Money and Power (48 page)

What’s more, Siegel and Giuliani had accused the three men of having a “virtual conspiracy,” since none of them had ever met or even knew one another. “
Never well conceived to begin with,”
Christopher Byron wrote in
New York
magazine, “the case against the trio began to crumble as soon as defense lawyers got a look at its details. Here was a virtual conspiracy of strangers: Tabor didn’t know Freeman, and Freeman didn’t know Wigton. Moreover, instead of subpoenaing the men’s trading accounts to see whether Siegel’s assertions were true, the prosecutors
had simply arrested the men. When they finally did get around to checking the documents, the information in them proved nothing.” And, of course, Freeman had only met Siegel once, and Siegel didn’t remember the meeting.

Siegel and Freeman did speak regularly about deals on the phone—the
Journal
would later report that the two men spoke on the phone 240 times during the period of the alleged conspiracy. But Pedowitz—the Wachtell lawyer who represented Goldman—argued that there was nothing untoward in that relationship between one of the Street’s leading arbitrageurs and one of the Street’s leading M&A bankers, especially since Freeman had no idea—and passed lie detectors tests to prove it—that Kidder had an arbitrage department. “
While there was clearly a phone relationship with Siegel,” Pedowitz explained, “it was not much different from Bob’s many such relationships with arbitrageurs, wealthy investors, buyout firms, corporate officers, investment bankers, and lawyers. The phone at the time was the essential tool for those who made their living trying to gather ‘market color’ information so that they could trade profitably.” The remarkable admission from Pedowitz was not that Siegel and Freeman often spoke on the phone but in how close to the edge arbitrageurs, such as Freeman, needed to be on a daily basis “so that they could trade profitably.” It’s no wonder, then, that a number of M&A bankers, lawyers, and arbs crossed the line.

As for the near obsession that the arbs had for “making the calls” and trying to glean whatever shreds of information they could in order to gain an information advantage in the marketplace—a practice that certainly nowadays has the whiff of insider information—Pedowitz found the practice “common” among arbs generally and that the arbitrageurs at Goldman felt “free to ask questions about publicly announced deals and would only be supplied with information that the companies felt was in their interest to share and that the companies wanted the arbitrageurs to know.” Wachtell allowed that “seeking out information of this sort in this manner seemed consistent with insider trading case law as it existed at that time, and the practice of freely asking questions and fishing for information was common across the industry. During that period, companies would often find it advantageous to communicate information in one-on-one conversations with reporters and market participants.” (Now, of course, with the SEC’s issuance of Regulation FD, these sidebar conversations are supposedly no longer permitted, and no one market participant can have information unless everyone has it.)

Pedowitz kept Weinberg, Rubin, and Friedman and the rest of the Goldman
Management Committee apprised regularly of his findings.
“
They knew our view that the firm’s trading appeared to be proper,” he observed. “They knew also that the arrest complaint was riddled with errors and that the charges in the dismissed indictment seemed extraordinarily contrived. They also learned that the trading records of both Goldman and Kidder undermined the numerous suggestions of tips that were coming from Siegel. They also knew that both Wigton and Tabor were adamant that they, too, had done nothing wrong.” As a result, Goldman “fully supported” Freeman throughout the case, paying for his separate legal advice and keeping him as a partner, although he was moved eventually into the firm’s merchant banking division and out of arbitrage. In reality, Freeman spent most of his time on his defense and trying to clear his name. “I was, basically, in an icebox up in the merchant banking, which was very small at that point,” Freeman said. “I was isolated, almost never talked to people in the trading room because the next day, they might be subpoenaed and be asked, ‘What did you and Mr. Freeman discuss?’ ”

Yet, as convinced as Team Goldman was that Siegel and Giuliani had fingered Freeman irresponsibly and unfairly, the U.S. Attorney’s investigation of Freeman continued, even after the abandonment of the original indictment. More than ninety document and witness subpoenas were issued, and more than sixty witnesses were interviewed or appeared before the grand jury during the ongoing investigation. Many Goldman partners and associates recalled being very nervous when asked to appear before the grand jury as witnesses shortly after Freeman was arrested. “I was uneasy …,” recalled one former partner. “It was frightening. The thought that they could indict the firm—that would be life-threatening. I never dreamed I’d be going to a grand jury.” Bob Rubin and Steve Friedman also appeared in front of the grand jury, as did nearly every senior Goldman partner except for John Weinberg.

