Ivan F. Boesky, one of the most powerful players on Wall Street, was felled by a handful of underpaid lawyers barely out of law school. Just how do the lawyers and investigators at the Securities and Exchange Commission, most of them in their 20s and early 30s, build their cases and make them stick?
The path leading to Mr. Boesky, which the SEC will not discuss but which has been detailed by industry sources, suggests it involves a mixture of the cloak and dagger and the mundane: an anonymous tip, a skittish informant, secret cooperation with the stock exchanges and Justice Department lawyers - and many late nights of mechanical digging.
In May 1985, the brokerage firm Merrill Lynch & Co. received a letter from Caracas. It alleged that two brokers in the firm's Venezuela office were buying stocks on nonpublic information on coming takeover bids.
The ensuing investigation revealed that the brokers were following the lead of an account in a Bahamian branch of a Swiss bank. Under pressure, the Swiss bank gave the SEC the name of the customer who was making these suspicious trades.
The customer was Dennis Levine, a managing director of Drexel Burnham Lambert.
In June 1986, Mr. Levine settled with the SEC and agreed to cooperate in its investigations. Five months later, Ivan Boesky agreed to pay $100 million in penalties, to stay off Wall Street - and to cooperate in further investigations. A trail of tips
Was the SEC just lucky? No. The New York Stock Exchange (NYSE) had been watching that Bahamian bank account for about five years.
``We had referred a number of cases [of suspicious stock movement] to the SEC which had specifically identified that account,'' says Agnes Gautier, vice-president of market surveillance services at the NYSE.
``They began to grow rather suspicious,'' and when the letter came to Merrill Lynch, the SEC followed up.
The commission has plenty of tips to choose from. It receives 36,000 complaints and inquiries a year from investors alone and says it follows up on all of them. More often, it begins an investigation after its computers, or the more sophisticated computers at the stock exchanges, pick up a suspicious pattern of trading.
The NYSE, which has spent $15 million to $20 million on its regulatory system in the last five years, has one system that watches the volume and price of each stock traded there.
If, over a period of days, a particular stock begins changing hands far more than usual, or the stock price rises, say, 10 percent, that triggers the computers that something may be amiss. And if a merger or takeover battle is subsequently announced, chances are someone was trading on inside information.
It doesn't always involve a takeover, nor does it necessarily involve big trades.
For example, a few years ago the NYSE noticed a suspicious pattern surrounding Value Line's stock choice of the week. The price of the chosen stock generally rose immediately after copies of Value Line reached customers, usually on Friday.
But the NYSE computers picked up that there was always an uptick in volume coming from two brokerage houses in Connecticut three or four days before Value Line was sent out.
An investigation revealed that a woman who worked for Value Line's printer in Connecticut was passing on the information to her husband, who in turn was giving it to friends.
As of a year ago, the NYSE has computerized a Standard & Poor's list of corporate directors and officers. If an investor is making a suspicious trade, the computers can check if he or she is in the same ZIP code, went to the same schools, plays golf at the same clubs, is a member of the company whose shares are being traded.
``With the analytical capabilities of the computer, you'll probably be caught in the net'' if you're trading on inside information, says Ms. Gautier. Culling computer data
The Big Board looks into 6,000 potentially suspicious trades a year, investigates about 190 of them, and turns about 60 of them over to the SEC.
Armed with computer ammunition, the commission begins a laborious process of turning suspicions into evidence - gathering depositions, interviewing associates of the potential wrongdoer and other people, sifting through phone records and travel schedules, seeing whether these suggest the investor has inside information that he abused.
Generally, a case takes nine to 18 months, says Paul Fischer, who oversaw the Levine case as assistant director of enforcement at the SEC.
Mr. Fischer, who left the commission for private practice in June, says the attorneys did ``very quick work'' in nabbing Boesky, since Levine didn't start cooperating until he settled with the SEC in June.
The team working on a case is small - usually one staff attorney and three supervisors who have varying degrees of involvement.
A hot case may have more to speed up the work - Boesky's had three - since every day holds the possibility that word of the case will get out and evidence will be destroyed.
If it's an accounting case, the SEC puts on a staff accountant to work with the attorney. If it's a stock market case, it may put on one of its dozen or so (in the Washington office) financial analysts or investigators (who generally come from Wall Street).
The merger boom created more and more opportunities for illicit profits. In the last decade, stock activity has increased sevenfold. But the size of the staff, as measured by staff years, has dropped 10 percent. How the exchanges help
There are several trends working in the SEC's favor, however. One is the sophistication and vigilance of the stock exchanges, which use the ultimate threat of barring a brokerage house from dealing in the market until it cooperates in an investigation.
On occasion, the stock exchanges have even prevented illegal trading. In June 1985, for example, the department store company Crowley, Milner & Co. told its public relations firm, headed by Anthony Franco, that another company was considering buying a large interest in Crowley.
Mr. Franco bought 3,000 shares of Crowley's stock on that information. Officials at the American Stock Exchange thought the purchase was unusual and obtained Franco's name from his broker.
The exchange also got in touch with Crowley officials, who were surprised that Franco was trading in the stock. Franco rescinded his purchases.
Such occasions are rare. Fischer notes, however, that there are other factors working in the SEC's favor. The penalties for insider trading have been stiffened, both for criminal charges which involve jail sentences, and for civil fines, which may now equal three times the money made on insider information.
The Levine and Boesky cases add another deterrent: ``The acknowledged willingness of Wall Street people to rat on each other,'' he says. ``Now people realize that it's likely that if anybody knows what you're doing, it's going to become known.''
Boesky secretly tape-recorded conversations with traders and others for weeks in cooperation with the SEC.
Commission attorneys often work around the clock, earning half the salaries their counterparts in the private sector earn.
The low pay can't hold people for more than a few years, but the lack of experience doesn't stop them from racking up an impressive record. This decade, the SEC has had only two reversals.
``The commission has a justly deserved reputation as one of the most effective regulatory agencies in the government,'' says Joel Seligman, a University of Michigan professor who's written a book about the SEC.
Fischer says the commission receives hundreds of applications for every attorney it hires. And catching the big fish - Levine, Boesky, and who knows who else - has given the job a certain glamour. ``It's the best kind of publicity,'' he says.