Corporate raiders and investment firms are subjects of the next phase of the expanding federal investigation into illegal insider trading in the stock market, according to sources familiar with the inquiry.
The Securities and Exchange Commission and federal prosecutors are examining the possibility that corporate raiders and investment houses used inside information to gain illegal advantages worth millions of dollars in big takeover deals, the sources said.
The business records of three investment firms and at least 10 Wall Street professionals were subpoenaed by the SEC last Friday as part of the investigation into the biggest scandal in recent Wall Street history, the sources said.
The subpoenas were delivered moments after the SEC disclosed that Ivan Boesky, one of the nation`s biggest and best known stock speculators, was cooperating with authorities after agreeing to pay a $50 million fine and to forfeit $50 million in profits from illegal insider trading. He also agreed to plead guilty to a felony criminal charge later and will be banned forever from the securities markets.
The sources said Boesky has been providing the SEC and the U.S. attorney`s office in New York with information on his dealings with corporate raiders, arbitragers and investment banking firms for several weeks.
The sources, lawyers who are familiar with some aspects of the probe, spoke on the condition that they remain anonymous.
Drexel Burnham Lambert Inc., a major investment firm used frequently by Boesky, acknowledged Monday that its business records had been subpoenaed by the SEC. In confirming the subpoena, a spokesman said Drexel Burnham was cooperating with authorities.
The fact that the SEC subpoenaed records of the investment firms and individuals does not mean they have been accused of any wrongdoing or that charges will be filed against them.
Gary Lynch, the SEC enforcement director, and prosecutors have refused to discuss the investigation.
Boesky began cooperating after he was implicated by Dennis Levine, a former managing director of Drexel Burnham. Levine named Boesky as an accomplice after pleading guilty to making $12.6 million in trading based on illegal inside information.
”After Levine pleaded, we said he was going to pick up the sheet music and start singing,” said an SEC official. ”Well, Boesky is picking up the composition, and he is going to write a symphony.”
Insider information is confidential corporate information that is not available to the public. Levine obtained the information in his capacity as an investment banker, which made him privy to plans for major takeover deals before they became public. He also employed at least four other persons to obtain information for him.
The SEC said Levine began passing insider tips to Boesky in February, 1985, as part of an arrangement in which Boesky promised to pay Levine up to 5 percent of his trading profits.
A source familiar with the investigation said that when the government obtained Levine`s telephone records, investigators found he had made hundreds of calls to Boesky over a one-year period.
Boesky and his companies earned at least $50 million in illegal profits on the basis of illegal inside information from Levine, but Levine was arrested last May 12, before he was paid any money by Boesky, the SEC said.
One phase of the investigation involves the possibility that Boesky provided inside information to corporate raiders–the large-scale investors who seek to take control of a firm by purchasing as much of its stock as possible.
Investigators are trying to determine whether certain raiders provided inside information to friendly arbitragers–the speculators who invest millions in a single stock–to enlist their help in buying up blocks of stocks in a target company.
