Back in The Spotlight

By Frederick Ungeheuer/New York

What ever happened to the insider-trading scandal? Black Monday, that's what. Since Oct. 19, crash has replaced crime as the top story on Wall Street. Some traders have even hoped that the markets' continued fragility might persuade the Government to delay further insider-trading probes lest new revelations drive stock prices even lower. No such luck. U.S. District Attorney Rudolph Giuliani maintains that even though the spotlight has shifted elsewhere, the investigations are proceeding at full speed. Says the Manhattan-based prosecutor, who has led the crackdown on Wall Street crooks: "Whatever the state of the market, our job is to uphold the laws of the U.S. -- not to protect profits."

The spotlight will be back on the scandal once again this week, when the biggest insider trader snared so far, Ivan Boesky, is scheduled to appear in U.S. District Judge Morris Lasker's Manhattan courtroom for sentencing. Boesky, who has been pointing investigators toward investment bankers and others with whom he traded inside information, faced Judge Lasker last week in a final hearing before sentencing. Once Wall Street's most aggressive speculator in takeover stocks, Boesky was a picture of contrition in court. "I am deeply ashamed," he said. "I have spent the last year trying to understand how I veered off course." Boesky's lawyer pointed out that the defendant has been pursuing rabbinical studies at the Jewish Theological Seminary of America, near Columbia University, and working under an assumed name at a project to aid the homeless run by Manhattan's Cathedral Church of St. John the Divine. Lasker praised Boesky for his "remarkable cooperation" with authorities but indicated that a jail term of more than six months was unavoidable because his crimes have aroused the "passions of public opinion."

Much of the public indignation was stirred by allegations that Boesky has emerged from the affair with a large part of his huge fortune intact, even after paying $100 million as a result of the charges against him. Though his attorneys claim that he is close to bankruptcy, a lawyer who knows him well says, "I would swap assets with Boesky any time." George Reycraft, who represents Boesky's former partners in a civil damage suit, claims that the speculator took $400 million out of his firm. "We just do not have a fix on his assets," says Lawyer Robert Gargill, who helped supervise the winding down of Boesky's brokerage business.

For sure, Boesky is a long way from the plight of the homeless men he has been helping. He still lives in a luxury apartment a few blocks from his company's headquarters on Manhattan's Fifth Avenue. In the firm's elegant suite of offices, his personal secretary continues to answer the telephone, while a guard hovers near a reception area decorated in gold colors and Far / Eastern art. "Boesky now uses the office as a private club to meet with his lawyers," says a source familiar with the investor's activities. A large renovated farmhouse on Boesky's 200-acre estate in Westchester County, N.Y., is up for sale for $3 million, but his wife Seema still lives in the main house across the road. As heir to a large real estate fortune, she received more than $70 million from the sale of the Beverly Hills Hotel a year ago. Close associates have denied persistent rumors that the couple is estranged.

Boesky's cooperation will probably help investigators nail other insider traders. So will last month's Supreme Court decision that upheld the conviction of R. Foster Winans, a former Wall Street Journal reporter who leaked advance information about his stories to brokers. The court ruled that improper use of inside information amounted to theft of property and that defendants could be tried under the Government's sweeping antifraud laws. The decision, says Giuliani, has "made it easier for prosecutors to bring fraud cases without fear that they will be reversed." Edward Brodsky, a Manhattan- based securities attorney, agrees: "The court gave the prosecution an absolute sledgehammer for inside-information cases."

Wall Street lawyers expect at least twelve more insider traders to be indicted, but the charges may not be filed soon. Explains Giuliani: "Sophisticated white-collar crimes traditionally take a long time, usually two to three years, to investigate." He dropped charges in May against three investment bankers arrested in February for insider trading: Robert Freeman, who worked at Goldman, Sachs, and Richard Wigton and Timothy Tabor, both formerly of Kidder, Peabody. But when he did so, he noted that he had discovered a much broader conspiracy and needed time to investigate it. He made it clear that Freeman, Wigton and Tabor were part of the widening probe.

Still at the center of the investigation, by all accounts, are Drexel Burnham Lambert and Michael Milken, head of the investment firm's junk-bond operation. Since junk bonds, which are high-yield, high-risk securities, are often used to finance takeovers, Milken and other Drexel Burnham employees have had advance knowledge of many big deals and could have passed information to speculators like Boesky. Drexel Burnham admits that in 1986 it received a $5.3 million payment from Boesky for "advisory services." After news of the payment broke, the firm's chief executive, Frederick Joseph, steadfastly ! maintained that internal company investigations had found "absolutely no wrongdoing." Recently, however, Joseph has stopped saying that.

The adverse publicity has been rough on Drexel Burnham. For a while after the investigation started, some other investment banks suspended trading with the company, and commercial banks cut back lines of credit. But Joseph insists that business is now as good as ever. Says he: "The investigation made life more difficult for us, but we are stronger for it today." Joseph cannot speak with any assurance, though, until the outcome of Giuliani's probing is known -- one way or the other.