The Insider (23 page)

CHAPTER 21

Oliver walked slowly through Central Park, dodging roller bladers and joggers making the most of the late-afternoon sunshine. As he strolled, he reflected on how it had all happened. How he had become involved in this ugly business.

Five years ago he and Bill McCarthy had met on a cool, rainy April evening in a smoky, out-of-the-way-of-anyone-from-Wall-Street bar in Greenwich Village and hatched a plan to make themselves fabulously wealthy. The scheme would be laced with risk, but the rewards could be tremendous.

Oliver, then a member of J. P. Morgan’s fledgling equity-trading group, had problems. Morgan executives were uncomfortable about several large stock trades he had recently executed. He was being hit with sticky questions from the executives concerning whether or not he had obtained the proper internal approvals and therefore even had the authority to make the trades. More important, there were whispers among coworkers that Oliver had obtained material, nonpublic information concerning the pharmaceutical company in question before purchasing its shares, then quickly sold the stock a month later at a huge profit when the company announced Food and Drug Administration approval of a new blockbuster drug.

Morgan’s senior officers were understandably concerned because they realized that the firm’s stellar reputation would come under attack from the press and competitors if a major insider-trading scandal broke. The old-line commercial bank was gearing up at that point to make a full-scale push into the investment banking business, and the last thing the executives wanted was a scandal splashed all over the front page of every newspaper in the world. On the evening Oliver first discussed the plan with McCarthy, he had just come out of a meeting with his superiors at Morgan about the trades in question, and he was feeling the heat. He was ready to leave Morgan, and they were ready to see him go. And at that point Oliver resented his father-in-law so intensely he would have done anything to make enormous amounts of money on his own.

Bill McCarthy had recently lost his longtime business partner and best friend, Graham Lloyd, in a boating accident. Now he had new partners. McCarthy was the owner of record of Lloyd’s 50 percent stake in McCarthy & Lloyd, purchased from Lloyd’s widow per an automatic buy-sell agreement executed by the two men when they had founded the firm in 1989. But a shadowy European group was the real financial muscle behind the transaction, because McCarthy didn’t have the money to pay for Lloyd’s shares. The stock hadn’t cost much— M&L was on the verge of bankruptcy—but McCarthy had next to nothing in his personal bank accounts, so he had taken on partners.

The new partners wanted McCarthy to generate cash quickly, and they weren’t particularly concerned about how he did it. A year before the meeting, McCarthy & Lloyd—upon McCarthy’s personal order—had made a disastrous investment in a Florida high-tech company.

The declining financial performance of the Florida company and the inability of its executives to raise fresh capital had almost wiped out the value of McCarthy & Lloyd’s investment, which in turn would have wiped out McCarthy & Lloyd’s own thin capital layer. But ultimately the firm had survived—with help from the new partners. McCarthy had been guardedly optimistic about the sudden, seemingly positive turn of events, but his new partners, who had originally claimed they would be passive investors, instantly became aggressive, demanding more from him than he could have ever imagined.

Within days of their meeting in Greenwich Village, Oliver and McCarthy had agreed to the terms of Oliver’s employment at M&L. Oliver would become the head of a new equity arbitrage desk and receive a one-million-dollar annual salary, substantial annual bonuses, and a piece of Bill McCarthy’s share of McCarthy & Lloyd— the Europeans weren’t willing to bargain with their 50 percent stake in the firm. In return for his huge compensation package, Oliver would put together a small, discreet ring of Wall Streeters with access to nonpublic information concerning companies about to be taken over, and the McCarthy & Lloyd arbitrage desk would execute the trades and earn the substantial profits the information would generate.

