Going After the Crooks

The affair has quickly become known as Wall Street's Watergate. That hardly seems an exaggerated description for the drama of financial power and corruption that was exploding on both coasts of the U.S. last week. An enormous scandal was spreading at the core of America's investment community, touching some of the biggest moneymen in the country. A civil and criminal investigation was peeling back layer after layer of evidence in a bid to uncover the full pattern of illegalities that had come to light in the $2.5 trillion U.S. stock market. There was even that ultimate Watergate touch: the disclosure that for weeks, perhaps months, conversations had been secretly tape-recorded in an effort to plumb the depths of the worst insider-trading scandal in U.S. history.

In the paneled corridors of Manhattan's brokerage firms and investment houses, the scandal was reverberating in an atmosphere that one eminent Wall Street lawyer described as "hysteria." At blue-chip law firms, telephones rang incessantly as worried players of the multibillion-dollar business- takeover game sought advice and protection. Said a nervous Manhattan brokerage executive: "Everyone is scared to read the newspaper in case his name might be in it." Similar jitters struck in Los Angeles, where guards carefully screened visitors to the offices of one of the country's hottest investment firms, now the focus of curiosity and controversy.

All across the U.S., investors were raging at the discovery that Wall Street high rollers had been ripping off millions of dollars by trading on knowledge not available to the general public. That sweeping form of sophisticated fraud did not merely touch the pocketbooks of professional stock-market players. The illicit profits came from taking unfair advantage of price movements in a broad range of stocks. That meant, in the end, that the speculators had pilfered from funds that countless thousands of ordinary investors had contributed to the market, in the form of their own stock purchases or investments in pension and mutual funds that in turn had bought securities.

At the center of last week's maelstrom was a shadowy figure whom few people had heard of until last week: Ivan Boesky. On Nov. 14 the Securities and Exchange Commission electrified the financial world with news that Boesky, 49, one of America's richest and savviest stock-market speculators, had been caught in an ongoing insider-trading probe. Boesky had agreed to pay $100 million in penalties, return profits and accept eventual banishment from professional stock trading for life for his alleged wrongdoings. He also faces a single, as yet unspecified, criminal charge, which could lead to a five-year prison term.

News of Boesky's misdoings echoed as far away as London, where he resigned his chairmanship of an investment trust known as Cambrian & General Securities. London brokers were reportedly told they could still trade with Boesky, but must inform the surveillance division of the London Stock Exchange of any such dealings.

In the process of striking his settlement with U.S. authorities, the relentless wheeler-dealer who earned the nickname "Ivan the Terrible" talked long and hard to investigators about the stock trades he had made using insider knowledge. He also reportedly allowed regulators to eavesdrop on and tape his telephone conversations as he conducted his business dealings. Last week Boesky's singing began to discomfit some of the biggest names in the corporate-takeover business. Said Pierre Rinfret, head of a Wall Street investment and consulting firm: "This may be the end of an era."

If so, the age of Boesky threatened to close with a bang rather than a whimper. Process servers working for both the SEC and the U.S. Attorney's office in Manhattan had delivered subpoenas to at least a dozen important figures in the stock-trading pantheon. The subpoenas did not imply guilt on the part of those who got them, but requested information about any dealings and relationships with Boesky. Among those said to have received the documents:

TWA Chairman Carl Icahn, 50, the Manhattan-based corporate raider currently involved in an $8 billion takeover bid for Pittsburgh-based USX. The Washington Post last week quoted unnamed sources to the effect that Icahn and Boesky, who in 1985 owned more than 5% of Gulf & Western's stock, had collaborated to run up the price of those shares by fueling rumors that the company would be a takeover target. The two then sold their shares back to Gulf & Western for a profit. That ploy would have amounted to illegal stock manipulation. In a memorandum to his TWA staff, Icahn denounced the accusation: "I have never traded on insider information."

