The Securities and Exchange Commission charged yesterday that a managing director of the securities firm Drexel Burnham Lambert Inc. made $12.6 million in illegal profits by systematically trading on confidential information about mergers and acquisitions.
It was the largest insider-trading scheme ever, the agency alleged.
At the SEC's request, a federal judge in New York yesterday froze the assets of Dennis Levine and issued a temporary restraining order against Levine, who, the SEC said, made trades through a financial institution in the Bahamas, using the code name "Mr. Diamond."
Documents filed by the SEC in U.S. District Court in New York in a civil suit against Levine detail a scheme the government alleges went on for five years. Levine, who also worked for two other securities firms during the period in question, repeatedly took confidential information about deals on which he was working and turned it into profitable trades, the SEC said.
During the years in question, Levine, 33, worked for some of Wall Street's biggest names, including Smith Barney Harris Upham & Co. and Lehman Brothers Kuhn Loeb Inc. (which became part of Shearson Lehman/American Express) as well as Drexel Burnham, the nation's ninth-largest securities firm.
None of the securities firms is charged with any wrongdoing.
The allegations against Levine follow an agreement last week by First Boston Corp. to pay penalties and repay illicit profits the SEC said that investment firm had earned by violating prohibitions against trading on insider information. In that case, one branch of First Boston made trades based on confidential information from a client obtained by another branch.
The two cases are likely to raise troubling questions about the nature of the relationship between investment bankers and their corporate clients, who rely on their financial advisers to treat information about proposed takeovers with strict confidentiality.
The SEC said Levine placed orders with the Bahamian institution during his lunch hours by making collect calls from a phone booth. He traveled to the Bahamas by indirect routes and under an alias to pick up his profits, in $100 bills, the SEC charged, keeping the trips secret even from his wife.
The pattern continued even after Levine had been supboenaed by federal regulators, the SEC said.
Levine could not be reached for comment yesterday. Martha Goldstein, a vice president of Drexel Burnham, said Levine has been relieved of his responsibilities as one of 50 managing directors in the company's corporate finance and mergers and acquisitions division.
"The SEC allegations, if true, would be a most serious breach of Drexel Burnham Lambert Inc.'s standards," the firm said in a statement. The company noted that the SEC complaint was "the first such allegation made against a Drexel employe in our 51-year history" and that Levine had worked for other firms during much of the time covered by the investigation. He joined Drexel Burnham in 1985.
The SEC's director of enforcement, Gary Lynch, said the agency's investigation revealed a "very systematic and very complex scheme" by "a person who was in an extremely sensitive position where he could garner client confidences."
The charges, if proven, represent the largest insider-trading case ever, both in terms of the money involved and the number of securities traded. The SEC claims Levine traded in the stock of "at least 54 companies" as part of the alleged fraud. Levine could be subject to civil penalties of treble damages on the more than $6 million in profits the agency alleges he made after Aug. 10, 1984.
According to the SEC, Levine also sought to cover up his activities as the agency pursued its investigation and was attempting to remove $10 million from the institution in the Bahamas. It was that effort that triggered the SEC's motion for an order freezing his assets. The SEC also alleged that Bernhard Meier, Levine's broker in the Bahamas, joined Levine in profiting from insider information.
The SEC documents said Levine purchased securities or options of companies who were subjects of actual or contemplated tender offers, mergers, leveraged buyouts or other transactions in which his employer had been retained as an investment banker.
Some of the deals for which transactions are detailed in the SEC complaint include 1983 mergers of LTV Corp. with Sierra Research Corp., Maryland Cup Corp. and Fort Howard Paper Co., Gulf & Western Industries Inc. and Esquire Inc., and a 1985 tender offer by Coastal Corp. for the stock of American Natural Resources Co.
He also purchased stock in other companies involved in potential deals, including Carter Hawley Hale Stores Inc., Crocker National Bank Corp., Nabisco Brands Inc., G. D. Searle & Co. and Sperry Corp.