The obvious risk embedded in the scheme was that law enforcement authorities would uncover the ring. Oliver knew that the easiest way for the authorities to prove that an insider-trading ring existed was to identify personal connections within the ring and find a money trail leading from individual to individual. So he carefully instructed the insiders to make calls only from pay phones when arranging face-to-face meetings, which were kept at a minimum. The insiders would receive their compensation for the information they provided Oliver in the form of McCarthy & Lloyd stock, which, upon Bill McCarthy’s death, would be distributed to an offshore partnership entity the insiders had formed. After the insiders or their heirs had received their shares from the partnership, the stock would be repurchased by McCarthy & Lloyd over a four-year period at a price to be determined using a preset multiple of McCarthy & Lloyd’s book value. Oliver and the other insiders would essentially become shadow equity owners of McCarthy & Lloyd.

Within six months Oliver had recruited four men to become insiders. Instead of approaching investment bankers who were working on deals in secret and knew about them before the rest of the market, Oliver had recruited four back-office people who worked in compliance areas of brokerage houses and investment banking firms on Wall Street. Investment bankers earned huge bonuses and typically came from monied families to begin with. Oliver reasoned that they had far less incentive to trade on the inside and put themselves in legal jeopardy. Back-office people, on the other hand, earned much less. They had a great deal more incentive.

Oliver knew that compliance areas maintain highly confidential lists of companies in which individuals at the investment bank cannot trade for the firm or themselves. As a matter of policy, investment bankers who arrange takeovers notify their firms’ compliance areas about companies involved in takeovers on which they’re working as soon as a deal is in the works—well before it becomes public knowledge—so people at the firm, specifically equity traders, won’t deal in the shares of either the target or the attacker. The Securities and Exchange Commission and other federal and state authorities take a dim view of brokerage firms that trade in the shares of companies for whom they are arranging financial transactions in the weeks before those transactions are announced. The brokerage firms can easily anticipate sharp rises or drops in stock prices that the rest of the market can’t—clearly insider trading. Even the appearance of impropriety can cause trouble for the firms.

The compliance groups attempt to make certain no one at the firm trades in the shares of such companies by putting out a “gray list”—a list of stocks that can’t be bought or sold by the firm as long as they remain on the list. Professionals at the firm have access to the gray list and could use the list to secretly trade in the stocks and make themselves exceptional profits, except for one small detail: Some stocks on the gray list are decoys— stocks that aren’t involved in takeovers and which won’t necessarily generate huge overnight profits. This snag helps keep people honest and assists the firm in identifying individuals who violate the gray list. Only a few people in the compliance group know exactly which stocks are hot and which are decoys. That kind of knowledge makes those individuals invaluable—and vulnerable—to a person such as Oliver Mason.

The four men Oliver recruited into the ring—Tony Vogel, David Torcelli, Kenny Serrano, and Peter Boggs— were midlevel executives in compliance groups at major Wall Street investment houses. The men had large immediate families—at least four children each—and therefore large bills to pay. Oliver picked them carefully, as he had Jay West, making certain that each man had a significant financial need without family money to fall back on. Nothing about the ring was ever recorded, and the only tangible evidence of its existence was the alteration of Bill McCarthy’s will by his personal attorney to include the insiders’ offshore partnership entity as an heir. However, the insiders had no say at all in the management of McCarthy & Lloyd. Each man was provided with a copy of McCarthy’s new will as well as a separate document, signed by all six parties, whereby McCarthy agreed not to change the terms of the will without written approval of each insider. This caveat would allow McCarthy to buy them out early if that made sense for all parties involved.

In its first full year of operation Oliver’s insider-trading ring earned McCarthy & Lloyd fifty million dollars. After that, profits only improved. The already booming takeover market on Wall Street accelerated with the strong economy. By the late nineties the annual value of takeovers in the United States had grown to almost one trillion dollars—plenty of volume for a small arbitrage shop at a boutique investment bank to make unsightly profits on sure-thing bets.

For Oliver, it became like shooting fish in a barrel, only easier. In fact, the shooting became so good, he began intentionally picking a few losers—stocks he had no inside information on and actually hoped
wouldn’t
increase quickly in value—to throw anyone who might be watching too closely off the track. He was careful, buying as far in advance of the takeover as possible, and spreading his purchases over a wide number of brokers. There was never even a hint of trouble.