-- Victor Posner, 67, another well-known corporate raider who lives in Miami Beach. Between 1984 and 1985, Posner paid about $80 million to acquire control of New York City-based Fischbach, the largest electrical contractor in the U.S. Boesky had also bought 13.4% of the shares of that company. In September, Posner was granted a new trial by a federal judge who overturned his July conviction on charges of evading $1.2 million in income taxes. Posner will neither confirm nor deny that he was subpoenaed.

-- Boyd Jefferies, 56, chairman of the Los Angeles-based Jefferies & Co. investment firm, which specializes in assembling large blocks of stock in takeover targets. Jefferies recently supplied Canadian Raider Robert Campeau with $1.8 billion worth of stock in Allied Stores, a move that eased a $3.6 billion takeover of the retail chain. Jefferies has acknowledged receiving a subpoena, and told the New York Times that he was innocent of wrongdoing. Also served was Michael Singer, 37, a former Jefferies senior vice president who | switched in October to the Manhattan-based Salomon Brothers investment firm. Singer resigned his new post last week, but said, "I have done nothing wrong."

-- Michael Milken, 40, senior executive vice president of New York City's Drexel Burnham Lambert investment firm. Milken, who works out of branch offices at the tony corner of Beverly Hills' Wilshire Boulevard and Rodeo Drive, is the guru of the so-called junk bond, the high-interest but risky investment vehicle that has provided much of the financing for the stock market's takeover frenzy (see box). At least five other Drexel Burnham employees, including Milken's younger brother Lowell, have also been subpoenaed.

In addition to the individuals, Drexel Burnham as a corporation was subpoenaed by the SEC and by a federal grand jury. For the past two years Drexel Burnham has been Wall Street's most profitable investment firm; its 1985 gross earnings were an estimated $1.1 billion. In a bid to head off a run on accounts held with the company, Drexel Burnham declared it was "providing information" to investigators and emphasized that it "will not condone or tolerate any activities which violate the integrity of the markets."

Meanwhile, the stock market suffered some profound jitters of its own. On the day after disclosure of the SEC subpoenas, the Dow Jones index of 30 blue- chip industrial stocks plummeted 43.31 points, to 1,817.21, the fourth largest drop on record. If anything, the Dow understated the market's nervous collapse. On the New York Stock Exchange, 1,390 issues fell that Tuesday, and only 283 gained. Many of the hardest hit were stocks that had been heavily traded by speculators in the anticipation of takeover action. Later in the week, as opportunistic traders saw many stocks as bargains, the Dow stormed back 76.35 points, to finish at 1,893.56.

Even amid that recovery, however, many Wall Streeters were livid to discover that Boesky and the SEC had apparently collaborated in what many considered another stock-trading outrage. Prior to the Nov. 14 announcement of his penalties, Boesky had been allowed by the federal regulators to unload quietly some $440 million in stocks from the estimated $2 billion worth of portfolios he controlled. In effect, Boesky avoided the market slump caused by the news of his own spectacular downfall. Steamed one senior Wall Street trading executive: "This was the ultimate insider deal." Raged another investor: "It's incredible! This guy was allowed to protect himself while the rest of us had to take a hit for being honest."

At week's end the SEC offered a defense of the $440 million sell-off. Boesky's action was legal, the commission declared, and the regulators had been fully aware of it. The SEC realized there was a danger of a stock-market slide after the announcement of the action against Boesky. If that happened, Boesky would have been forced because of margin debts on his stock accounts to liquidate huge amounts of securities quickly. That could have sent the market into a steeper downward spiral. The SEC apparently decided it would be better for Boesky to dispose of some of his portfolio in advance.

Little investor rancor but presumably considerable discomfort was in evidence at a meeting Boesky held on Thursday at the office of his lawyers in downtown Manhattan. In attendance were some of the 43 limited partners who had anted up $221 million in capital for his major arbitrage fund, Ivan F. Boesky & Co. L.P. Boesky's tribulations had cast an unwelcome spotlight on a heterogeneous group of investors who suddenly found themselves unwitting participants in the scandal. The list of partners included several high- profile companies, such as Rapid-American (investment in Boesky: $5 million) and National Can ($6.5 million). Prominent individuals ranged from Manhattan Investor Jeffry Picower ($28 million) to Martin Peretz, editor in chief of the liberal weekly New Republic ($250,000). Even the British Water Authority Superannuation Fund had chipped in $10 million.

