There are no brokerage records to describe some of the most important trading on Wall Street.
Not far from the floor of the New York Stock Exchange, where millions of shares of stock change hands each day, executives quietly trade an immensely valuable commodity: information. Inside information today about takeovers tomorrow is worth a fortune to those who speculate in the stocks of takeover targets.
On May 12, the Securities and Exchange Commission charged investment banker Dennis Levine with illegally making $12.6 million by trading 54 stocks on the basis of inside information about upcoming mergers and other deals. As an adviser to corporations on takeover strategy, Levine had access to nonpublic information on less than half of these stocks. If, as the SEC alleges, he made all of his trades on the basis of confidential information, then he must have learned about many deals from other investment bankers and arbitrageurs.
Arbitrageurs are professional investors who speculate in the stocks of takeover targets. Some "arbs" reportedly use detectives to trace the movements of executives involved in merger negotiations. More routinely, in their quest to learn about deals in advance of the public, arbs trade information with investment bankers. Wall Street sources said Levine was superb at trading information with the arbs.
While the SEC charges that Levine used inside information to trade stocks illegally, his colleagues say he used it cleverly to identify companies that might want to retain his firm as their financial adviser. From June 1980 through December 1985, the period in question, Levine worked for Smith Barney, Harris Upham & Co., Lehman Brothers Kuhn Loeb Inc. and Drexel Burnham Lambert Inc. He has denied the insider-trading charges.
Eighteen months before he was charged by the SEC, Levine was questioned by the commission in connection with unusual stock trading in Textron Inc., a conglomerate based in Providence, R.I. Even after being questioned, Levine continued to trade stocks on the basis of inside information, the SEC said.
In the course of that deposition, Levine explained how he used bits of information -- from conversations he overheard and discussions he had with an arb -- to try to persuade Textron to retain his employer, Lehman Brothers, as its takeover adviser. Levine said he first learned that Textron might become a takeover target in the first week of October at Drexel's offices.
"I was in the reception area of Drexel Burnham in New York and overheard a conversation between two gentlemen," Levine said. " . . . One gentleman was talking to the other and discussed the following: Lester Crown has a group together with approximately $300 million equity and they need an additional billion-plus dollars to accomplish their objective. That although the economics of the transaction are attractive, Bankers Trust could be a problem and we should consider these guys and Citibank as alternates.
"I then overheard what I would characterize as garbled where they said something about a 13-D filing, the words 'Skadden Arps' and 'First Boston,' and also 'fireworks in Rhode Island,' " Levine said.
Levine explained that, even though he did not know who the men were, he figured out they were probably discussing a takeover bid for Textron. When the men said we should consider "these guys," they were referring to using Drexel to finance the deal, Levine said.
A few days later, Levine said he informed Steve Waters, another investment banker in Lehman's merger department, that he had heard a rumor that Textron might be a takeover target. They decided to call Textron's president, B. F. Dolan, in an effort to sell Lehman's "antitakeover" services.
Levine and Waters told Dolan only a little of what they knew in the first call, so that in subsequent calls it would appear they were telling him about new developments related to Textron. Dolan thanked them for the information but did not retain Lehman.
A week later, Levine called Dolan again to say that a group might be accumulating Textron shares. In an aggressive sales technique that would shake up any corporate executive, Levine said bidders could include "Carl Icahn, Saul Steinberg, Victor Posner, Ivan Boesky and other predator types." Dolan again declined to retain Lehman.
Levine did not give up. "Our objective was to be retained by Textron, and we provided them with information over a period of time to keep a dialogue going and to maintain continuity," he said.
True information trading occurred later. In a telephone conversation with an arb, Levine said he learned that Textron was about to become the target of a hostile takeover bid from Chicago Pacific Corp.
"A call came in to Lehman Brothers from an arb and was transferred to me since it is my responsibility to ferret out these types of calls," Levine said. "So he the arb got on and said, 'Are you guys involved in Textron?' I said, 'Why do you ask? What do you know?' He said, 'You're the banker of record and we hear that they're getting an offer.' I said, 'I see that in the market, but do you know anything additional?' He said he heard it was Chicago Pacific."
Levine told the SEC in the deposition that he had no brokerage accounts. However, according to the SEC's insider-trading charges, Levine had an offshore account and began buying Textron stock on Oct. 1, 1984. By the time Chicago Pacific announced a takeover bid for Textron on Oct. 25, Levine had 51,500 shares, which he later sold for a $200,076 profit.
In his deposition, Levine said he told Peter Solomon, a senior investment banker at Lehman, that the SEC wanted to question him about trading in Textron stock. Levine said Solomon advised him:
"Tell them the truth; give them the facts. You'll have no problem."