Wall Street’s 10 Most Notorious Stock Traders

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Inside information is as old as free markets, and for a long time it was regarded simply as a perk of office. In the 1920s, specialists on the exchange routinely provided friends with information from their order books so that their friends could make near-risk-free speculations. When the SEC began to regulate Wall Street more closely, the use of inside information became illegal, even though it has yet to be precisely defined. There is no question that someone with a fiduciary duty, such as corporate management has to its stockholders, may not violate that duty by leaking inside information or taking advantage of it personally in ways that would damage the stockholders. But beyond that lies a large gray area.

Boesky operated mostly in that gray area, but he attracted the SEC’s attention by making large bets on mergers that were announced only a few days later. It turned out that he was receiving inside information, sometimes by providing leakers with suitcases full of cash. Caught dead to rights, Boesky agreed to provide information on others and to let investigators tap his telephone and listen in on his negotiations.

The story broke in mid-November 1986, and dozens of Wall Street figures received subpoenas. Some, such as Carl Icahn and Michael Milken, were famous; many were not. In the end Boesky served two years in jail and forfeited $100 million in “ill-gotten gains.” Milken, who had pioneered the modern high-risk bond (often badly misnamed “junk bonds”) to finance such risky start-up companies as the Cable News Network (CNN), eventually pleaded guilty to several counts and was sentenced to 10 years, but he served slightly less than two. He also paid a fine of $200 million and disgorged over $500 million in ill-gotten gains. His firm, Drexel Burnham Lambert, once the most profitable investment bank on Wall Street, went bankrupt.

Boesky could have done worse without some help from the SEC, which allowed him to sell $440 million worth of securities out of the about $2 billion he then controlled, before his situation became public knowledge. The market was sure to respond adversely to Boesky’s fall (in fact the market fell over 2.3 percent on the day the news was released). In effect, Boesky was permitted to trade on inside information, this last time with the blessing, indeed active cooperation, of the SEC.

Those on Wall Street who took a hit were outraged. But the regulators said their actions were necessary to prevent an even bigger decline. Had Boesky not sold ahead of the announcement, the SEC argued, his margin debt would have forced a much larger liquidation of his securities, and a full-blown panic might have resulted.

Bernard Madoff

The full extent of Bernard Madoff’s crooked dealings will not be known for a considerable period, but it already promised to be the biggest scam in the Street’s long history, unprecedented in both size and longevity.

By Madoff’s own admission, he was operating a Ponzi scheme, paying steady dividends to early investors out of the principal paid by later investors. The steady, large dividends then attracted more investors, and the cycle escalated. The scheme fell apart in early December 2008 because the bear market created demands for redemptions that Madoff could not meet, but by then it had reached around the world.

It appears to have been what is known as an “affinity fraud,” when the defrauder himself belongs to the groups he bilks. In this case, many of Madoff’s victims were members of the Palm Beach Club, the luxurious, largely Jewish country club in Palm Beach, Florida, to which Madoff himself belonged. Sadly, many of his clients were charities and eleemosynary institutions such as colleges. Some have been wiped out by Madoff’s peculation. One particularly successful aspect of the scheme was its exclusivity. Madoff deliberately made it difficult for people to become his clients, adding to the cachet.

It is fitting, perhaps, that the biggest fraud in Wall Street history should be exposed at the end of the Street’s greatest extended bull market, which saw the Dow Jones Industrial Average rise from under 1,000 in 1980 to over 14,000 in 2007. The bull market made tens of millions far richer than they ever thought they would be. Madoff’s Ponzi scheme made a few thousand of them poorer than they ever thought they would be.

Both outcomes, it would seem, are inherent aspects of capitalism.