Securities and Exchange Commission Historical Society

The Enforcement Division: A History

Gary Lynch, Stanley Sporkin and Bill McLucas, 2018
Gary Lynch, Stanley Sporkin and Bill McLucas, 2018

The Reagan Era and Insider Trading, 1980 - 1990

Winning the Battle: Catching Boesky and Milken

In 1985 Fedders was replaced by Gary Lynch, a staff veteran who worked under Sporkin and would head the division for the next four years.(1) At the time, the battle against insider trading was far from won. The Division had managed to successfully bring some high-profile cases, including one against Deputy Secretary of Defense Paul Thayer, but the general impression remained that insider trading was out of control. In April 1985, the same month Thayer pled guilty in a related case, Business Week ran a cover story warning the SEC was “fighting a losing battle” against an “epidemic of insider trading.”(2) Over the next two years, the SEC would start to win.

Boesky Inscription
Inscription to Dennis Levine from Ivan Boesky, within a copy of "Merger Mania" by Mr. Boesky, published in 1985

In August 1985 Lynch received a tip that ultimately led the Division to accounts at the Bahamas office of Switzerland’s Banc Leu. There a manager, Bernhard Meier, seemed to have had remarkable luck in buying shares of firms whose stock was soon to rise due to a takeover attempt. Meier attributed his success to skill in identifying likely takeover targets, but the staff suspected he had access to inside information. Meier stalled on providing information, but had underestimated the staff’s persistence. On a trip to New York, he checked into the Waldorf-Astoria, not realizing the SEC had alerted U.S. Customs to watch for him. He was astonished when a knock on his door revealed an SEC attorney with a subpoena demanding the bank’s trading records—and Meier’s.(3)

Meier’s story crumbled, as it became clear that the suspicious trading had not been his, but an unidentified client of Bank Leu’s. Fearing the SEC, the bank began exploring cooperation, but faced a problem: Bahamian bank secrecy laws might prohibit disclosure of its customers’ names. Only after a delegation from the U.S., including Lynch and the U.S. Ambassador, persuaded the Bahamas’ Attorney General that the privacy laws applied only to banking transactions, and not securities trading records, did the Bank hand over the identity of the customer, an investment banker at Drexel Burnham Lambert named Dennis Levine.(4) It was Levine’s name, and his employer, that turned another episode of insider trading into an inquiry into corruption at the heart of American corporate capitalism.

Michael Milken
Michael Milken

The takeover boom of the 1980s had transformed the corporate landscape, and it owed its existence to Drexel Burnham Lambert. The bank’s leading light, Michael Milken, had become the master salesman and evangelist for the sub-investment-grad “junk bonds” that had fueled the takeover boom, and by the mid-1980s he was arguably the most powerful investment banker in America.(5) Levine’s ties to Drexel alone made him a major catch, but after his arrest he agreed to cooperate with the SEC and Federal prosecutors. He revealed that he had shared inside information with another major Wall Street figure, the merger arbitrageur Ivan Boesky. The SEC soon was in pursuit of Boesky and, after secret negotiations, he agreed to cooperate as well, giving the enforcement staff the biggest name of all: Milken.

On November 14, 1986, Boesky’s cooperation and plea deal became public. He settled with the SEC, pled guilty to one count of conspiracy to commit securities fraud, and paid a penalty of $100 million.(6) On that day “Federal securities law enforcement entered the mainstream of public consciousness.”(7) Boesky was on the front covers of the major newspapers and magazines. That same day, subpoenas were served against a number of major figures including Drexel and Milken.(8)

The denouement was long. Drexel and Milken fought bitterly against the insider trading charges brought by the SEC and Justice Department, and their cases were not resolved for over two years. In the end, however, both settled. Milken pled guilty to six criminal counts, earning a sentence of ten years in prison, and agreed to pay a $600 million fine. Drexel pled guilty and paid huge fines as well, and in its settlement with the SEC agreed to far-reaching governance changes, including new compliance procedures. It even named John Shad, who had left the SEC in 1987, as its new chair.


Previous Next

Footnotes:

(1) Alison Muscatine, SEC Official Quits After Abuse Stories, Wash. Post Feb. 27, 1985: A1.

(2) James B. Stewart, Den of Thieves: 273 (1992).

(3) Stewart, Den of Thieves: 279.

(4) Id. 293.

(5) Connie Bruck, The Predator’s Ball: The Insider Story of Drexel Burnham and the Rise of the Junk Bond Raiders.

(6) Daniel Hawke, “Boesky Day” November 14, 1986; Stewart, Den of Thieves: 366.

(7) Hawke, “Boesky Day.”

(8) Stewart, Den of Thieves: 344.

Related Museum Resources

Papers

June 3, 1983
"Financial Frauds and Related Party Transactions - the SEC Response," by Theodore A. Levine, Frederick Wade, James B. Bragg and Thomas A. Ferrigno

(Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

August 31, 1982
image pdf (Government Records)
February 19, 1986
image pdf (Courtesy of David B.H. Martin)
September 17, 1986
image pdf (Courtesy of the National Archives and Records Administration)
December 11, 1986
image pdf (Courtesy of the Library of Congress)
February 12, 1987
image pdf (Courtesy of the National Archives and Records Administration)
April 23, 1987
image pdf (Courtesy of the National Archives and Records Administration)
April 23, 1987
image pdf (Courtesy of the National Archives and Records Administration)
April 23, 1987
image pdf (Courtesy of the National Archives and Records Administration)
May 24, 1987
transcript pdf (Courtesy of the National Archives and Records Administration)
June 11, 1987
image pdf (Courtesy of the National Archives and Records Administration)
June 15, 1987
image pdf (Courtesy of the National Archives and Records Administration)
June 17, 1987
image pdf (Courtesy of the National Archives and Records Administration)
November 3, 1987
image pdf (Courtesy of the National Archives and Records Administration)
December 3, 1987
transcript pdf (Courtesy of the National Archives and Records Administration)
December 14, 1987
transcript pdf (Courtesy of the National Archives and Records Administration)
December 14, 1987
image pdf (Courtesy of the National Archives and Records Administration)
December 18, 1987
transcript pdf (Courtesy of the National Archives and Records Administration)
April 13, 1989
image pdf (Courtesy of David S. Ruder)
September 13, 2004
image pdf

Photos

April 3, 2018
Roundtable of Current and Former SEC Enforcement Directors

Oral Histories

19 July 2006

Gary Lynch

Permission for Use

The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.

Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.

Material used with the Society's permission should be credited to: www.sechistorical.org.