The only negative for the insiders—other than for Oliver, who received his annual million-dollar salary and huge bonuses—was that they received no cash for the valuable information they provided to the arbitrage desk. On paper, however, they were millionaires. Since its low point five years before, the value of McCarthy & Lloyd had skyrocketed. Once back on his feet with the fifty million Oliver had earned in the arbitrage desk’s first year of existence, Bill McCarthy had beefed up the staff in every area of the firm, and now it was competing against the bulge-bracket firms in corporate finance and sales and trading and making serious money. But Oliver remained the cash cow, and his reputation within the firm became legendary to the point where some simply referred to him as “God.”

Though the value of the insiders’ shadow ownership in McCarthy & Lloyd had risen dramatically, it wasn’t an asset that provided any immediate value. It hadn’t put anything in their pockets, and they couldn’t use it as collateral because the partnership didn’t actually take possession of the shares until McCarthy was dead. They had all rationalized that they were doing this for their children, building a huge nest egg for them. But cash needs grew for the four men. There were bigger houses and newer cars that had to be purchased; their children were approaching college age, and there would be staggering tuition bills very soon. The insiders had taken huge risks and decided it was time to see the fruits of their labor. The hell with the future and a nest egg later on. They wanted their piece of the pie now.

Oliver had deftly defused dissension in the ranks with annual five-figure cash loans, which he delivered to each man in briefcases filled with small bills. Oliver funded these loans out of his own pocket, carefully withdrawing the money from many different accounts over time so nothing could be traced. The men never deposited the money from Oliver. They kept it at home, literally under their mattresses. Fire and theft were constant risks, but they had no choice. Putting the cash in a bank might have alerted the IRS to the scheme during an audit. The men were temporarily placated, and the profits kept piling up at McCarthy & Lloyd.

Oliver had believed that the success of the arbitrage desk would continue forever, even as he had sat in the living room of Bill McCarthy’s Park Avenue apartment the past March wondering why McCarthy had needed to see him so urgently. Even as the tall man with dark red hair and green eyes, wearing an inexpensive-looking wool suit, followed McCarthy into the room, Oliver had remained his typically brash and confident self. He had believed paradise would last forever—until the moment McCarthy had uttered the words “Kevin O’Shea, an assistant U.S. attorney for the southern district of New York.” With those words Oliver’s world had shattered, because he knew exactly why O’Shea was there. The insider trading at McCarthy & Lloyd had been uncovered.

For several heated seconds Oliver had actually considered bolting past the other men and heading for the apartment door and a life on the run. He saw no handcuffs on O’Shea’s belt, but Oliver was certain he was about to be led downstairs in shackles and loaded into a police cruiser, where he would sit on his hands and stare at the backs of two policemen through a metal screen as they drove him downtown for booking.

But he had come to his senses and realized that running was out of the question. He probably wouldn’t make it out of the building before being apprehended, and if he did, they’d find him sooner or later. He had no idea how to remain one step ahead of the law and no stomach for being hunted. Besides, he had figured out as he stood staring open-mouthed at the Justice Department official that there must be something to listen to, as O’Shea hadn’t snapped the cuffs on him right away. He’d been right.

O’Shea explained that he had uncovered several situations where certain trades appeared suspicious—where the McCarthy & Lloyd arbitrage desk had purchased stock immediately prior to a takeover, and where he was certain he could prove insider trading. However, the word had come down from on high that no one wanted Bill McCarthy to get caught up in a nasty situation. McCarthy had major-league political connections, and those connections wanted him and his contribution money to remain clean, so O’Shea was ready to offer Oliver a deal. The arbitrage desk would have to offer up a sacrificial lamb to take the heat for the insider trading, and it would have to abstain from any arbitrage activities for six months. If subsequent instances of insider trading were uncovered, everyone, including McCarthy, would be locked up. The sacrificial lamb would be a junior person, marketed as a rogue trader acting outside the bounds of his authority, and his or her arrest and prosecution would pacify those at the U.S. attorney’s office who had already spent time on the investigation.