Wolves on Wall Street, Ivan Boesky

Corporate mergers and acquisitions soared in the 1980s. Nearly 3,000 mergers and buyouts worth more than $130 billion occurred in 1986 alone. Time and again the share price of stock in companies targeted for leverage buyout (LBO) or hostile takeover would rise before the deals were announced, indicating that insider trading was occurring.  Using an arbitrage fund of capital provided by limited partners, Boesky would pay more than the current trading price for a company's shares with the expectation of selling them at a higher price when the acquisition was announced. For example, Boesky and others bought a large bloc of shares in Gulf+Western before rumors of a takeover bid drove up the price of that stock. Three days before Maxxam Group tendered an $800 million offer for Pacific Lumber, Boesky bought 10,000 shares of Pacific Lumber stock.  When merger-and-acquisition specialist Dennis Levine, managing editor of Drexel Burnham Lambert, was charged with illegal trading in May 1985, the SEC learned that Boesky had cut a deal with Levine in which the former paid the latter a percentage of profits for insider tips.

In return for leniency, Boesky allowed the SEC to secretly tape his conversations with junk bond dealers and takeover artists. The SEC allowed the arbitrageur to reduce his partnership liabilities by selling stocks and securities before his crimes were made public.  Outraged members of Congress and the business community complained about this "sweetheart arrangement," as Rep. Ron Wyden (D-Ore.) put it.  In the sellout that followed news of the scandals, other arbitrageurs lost more than $1 billion as investors dumped deal stocks for more traditional blue chips, and corporate raiders backed off from takeover schemes. Some experts predicted that the widening scandal would prompt investors to act more conservatively and end the speculative boom that drove the bull market of the mid-Eighties.