At one point, in June and July 1987—after the indictment had been dropped—Wigton waived his Fifth Amendment rights and spent four days being interrogated by Giuliani and his deputies. But the U.S. Attorney’s Office “was unable to elicit one bit of evidence against Mr. Freeman or one bit of evidence to corroborate Siegel,” according to Freeman’s attorneys. After the intense questioning, Wigton took a lie detector test, “which confirmed his denial of all of Siegel’s allegations.” Later, in 1989, “in an extraordinary move,” according to Freeman’s attorneys, Giuliani offered Tabor “complete immunity” in “exchange for offering anything that would corroborate Siegel’s allegations that he told Mr. Tabor that he was receiving inside information from Mr. Freeman.” Giuliani made this offer to Tabor despite the fact that he was “a man [the government] had
arrested and indicted in 1987 on sweeping insider trading charges and against whom it conducted a grand jury investigation for two years.” Tabor rejected Giuliani’s offer, though, because he could not “corroborate Siegel’s lies” and “it was impossible for him to implicate Mr. Freeman by telling the truth.” Tabor refused to “lie, even if it meant he would gain freedom from further prosecution,” is the way Freeman’s attorneys put it. The trading records were getting Giuliani nowhere either, and so he subpoenaed Freeman’s college records and the records of an architect who built a home for the Freemans in 1984 and 1985 “in his desperation to find any scintilla of criminal activity.”

——

N
EVERTHELESS
, G
IULIANI CONTINUED
to pursue Freeman, mostly through strategic leaks to
Wall Street Journal
reporters
Daniel Hertzberg and
James B. Stewart, both of whom would win Pulitzer Prizes in 1988 for their richly detailed and lyrical accounts of the insider-trading scandals. It would be difficult for readers not to be seduced by the portraits they painted. But Freeman and his attorneys insist—to this day—that the stories the two men were writing were largely inaccurate since they were based upon inaccurate information leaked by the prosecutors. “Trial by press release” was the way Freeman’s attorneys described Giuliani’s tactic. “Grand jury proceedings are never supposed to be public,” Freeman explained, “but it [is] well known that prosecutors leak grand jury material. It became so outrageous early in my case that my lawyers went to Judge Stanton to try to get it stopped. Giuliani, [Charles] Carberry, etc. leaked grand jury information to Stewart and Hertzberg throughout the case. Every bit of Stewart’s writings was from direct government leaks.”

This seemed to be the case right from the outset. For instance, within days of Freeman’s arrest, on February 17, Hertzberg and Stewart wrote a riveting narrative of Marty Siegel’s rise and fall, culminating in his guilty plea on two felony counts and his decisions to pay a $9 million fine, to forgo another $11 million in compensation due from Drexel, and to cooperate with Giuliani’s investigation. Siegel’s downfall was a “dream gone wrong” and his plea was “the biggest coup since the capture of Mr. Boesky.” Their
Journal
article also said that “it is known that Mr. Siegel is not the principal witness against Mr. Freeman but his testimony could be valuable corroboration if the government’s case against Mr. Freeman goes to trial,” although in the end the U.S. Attorney’s Office admitted that “Siegel had been the sole witness against Messrs. Freeman, Wigton and Tabor.”
Dean Rotbart, a former
Journal
columnist and the founder of the
Journalist and Financial Reporting,
criticized as “shocking” Stewart’s
failure in the Siegel story to disclose “his long-term symbiotic relationship” with Siegel, who, according to Freeman’s attorneys, Stewart used “as an anonymous source for stories concerning takeover battles and Siegel used Stewart to send the market messages that were beneficial to Siegel and his clients.”

