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Even so, the new charges suggest that insider trading is not just the work of lone wolves. Some Wall Street firms may have created an atmosphere for such trading, advertently or not, by failing to maintain the so-called Chinese walls of discretion between their investment-banking divisions and their trading departments. That may have been the case in one of the insider-trading arrangements allegedly started by Martin Siegel, the former Kidder, Peabody merger whiz kid who pleaded guilty Feb. 13 to charges of illegal stock trading and tax evasion. The Wall Street Journal reported last week that Kidder, Peabody's chief executive, Ralph DeNunzio, ordered Siegel in March 1984 to create an arbitrage department to speculate on takeover stocks, and to keep this special assignment secret. Reason: his arbitrage role could be seen as clashing with his position as the firm's chief corporate adviser on mergers and acquisitions. Kidder denies the Journal account, as well as any other wrongdoing. The Government charges that Siegel, who was apparently eager to get the arbitrage division rolling quickly, took part in a plan to share inside tips among two Kidder, Peabody arbitragers, Richard Wigton and Timothy Tabor, and a counterpart at the Goldman, Sachs investment firm, Robert Freeman.
If it can be proved that either Kidder, Peabody or Goldman, Sachs reaped profits from their employees' illegal dealing, the firms could be forced to disgorge huge sums. A federal statute passed in 1984 entitles the Securities and Exchange Commission to ask courts to impose treble damages on such profits. The federal investigators have reportedly served subpoenas on both Kidder and Goldman in an effort to search a wide range of trading records. In addition, Wall Street lawyers said they have begun to get a flood of inquiries from investors who want to file private lawsuits against the implicated investment houses.
The Government is likely to face its toughest fight yet in making any charges stick against Freeman, the Goldman, Sachs arbitrager. Proud of its starchy, spotless image, Goldman plans to help its employee fight the accusations, rather than persuade him to settle with the Government as other alleged insiders have done. The firm plans to provide Freeman with legal counsel and keep him on the job unless he is proved guilty. Confides a New York City securities lawyer familiar with the charges: "This is one case where the Government may have been a little too zealous." Kidder too aims to defend Wigton, its accused executive, against the charges.
The more beleaguered firm appears to be Drexel Burnham, the investment house with close ties to Boesky. Wall Street is restlessly waiting for the results of an SEC probe and a reported grand jury investigation into Drexel's activities, among them the highly profitable operation run by Michael Milken, the junk-bond guru. Even though no charges have been filed against Drexel, rumors have proliferated among competing firms that Drexel could conceivably face fines running into the hundreds of millions of dollars if its staff is found to have committed widespread insider trading.