At the meeting Boesky read a brief statement essentially apologizing for his actions, then handed the three- to four-hour session over to his legal advisers. They explained that the fund would be liquidated as part of Boesky's agreement with the SEC to remove himself from stock-trading activities over the next 16 1/2 months. Said Lewis Lehrman, a former Republican gubernatorial candidate in New York State, who had plunked down $1 million on Boesky's speculative endeavors but who skipped the session: "I would say that Mr. Boesky disappointed a lot of people, me included."

In Washington, Congressmen raised questions about the need for new regulation of the securities industry and promised lengthy hearings on the insider- trading issue. A more aggressive response came from Angelo Oriolo, 66, a retired businessman from Pennsville, N.J., who last week filed a class-action lawsuit in U.S. district court against Boesky and others implicated in the ^ scandal. Oriolo alleged that he had been injured financially in September 1985 when he sold 100 shares of General Foods stock. According to the SEC's complaint against Boesky, he made illegal profits from insider trading on General Foods. The Oriolo lawsuit is only the start of an expected avalanche of civil litigation that is expected to descend in the aftermath of the Boesky affair.

For many Americans, the Boesky case seemed to symbolize boundless avarice on Wall Street. Boesky's declared specialty was the high-return game known as risk arbitrage, which involves buying and selling stocks in companies that appear on the verge of being taken over by others. In little more than a decade, Boesky parlayed that arcane activity into an estimated net worth of at least $200 million.

Arbitrage based on public knowledge of acquisition bids has long been recognized as a legitimate exercise in which professional traders assume much of the risk inherent in trading stocks involved in takeover battles. But Boesky's illegal use of secret tips on takeovers has tarnished the reputations of all arbitragers and ordinary stock traders. Says Jack Steele, recently retired dean of the University of Southern California business school: "Where we're at today is really no different from the age of the robber barons." Agrees Robert Hanisee, president of Seidler Amdec Securities, a Los Angeles brokerage: "The popular perception among investors is that this kind of Boesky crap goes on all the time. The real tragedy is that we keep living up to people's worst expectations." Says John Baker, a broker with Shearson Lehman/ American Express: "In the eyes of the public, we are all bad guys now."

Behind that admission of public cynicism was a growing crisis of confidence in the functions of Wall Street itself. Over the past decade, the place where American business raises money for its operations and expansion has been transformed into a high-tech, high-volume supermarket in which institutional investors move billions of dollars in the blink of an electronic eye. In all, some $130 billion in stocks, bonds and other securities now change hands daily simply on the basis of telephone calls alone.

At the same time, the number of small individual investors who own stock has been steadily shrinking, and the Boesky scandal may well accelerate that trend. Says Bill Kasten, an account executive in the Chicago offices of the E.F. Hutton investment firm: "Smaller investors now think that they're just crumbs in the pie, that they have no control." Agrees Robert Nichols, president of Los Angeles-based RNC Capital Management: "If we don't restore the public's confidence, the public is going to exit and not come back."

Ironically, the offense that Boesky was charged with committing is anything but clear cut. Insider trading is a crime that goes virtually undescribed in U.S. securities statutes, although it is roughly defined in court cases as the illicit profiting from information about private corporate behavior before that knowledge has reached the public domain. It has been compared to playing poker with marked cards. But deciding when the cards have been improperly marked -- and, above all, proving it -- is no mean feat, since rumor, innuendo and split-second inference are the stuff of ordinary stock trading.

Walter Wriston, former chairman of Citicorp, the largest U.S. bank, observes, "I have great trouble in knowing the difference between insider information and a very fine research report." On Wall Street, says an SEC official, "knowledge is power is money. It's worth a fortune." Deciding whether that fortune is ill gotten is one of the regulators' most forbidding tasks.

