The king of arbitrage, Ivan F. Boesky, has been dethroned. And a stunned Wall Street community is just starting to ponder the ramifications of his downfall. In a settlement announced by the Securities and Exchange Commission late Friday, Mr. Boesky agreed to pay a $50 million fine for insider trading, by far the largest in SEC history.
He will also give up $50 million in profits, be banished from the United States securities business, and plead guilty to a federal criminal charge that could result in as much as five years in jail.
Boesky had a reputation as one of the largest and most aggressive ``arbs'' on Wall Street. Besides bolstering the SEC's enforcement image, toppling Boesky is likely to have several effects.
Takeover speculation before announced deals will cool, say merger specialists. ``This is going to have a real chilling effect. The arbitrage community will be a lot more cautious about how they gather information,'' predicts John F. Olson, a securities attorney and head of the American Bar Association's task force on insider trading.
Since Boesky is the biggest catch in a string of major insider cases brought by the SEC this year, public outrage may prompt Congress or the SEC to tighten securities regulations.
Indeed, Boesky said in a statement: ``If my mistakes launch a process of the reexamination of the rules and practices of the financial marketplace, then perhaps some good will result.'' The $100 million will be paid out of his personal assets.
One reform might be greater public disclosure of deals in progress. Currently a company is not required to tell whether it is in merger negotiations. But secrets are seldom kept long in the tight-knit financial community.
On average, insider trading starts about 10 days before a merger announcement, says Robert Comment, an assistant professor of finance at New York University and a former SEC economist.
``In a merger negotiation, business plans, cash flow projections are swapped. Many people get access to information not in the public domain. It's a private auction. And a glaring exception to SEC disclosure rules. If the SEC mandated disclosures, that would provide a level playing field for everyone, taking away the insider's advantage,'' says Mr. Comment.
Boesky's hunger for hints of pending deals was legendary. He reportedly had 160 phone lines into his office. He was said to track the comings and goings of takeover lawyers and corporate executives. But he went too far by striking a deal with Dennis B. Levine, a merger specialist at Drexel Burnham Lambert.
In February 1985, Boesky agreed to pay him 5 percent of his trading profits for any non-public information Levine could provide. Meanwhile, Mr. Levine was doing his own insider trading. And last May, Wall Street was scandalized by Levine pleading guilty to making $12.6 million in illicit gains.
Since then, Levine has led the SEC to eight other young financial lawyers or investment bankers involved in insider trading scams. More are likley to be implicated with the ongoing cooperation of Levine, and now Boesky. ``The investigation continues,'' says a gleeful SEC official.
Boesky, considered the pioneer of arbitrage, started in 1975 with $700,000. In one deal, the Getty-Texaco merger, he reportedly made $60 million. In another, he lost $70 million. His personal net worth is estimated at more than $200 millon. Earlier this year, Boesky shocked Wall Street by raising an astonishing $900 million from investors looking to ride on his coattails.
While arbitrage tends to facilitate a hostile takeover, it is not illegal. Typically, it involves a large bet on the success of a merger or takeover. ``Arbs,'' such as Boesky, quickly analyze the tender offer, then may spend millions buying the stock, guessing that a better offer will come along. But Boesky went astray by expanding into, as he called it, the ``pre-arbitrage'' business: betting on deals not yet announced.
To protect investors, the SEC has given Boesky until April 1988 to liquidate his businesses, and he says he is ``resigning all outside commitments.'' Boesky is an ardent supporter of the United Jewish Appeal and several other Jewish organizations and has taught arbitrage at Columbia University and New York University.
His $50 million in disgorged profits will be held in an escrow fund to be disbursed to investors determined by the courts to have lost money from insider trading.