Frederick H. Joseph is vice chairman and chief executive officer of Drexel Burnham Lambert Inc., a major Wall Street investment firm. Drexel was jolted last month when two of its employes, investment banker Dennis Levine and arbitrage analyst Robert Salsbury, were charged with illegally trading stocks on the basis of confidential, "inside information." Joseph recently discussed the problem of illegal insider trading on Wall Street with Washington Post staff writer David A. Vise.
Q. What are some of the things you do at Drexel to discourage illegal insider trading?
A. We give a big lecture to our new associates that is designed to make them nauseous, in terms of "you're going to to get caught, and you're going go to jail and you're going to get raped. Or you can have a really successful career and make money and rise to a Cabinet-level position in the government."
Q. Has insider trading always been a problem or have things gotten worse recently?
A. I think 10 years ago the Street was much tighter and people were much more careful. Arbs [arbitrageurs, professional investors who speculate on mergers by buying stock in takeover targets] were much less important, much less able to gather [and] barter information.
Q. Have things also changed at the investment banking firms?
A. I do think it has changed over the past decade. It has slid along. I don't want to sound glib about it, but the fact [is] that more people in the securities firms know [about upcoming deals] and the strategies got more complex, that the arbs became a very major factor and that the arbs developed their own research capabilities that were more expert. I think the press has gotten much more sophisticated, getting information [about takeovers] and developing its own sources and reporting the information. And investment bankers have gotten in the habit of using arbs strategically and using the press strategically [to try to win takeover fights].
Q. What new steps are you going to take at Drexel to stop people from misusing inside information?
A. I want to make it tight. I want to make it tighter, tightest. I don't know exactly what else to do. There are some tradeoffs you can always make.
Q. What kind of tradeoffs?
A. For example, the availability of information to your professionals in your investment banking departments. There's a need for some information to be available. Otherwise, you're apt to find one professional buying a company and one professional buying it for another client at the same time.
There's a need to have some cross information. . . . So we're going to take another look at [whether we can] crank that down tighter and maybe have a person work as a clearinghouse and reduce the flow [of information].
Q. Are you saying that all senior investment bankers in your merger group don't need to know about all of the group's deals?
A. Yes, as long as somebody knows and there's a clearinghouse. So those are the kinds of tradeoffs you keep looking at, and you tighten them and then you find you're making mistakes because it's too tight, and you're losing opportunities to do transactions because it's too tight. So as an ordinary business practice, you loosen it, and then something like this happens and you tighten it.
Q. Let's talk about the Levine case. Dennis Levine joined Drexel last year. He has admitted that he traded stocks offshore using confidential information about upcoming takeovers. What should Drexel have done differently?
A. I participated in the hiring, and I don't think there's any flaw in our recruiting procedures. Dennis Levine -- I still don't see how we could have known. We spent six months recruiting him and must have talked to two dozen people that knew him. We got to know him very well, and there is no way you can tell. I've not found the flaw in our system.
Q. Is Drexel, or any other major firm, capable of stopping someone like Dennis Levine?
A. You can't stop a Levine case by yourself, or a [Robert] Salsbury [case], I guess. If a guy is going to commit fraud and go offshore, you're not going to catch him without police power. But the most important thing you do is try to be a deterrent by explaining what's going to happen if they get caught, and that you're serious, so that there's no confusion about the standards.
Q. Last month, two of your employes were charged with insider trading and a third was charged with bank fraud. None of them had been with Drexel very long. Is Drexel more likely to have these kinds of problems than other firms?
A. As a statistical matter, Drexel has been the best-growing firm in the Street. Therefore, we've added personnel faster that any other firm that I know. Last year, our revenue grew 100 percent and our staff only grew 18 [percent], but an 18 percent increase is going to result in more new guys than a 5 percent increase. So, I think it's possible, just because we're hiring more people, there has clearly got to be a greater probability that we'll hire a new person who is bad.
Q. What about your recruiting of Antonio Gebauer? He has been charged with bank fraud.
A. In that case, we actually had a detective agency investigation before hiring him merely because he'd been working in Brazil. We didn't have anything on him particularly, but we tried to be as careful as we could. We got a clean slate.
Q. Is it typical for you to authorize a detective agency investigation before hiring someone?
A. It's not typical, but it's not horribly unusual. We do it whenever we have any reason to think we should.
Q. How much have the three cases involving Drexel employes hurt the firm's reputation?
A. I'm a little bit too much in the trees to see the forest clearly. I don't know of any business that Drexel has lost over it. People who have talked to me have been expressing some sympathy. My feeling at the moment is that I don't think it has really hurt the firm.
Q. What about Wall Street's reputation? How badly has that been damaged by all the insider-trading publicity?
A. I am, in fact, at the moment, more concerned about the industry, where I think the amount of publicity, the screaming headlines in the New York Post, Newsweek, is really scary. The public's perception of the integrity of the market is a vulnerable kind of perception. And very important. Q What about inforcement of the insider-trading laws? And do you think the laws are too vague?
A. I get to two things. I get to a need to absolutely make it clear that, if you use insider information for gain, you break the law. They're going to get you, and they've got systems to get you, being offshore is not going to protect you, and, when they get you, nobody is going to protect you.
Then the other thing is they really ought to make the line clearer. I'm for pushing the line pretty far in the direction of limiting insider information, increasing public belief that the markets are fair, that there are not insider abuses. But [the law] may need some redefinition. It may need some new law.
Q. How widespread is insider trading on Wall Street?
A. If what you mean is out-and-out theft and unquestioned abuse . . . a professional with access to the data goes out and sets up an account offshore . . . I don't think that is widespread at all. I think most of the professionals have always feared that a guy could do that who is willing to risk everything. I was always afraid there could be one, there could be two, there could be five. I don't think that is widespread.
I've got to guess that it's concievable that there is another one. There are 2,500 professionals in the position to have that kind of information on the Street. And probably at least a comparable number among the law firms. It's hard to imagine Dennis was the only bad seed.
Q. What about all the stock prices that have moved up in advance of public announcements of takeover bids?
A. Now, if inside information is that casual accumulation of a tidbit here and a tidbit there, that is clearly very widespread, you can see it in the rising movement in stock prices before deals come. It includes investment bankers questioning arbs about a company or even arbs questioning the bankers and getting the knowing look. Again, not the criminal information but the casual.
Some of it is, I think, just excessive casualness and it accumulates very quickly. The information flows together very quickly. I was one of those people that they alway thought was dumb or something because I never could talk to [arbs]. I never figured out how to talk to them without just answering their questions.