Beneath all the wrongdoing, panic and disaffection with Wall Street lies a deeper issue. The lanky, impeccably tailored Boesky rode to staggering success and then to disaster on the wave of takeovers that have swamped the stock market in the '80s, dramatically reshaping the way that corporate America does business. Some 2,806 mergers and buyouts worth nearly $130 billion have occurred so far this year, up from 2,755 deals worth about $100 billion during a comparable period of 1985. The feverish activity has created a climate in which corporate raiders can reap quick, huge profits simply by buying a block of stock in a company, driving up the share price and then selling the securities back to the firm or to a higher bidder.

In 1984, for example, Fort Worth's Sid Bass and his brothers bought and sold 9.9% of Texaco's shares for a swift profit of $300 million. Manhattan Financier Saul Steinberg earned $60 million that year by buying 11.1% of Walt Disney Productions and then reselling it to the company at a premium, a practice known as greenmail. Boesky made much of his fortune by guessing -- and sometimes knowing -- where the corporate raiders would strike next. Says an eminent Washington securities lawyer: "The millions and millions that are made out of nonproductive deal making represent the collapse of real morality in our markets."

The Boesky case had an instant sobering effect on the takeover game. As the thunder of the insider-trading disclosures rose in volume, a number of big plays suddenly came to a halt. Wickes, a Santa Monica, Calif., retailing and manufacturing conglomerate headed by Sanford Sigoloff, 56, announced that it might not be able to carry out the estimated $1.7 billion acquisition of California's Lear Siegler, the aerospace and automotive-products concern. Sigoloff's bankers, spooked by the Boesky scandal, apparently balked at financing the deal.

Sir James Goldsmith, 53, the Anglo-French raider, abruptly ended his 2 1/2- week siege of Goodyear Tire & Rubber, the Akron manufacturer, after being grilled before the House Subcommittee on Monopolies and Commercial Law in Washington. "My question is: Who the hell are you?" said Ohio Democrat John Seiberling, whose family founded Goodyear. Goldsmith's sharp retort was that he represented the "rough, tough world of competition . . . a world in which you run a business as a business and not as an institution." But the aggressive tycoon, who owned 11.5% of Goodyear's stock and had offered $4.7 billion for the whole company, was in the end bought off by the management, which promised to repurchase his holdings for $618.8 million plus expenses. The profit to Goldsmith and partners: $93 million. He said that his change of plans resulted in part from what he called, with lordly British disdain, "this ghastly Boesky affair."

Boesky's name popped up again in the ongoing takeover battle between Gillette, of shaving-blade renown, and Revlon Group, the cosmetics conglomerate. Revlon, headed by Raider Ronald Perelman, offered $4.12 billion for Gillette two weeks ago, just hours before the Boesky case broke. Gillette counterattacked last week with a claim in Boston's Federal District Court that charged Perelman with violating insider-trading laws. Gillette's lawyers issued a blizzard of demands for records from Boesky and a host of other Wall Street investment firms. Perelman called the Gillette accusations "totally without merit and self-serving." He denied that he had ever had any dealings with Boesky and vowed that he would press on with his takeover suit.

Other merger bids were seemingly not affected. Undeterred by its frustrated advances toward Lear Siegler, Wickes announced it would proceed with a $1.16 billion bid for New York-based Collins & Aikman, a textile concern. In California, First Interstate Bancorp is continuing its more-than- $3 billion bid to win giant BankAmerica.

The acquisition trend, however, is still vulnerable to further Boesky- related disclosures, and the odds are good that there will be plenty. Most of the furor that the Boesky case has caused so far comes from the SEC's Nov. 14 judgment against the arbitrage superstar. That, in turn, was based on the relationship investigators uncovered between Boesky and Dennis Levine, the former managing director of Drexel Burnham who first blew open the scandal when he was charged last May with illegal trading in 54 stocks.

