and provided a road map for other politically astute officials looking for ways to leverage crackdowns on white-collar crime to further their careers. U.S. Attorney Rudy Giuliani would become mayor of New York City several years later. The SEC