A March 6 Stewart article claimed that “[r]ecords seized by the Government from Goldman Sachs & Co. show that Robert M. Freeman, the firm’s head of arbitrage, engaged in massive trading in stocks that later became targets of takeover bids” and then described the records in detail. “This established the pattern for the whole case,” Freeman explained. “This was an egregious violation of leaking confidential grand jury information to discredit me and give credence to the prosecutors’ absurd ‘tip of the iceberg’ claim.” A May 14 article included an interview with Giuliani in which he explained that several witnesses had been granted immunity and were now “providing testimony and records that could lead to more charges against the three men and to the naming of additional defendants.” Giuliani also took to the airwaves himself to make his case. On February 22, he appeared on CBS’s
Face the Nation
. “You can be sure we would never arrest the head of arbitrage at Goldman Sachs if he was the only witness,” Giuliani said of Siegel. On May 17, he appeared on
Business World,
a TV show, and reiterated his “tip of the iceberg” comment. “Imagine how frightened I was,” Freeman said. “He was throwing out all these lies.” Freeman remains incredulous about the quality of the
Journal
’s reporting, specifically Stewart’s. He cannot understand to this day why Stewart and Hertzberg did not pull the 13D disclosure forms that investors must file with the SEC when buying public equity securities. “I think he’s absolutely dishonest,” Freeman said of Stewart. “I think he just published anything that they gave him, never checked out one thing. Never did one ounce of investigation. Most of what we put together, all this stuff we put together, much of it was based on publicly available information. We didn’t have subpoena powers in Boesky’s stuff. We relied on public information—all the SCA stuff, all the Disney stuff, the Storer stuff about Boesky, the Continental Group stuff, the St. Regis stuff. That was all publicly available. How hard is it to get 13Ds on anybody? Not very hard, is it?”

Of course, even though Freeman’s name was on the complaint and the indictment, Goldman Sachs was still very much at risk for the potential criminal behavior of its partner, especially since it was a private partnership where the liability to individual partners was unlimited. “
As a matter of law, the firm was legally responsible for criminal activity,” Pedowitz said. “The law is that if you engage in criminal activity as an
employee, even if it’s in violation of your firm policy, if you are doing it in part for the financial benefit of the firm, that’s sufficient to create criminal liability for the firm, for the corporate organization—in this case, a partnership. So the legal responsibility was there almost by definition.” Since charging the firm was something the prosecutors could do at their own discretion at any moment, Goldman and its lawyers were walking a fine line, where they were careful not to do anything too rash that might invite prosecutorial ire while at the same time making sure the prosecutors were aware how wrong Goldman thought they were about the facts. “Obviously, we cared deeply about Bob,” Pedowitz continued, “and obviously we cared deeply about Goldman Sachs. Our objective was not to sort of punch [Giuliani] back in the eye because the last thing in the world we needed was for them to get angry at Goldman Sachs. If at the end of the day they had a criminal case, I didn’t want it being brought against Goldman. It was bad enough that it might be brought against Bob, but the last thing we wanted to have happen is to have all of those people who were working at Goldman Sachs basically see their firm disintegrate.”

——

F
REEMAN’S TRAVAILS ONLY
worsened. The prosecutors zeroed in on a brief conversation Freeman had had with Siegel, when Freeman was trying to ascertain if KKR’s previously announced $6.2 billion acquisition of
Beatrice Foods was in trouble. Freeman had earlier spoken with Bernard “Bunny” Lasker, an arbitrageur, close friend of Bob Rubin’s, and former chairman of the
New York Stock Exchange, who said he had heard rumors the deal was in jeopardy. In January 1986, when Freeman asked Siegel, KKR’s M&A banker, about this, Siegel replied, “Your Bunny has a good nose,” which went on to become one of the most infamous lines in Wall Street history, and soon enough the crux of Giuliani’s crusade against Freeman. While Freeman did sell his and Goldman’s Beatrice shares after the conversation with Siegel—thereby saving Goldman (and himself) a large amount of money—he and his colleague in the arbitrage department,
Frank Brosens, had received information from other sources, too, indicating the deal was in trouble.

The initial charges against Freeman and the two Kidder arbs referred to trading in Storer and
Unocal. Now, on the one-year anniversary of Freeman’s arrest, the
Journal
reported that from time to time both Goldman and Freeman personally had allegedly profited from trading in the stocks of companies such as
St. Regis Corporation,
SCA Services Inc., and Beatrice Foods based on insider information. In the case of St. Regis, the
Journal
article stated that Freeman knew that St. Regis was on
the firm’s “gray list” of stocks that could not be bought or sold because the firm possessed inside information about the company and what might happen to it. While the claim in the
Wall Street Journal
against Freeman for trading in St. Regis stock and passing information about it to Siegel was a bombshell, and extremely damaging to Freeman’s reputation and to Goldman’s, it was—unfortunately—not true. St. Regis was
not
on Goldman’s gray list and “thus both Goldman Sachs and Mr. Freeman were free to trade the stock” and “both did” without “the benefit of confidential information.” Freeman’s “individual trading was completely in compliance with Goldman Sachs’s internal rules,” his lawyers wrote.