In its case against Boesky, the SEC charged that he had in effect contracted for insider information with Levine, who as a merger-and- acquisition specialist with Drexel Burnham had advance knowledge of takeover bids. Levine has been ordered to pay back $11.6 million in illegal profits and awaits sentencing on four criminal counts. In the spring of 1985 Boesky allegedly promised to pay Levine a percentage of profits for his tips, and subsequently the two agreed on a $2.4 million lump-sum payment. The SEC's complaint detailed a number of stock-trading situations in which Boesky had profited illegally to the tune of "more than $50 million." Among the stocks cited: Nabisco Brands, Houston Natural Gas, General Foods, Union Carbide and Boise Cascade.

Last week Irving Einhorn, the SEC's West Coast regional director, observed that "nobody has said that Boesky's trading was limited to tips only from Dennis Levine." In addition to the cases mentioned by the SEC in its complaint, regulators were believed to be studying as many as a dozen others for evidence of illegal trading activity.

Among them were January 1985 merger talks between Diamond Shamrock, a Dallas energy firm, and Occidental Petroleum -- discussions that subsequently broke off. Another case is said to involve T. Boone Pickens' February 1985 takeover bid for Unocal. Pickens eventually backed away after Unocal bought up his holdings in the company. Analysts estimate that he broke even on the takeover bid. Yet another situation reportedly involves a successful June 1985 offer by the voracious Wickes for Gulf & Western's consumer- and industrial-products group, which manufactures such products as Simmons mattresses and Burlington hosiery.

Among more recent takeovers, the SEC is said to be looking at the action of traders amid the turbulence surrounding Broadcaster Ted Turner's acquisition of MGM/UA, for which the Atlanta buccaneer paid $1.6 billion last March. In October 1985 the New York-based Maxxam Group, an investment and real estate- holdings firm, made an $800 million tender offer for San Francisco's Pacific Lumber, leading to the companies' merger early this year. Boesky is said to have bought 10,000 shares of Pacific Lumber stock three days before the tender was made public, and he may eventually have owned 5.1% of the company's shares. Another case reportedly receiving scrutiny is the $400 million merger in February of Lorimar, producer and syndicator of Dallas and Falcon Crest, with Telepictures.

One thing that seemed to tie many of those deals together was the financing role played by Drexel Burnham. In one sense that was unsurprising, since the company completely dominates the market for the high-interest junk bonds that have been issued to finance so many corporate mergers and buyouts. For other Wall Street firms even remotely connected with suspect deals, a major source of concern was the sheer sweep of Boesky's operations over the years. Said a member of the Goldman, Sachs investment house: "Most major brokerage firms executed trading orders for Boesky." Agreed another Wall Street analyst: "We are all scared that it will work its way back here."

New details continue to leak out about the way the insider-trading ring was discovered, starting with the exposure of Levine. The investment banker's covert role began to surface as far back as May 1985, when an anonymous letter from Caracas to the giant Merrill Lynch investment house alleged trading irregularities on the part of two of the company's employees in Venezuela, both of whom have since left the firm. In tracking down the accusation, Merrill Lynch authorities discovered that their employees' actions mirrored trades ordered through an account at the Bahamas branch of Switzerland's Bank Leu International. The brokerage did not know it, but the account was the main conduit used by Levine for making his own insider moves. Merrill Lynch passed on the information about Bank Leu to U.S. authorities in June 1985; it took almost a year before Swiss authorities agreed to divulge the name behind the account number.

Levine soon led federal officials to smaller fish in his insider-trading network, but Boesky's role may also have been uncovered as early as the end of last August. If that is true, the ten-week hiatus between then and the Nov. 14 revelations would mark a truly substantial period of clandestine cooperation between the speculator, the SEC enforcement unit commanded by Gary Lynch, and the Manhattan branch of the U.S. Attorney's office headed by Rudolph Giuliani. The aggressive Giuliani, who has overseen the criminal side of the investigation since Levine was snared, may eventually become almost as renowned for chasing insider traders as for bringing Mafia bosses to justice.

