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Ivan Boesky - White-collar Crime

milken insider bonds trading

Insider trading occurs when any person on Wall Street receives confidential information about the movement of stocks or planned mergers and acquisitions. The person then takes that information and uses or trades it for personal gain. In 1934 the federal government set up the Security Exchange Commission (SEC) to regulate Wall Street. The SEC made it illegal for anyone to act on insider information; if a person receives "insider" knowledge of some sort, he or she is required to keep this information secret and not act upon it. Wall Street was booming in the 1980s, but some wanted more—those participating in illegal activities included everyone from bankers and lawyers to major investors and stockbrokers.

Boesky and his partners not only profited from insider information, but they were able to manipulate the market value of stock prices through the formation of limited partnerships to further increase their earnings. Boesky's strategy was to create a limited company with capital (money) provided by partners, then pay more than the current trading price for that

The Junk Bond King Michael Milken

For generations the American bond market has been dominated by two large bond rating agencies, Moody's and Standard & Poor's. The agencies rate a corporation's risk factors in order to help guide investors on Wall Street. Companies trying to attract investors are given a rating and are divided into two categories—either investment grade or below-investment grade bonds.

A "AAA" rating is risk-free and given to top, blue-chip corporations. Risk-free bonds usually yield very low interest rates to investors. BBB is the lowest credit rating considered to be a worthy investment grade. Below BBB are the speculative or high-yield bonds Wall Street called "fallen angels," because their companies had fallen on hard economic times. These bonds pay high interest and are sold at a discount because of their high risk factor. The fallen angel name stood until the 1970s when Michael Milken arrived on Wall Street.

Milken became known as the "Junk Bond King" because he made his fortune trading in the high-yield, low-grade bonds, which he nicknamed "junk bonds." In 1973 Milken started with two million dollars in capital at his company, Drexel Burnham Lambert, in New York City. He had found buyers for his own company's bonds by sharing his vision of the untapped market. Milken soon generated a 100-percent return of the money invested in his company.

The next year Milken received double the amount of capital from his growing roster of clients, since they had made handsome returns on their investment. While other Wall Street traders tried to copy Milken, few could match his success. Impressed with Milken's achievements, additional investors contacted him and he soon accounted for most of Drexel's profits. In 1978 Milken moved his branch of Drexel from New York to Beverly Hills, California.

In the late 1970s corporate raiders were buying struggling companies and selling off pieces of those businesses and their assets at a huge gain. Milken transformed the art of speculating on these corporate takeovers with his ability to raise large amounts of capital using high-yield junk bonds. He knew the market and could raise capital for investors on short notice, but his methods were not always legal. Milken himself received huge bonuses from his company. One year he earned a total of $550 million.

Milken's involvement with insider trading practices became a focus of the SEC investigation in 1986 when Ivan Boesky agreed to be a government informer as part of his plea bargain. In September 1988, the SEC filed charges against Drexel and Michael Milken. (AP/Wide World Photos)
Michael Milken under the 1970 RICO (Racketeer Influenced and Corrupt Organizations) statute. The SEC accused the defendants of trading on inside information as well as filing false disclosure forms with the SEC to disguise stock ownership.

Drexel and Milken were accused of manipulating stock prices, of keeping false records, and of defrauding their own clients. Drexel plead guilty to six felony counts of securities fraud on December 21 and paid a $650 million settlement fee. The company also agreed to assist in the indictment against Milken. Two months later, Milken was indicted on ninety-eight counts, including insider trading and racketeering.

In a plea bargain, Milken agreed to plead guilty to six charges of securities fraud and related charges while the government agreed to drop the more serious charges of insider trading and racketeering. On April 14, 1990, Milken was sentenced to ten years in prison and fined $600 million. He entered the minimum-security prison at Pleasanton, California, in 1991, but was released two years later when he was diagnosed with prostate cancer.

Michael Milken was seen as a financial visionary who could have influenced corporate restructuring in America without breaking the law. Instead, his manipulation of stocks and company buyouts resulted in a large number of bankruptcies, especially for small- and medium-sized companies. The corporate consolidations and layoffs resulting from the Drexel's high volume of takeovers left few defenders once the investigation caught up with the firm.

The resulting investigations and indictments also resulted in a loss of investor confidence in the nation's financial markets for years. Investors returned to traditional bluechip stocks and mutual funds until enough time had passed and confidence returned to the riskier junk bonds. Following the insider trading scandal, Congress increased criminal penalties for securities violations.

company's shares which in turn brought in other investors believing the stock's potential. As a result of the buying, the stock value would rise and Boesky would sell his stock at the inflated prices, splitting the profits among the limited partners.

By the mid-1980s most of Boesky's capital resulted from his close association with Michael Milken of Drexel Burnham Lambert. Boesky, Milken, and others involved in the insider trading and market manipulations accumulated extraordinary fortunes from their criminal activities. Sophisticated schemes were necessary to conceal their deceit. They set up secret bank accounts to hide their money and misled federal regulators attempting to monitor their activities.

All those involved in the schemes were aware of the fines and the possible imprisonment they faced if caught; the lure of riches and the likelihood of little jail time kept them going. Public opinion also played a part in the continuing fraud. The social harm caused by white-collar criminals, especially those with high social status, was not known to the average person in the 1980s. It was commonly seen as a lesser evil than crime involving physical violence and injury. This opinion, however, was about to change.

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