The help that Boesky has given to authorities may explain what many Wall Streeters feel has been extraordinary leniency shown toward the speculator, given the extent of his alleged misdoings. In 1984 U.S. securities laws were amended to allow confiscation of as much as three times the illegal profits earned from insider trading. But Boesky's $100 million penalty includes only $50 million in returned illegal profits, or about the same amount of ill- gotten gains cited in the SEC's Nov. 14 complaint. What many Wall Streeters found even more surprising, in view of the sweep of his illegal activities, was the mildness of a single unspecified criminal charge against Boesky. Says a securities lawyer in Washington: "He must have made a very attractive offer to them."

Boesky's appeal to investigators lies in the central role he has played in so many takeover deals. As practiced in the go-go stock market of the '80s, the corporate- takeover game often resembles a feeding frenzy; even in perfectly legal situations it brings together, in a swift sequence of events, raiders, arbitrage specialists like Boesky, financiers and brokers.

In a typical takeover, a corporate raider might begin by buying a few million shares of a target stock, acquiring them on the open market through a major Wall Street broker. Under SEC rules, however, a raider is obliged to announce his holdings and his intentions once 5% or more of a company's shares are in his grasp. The first result of such an announcement is usually a boost in the stock's price. After the offer is made public, arbitragers, betting that a takeover bid will succeed, jump in and buy as much of the target stock as they can. Shareholders who are willing to sell then have the opportunity to win profits without staying the full course of the takeover, which may not succeed. Of course, the activities of the arbitragers boost the share price again.

Meantime, the raider would make plans with an investment banker to raise the cash or credit needed for the takeover, often by launching a junk-bond issue. With such financial backing lined up, the raider could then announce a bid for the controlling interest in the target company's stock. By then, the necessary holdings might be in the hands of arbitragers, who would be waiting to sell at a still higher price than their own efforts had created.

If the intended takeover victim fights back, outside brokers who are unregistered with the major stock exchanges might enter the game, usually as stalking horses for the raider. The job of the so-called third-market brokers is to "sweep the Street" quickly and quietly for any available blocks of stock in the target company, usually after regular market hours or when normal trading in a stock has been suspended under exchange rules. Then they turn the shares over to the raider.

All those operations are completely legal. But the close proximity of a small core of professional takeover specialists, and their towering importance in the market of the '80s, makes the prospects for collusion virtually endless. Since brokers and junk-bond dealers often know about a raider's plans well in advance of the general public, those professionals have the opportunity to tip off other investors or to make their own profits by trading in the target stock.

Lawyer Daniel Bergstein, a senior partner in the New York firm of Finley Kumble Wagner, which has many Wall Street clients, notes that raiders and arbitragers can form what he calls an "unholy alliance." In a typical maneuver, they might have a mutual commitment to buy up stock in a company, limiting their blocks to less than 5% to avoid the SEC's required disclosure rule. Then one member of the ring can leak the rumor of an impending takeover. When legitimate arbitragers leap into the fray, the group can unload at an inflated stock price and make off with enormous profits. Says Bergstein: "Both the raider and the arbitrager have an incentive to tell the other side what they are doing."

As reports of abuses in the takeover game proliferate, the political pressure to put new curbs on corporate raiders is sure to rise. At last week's hearing before the House Monopolies Subcommittee, A.A. Sommer, a Washington securities lawyer and former SEC commissioner, delivered a strong denunciation of takeover mania. Said he: "American enterprise, at a time when all its energies are needed for the worldwide economic struggle, is being driven by a . handful of opportunists into a massive restructuring, with consequences that may be disastrous." Sommer's argument struck a responsive chord among the legislators. Said Democratic Representative Mary Rose Oakar of Ohio: "Corporate America is being held hostage by the corporate raider. Profitable companies are being driven into debt, American jobs lost, and American businesses are being taken overseas, all so that a few enormously wealthy individuals can add to their personal fortunes."

But the issue is not that simple. In many cases a raider's acquisition bid may be one of the few defenses that shareholders have against inept, self- serving and complacent management. Many economists, along with key figures in the Reagan Administration, believe executives should be subjected to the full discipline of the marketplace, including the threat of takeover.

In recent criticisms of American companies, some Administration officials have sounded as harsh as the corporate raiders. Only three weeks ago Deputy Treasury Secretary Richard Darman launched a slashing attack on what he called "corpocracy." By that, Darman said, he meant the tendency of U.S. corporations to become similar to the Government bureaucracies that company executives frequently deplore: "bloated, risk averse, inefficient and unimaginative." Corporate raiders, Darman added, "are gaining attention as a new kind of populist folk hero, taking on not only big corporations but the phenomenon of corpocracy itself."

The Administration's reluctance to offer companies protection against takeovers may be tested in the new Democrat-controlled Congress. A number of suggestions for legislative reform are already beginning to percolate. Felix Rohatyn, a partner in the New York City investment-banking firm of Lazard Freres and a longtime critic of the stock market's speculative excesses, has proposed a sharp limit on the right of Government-insured pension funds, thrift institutions and trusts to invest in junk bonds. He suggests that takeover bids that are conditional on anticipated junk-bond financing be forbidden as an unfair manipulation of public markets. Rohatyn also thinks that offers to acquire a large number of shares in a firm should be voted on by all stockholders on both sides of the transaction. That would help to prevent managements from paying inflated prices to buy back stock from raiders in greenmail deals.

One of the most controversial suggestions on how to limit takeovers comes up for SEC hearings next month. It involves a New York Stock Exchange proposal to remove its 60-year-old "one share, one vote" rule, which prohibits the trading of shares in companies that issue both voting and nonvoting common stock. The revision would allow corporate managers and other insiders to keep the voting stock for themselves and to raise money by selling the nonvoting shares to other investors. Critics of the proposal see it merely as a way for managements to make themselves impregnable.

Whether or not anything should be done to restrict takeovers, specific steps can be taken to slow down insider trading. One would be to cut back steeply on the time speculators have to maneuver before a takeover bid is publicly announced. Under current SEC rules, corporate raiders have ten days between the time they acquire 5% of a target stock and the date when a public announcement of their intentions is necessary. It is precisely at such times, when insiders know that something is happening and outsiders are in the dark, that the potential for abuse -- and for profit -- is greatest.

Says Samuel Winer, a former SEC enforcement lawyer now in private practice in Washington: "You can get away with all kinds of discussions and not tell anyone." Winer would require companies to announce publicly whenever preliminary takeover negotiations begin. He would also mandate companies to release much more quickly such important data as earnings projections and year-end financial results.

Almost everyone agrees that one of the best defenses against illicit insider trading is to increase the likelihood that offenders will be caught -- and that getting caught will hurt. So far the SEC has been reluctant to use the powers of treble confiscation of illegal profits granted to the agency in 1984. That should change. At the same time, the SEC under Chairman John Shad has shown greater eagerness than it had under his predecessors to pursue insider cases. Says Shad: "If the public believes that a few have privileged information and take advantage of it, it is going to shake confidence in the fairness and the integrity of the securities market." Shad's crackdown on insider trading would be greatly helped by an increase in the SEC's budget, which is currently $106 million, or only a little more than Boesky's total penalty.

A highly regarded Washington securities lawyer who is familiar with the Boesky case probably speaks truly when he observes that "we may well get a whole string of new laws or regulations. Whether they're fundamental changes, however, depends on whether the public will care enough to push for them." In that regard, the widening stain surrounding Ivan Boesky may be serving a perverse kind of service to the integrity of the marketplace. If the shock and dismay engendered by his case are bolstered by further disclosures, popular indignation could guarantee a regulatory shakeup. It may be that further fallout resulting from Boesky's cooperation with the authorities will also help to clean up the marketplace the old-fashioned way: by deterring insiders from succumbing to Wall Street's temptations.