Boesky Inquiry Spreading, Sources Say

NEW YORK — Some of Wall Street’s leading investment firms and deal-makers have been implicated in the widening scandal touched off by federal testimony being given by stock speculator Ivan F. Boesky, sources said Tuesday.

Officials of the Securities and Exchange Commission have served subpoenas on as many as 37 firms and individuals, touching on the highest levels of Wall Street’s merger community.

The SEC on Friday disclosed that Boesky had agreed to settle charges that from February, 1985, to April, 1986, he had traded on secret information about impending mergers. Boesky agreed to pay a penalty of $100 million, plead guilty to a felony charge of securities fraud and submit to permanent barring from the U.S. securities business.

Sources say Boesky also agreed to a request from the U.S. attorney’s office in Manhattan to gather further evidence by secretly taping telephone calls with associates and wearing a hidden tape recorder in personal meetings. The taping began at least six weeks ago, sources said.

Sources on Wall Street and elsewhere said that among the investment firms whose trading and telephone records have been subpoenaed by the SEC are Lazard Freres & Co. and Goldman, Sachs & Co., two investment houses that advised parties in merger deals that have figured in the SEC’s cases against Boesky and Dennis B. Levine. Executives were unavailable for comment at both firms.

Levine is the investment banker who passed non-public information on to Boesky and who himself made $12 million through illegal trading before his arrest last May 12.

Among individuals known to have been subpoenaed are several executives at the firm of Drexel Burnham Lambert, the nation’s leading underwriter of risky “junk bonds” and Levine’s employer at the time of his arrest in May. Junk bonds were perfected by Drexel as a financing vehicle for hostile takeovers.

These executives include Michael Milken, 40-year-old head of Drexel’s Beverly Hills-based junk-bond trading operation and the mastermind of the entire junk-bond market. Wall Street executives said they understood that, at least in one conversation, Boesky taped Milken.

Milken’s group contributes an estimated 25% of Drexel’s revenue and a higher share of the firm’s profits. Milken himself is among Wall Street’s best-paid figures--Business Week estimated his earnings last year at $40 million, and Forbes has estimated his net worth at more than $500 million.

Drexel has drawn extraordinary attention in the insider trading scandal because it represents an important link between Levine and Boesky; Boesky was an important client of the firm, which in the last year raised more than $600 million from large investors to participate in a Boesky-managed speculative fund. The firm has also provided financing for some of the largest takeover deals of recent years, including many of those in which Boesky invested.

A rumor sweeping Drexel offices Tuesday, according to people familiar with the firm, was that Milken had offered to resign to diffuse the attention being directed at the firm. Drexel Chairman Robert Linton categorically denied the story.

Others Also Subpoenaed

“I’m amazed that such rumors exist,” he said.

Also subpoenaed, sources said, were Lowell Milken, Michael Milken’s brother and an executive of the Beverly Hills unit, and Martin A. Siegel, a Drexel mergers and acquisitions specialist who recently joined the firm from Kidder, Peabody & Co. The subpoenas were said to have been served about half an hour before the SEC disclosed its probe of Boesky at 4 p.m. EST Friday.

Sources said the subpoenas require the individuals to begin reporting to the SEC for depositions about the end of this month.

Another subpoena was said to have been served on Carl C. Icahn, the corporate raider whose acquisition drives have often inspired trading by Boesky, who owns a Westchester County, N.Y., estate near Icahn’s. Icahn could not be reached for comment, and whether he is a target of the probe or is being asked to provide information pertaining to others could not be determined.

A spokesman for another firm, Los Angeles-based Jefferies & Co., confirmed that its chairman and chief executive, Boyd Jefferies, received an SEC subpoena in connection with the case. Jefferies & Co. is a brokerage specializing in the trading of large blocks of stock for institutional investors and takeover entrepreneurs.

But the spokesman, Frank Baxter, said from New York: “We have not engaged in insider trading.”

Speculation about where the SEC investigation is heading ranged far beyond those firms. One source said the SEC has issued as many as 37 subpoenas.

‘Surprises’ in Store

“What we have out there is an extremely long net,” said an executive of a leading investment bank. “We’ve been told that there are going to be some surprises in the next few weeks.”

Others said the probe was sure to begin involving leading law firms specializing in mergers and acquisitions.

There are other signals that the SEC intends to broaden its probe to cover virtually the entire spectrum of merger and acquisition activity on Wall Street. Many of its targets, sources say, have made huge fortunes from insider trading. “What some of these people made makes what Boesky got look like a pittance,” said one federal official familiar with the case.

The fact that certain individuals have received subpoenas does not mean that they have committed any wrongdoing or that any civil or criminal charges will be filed against them. Those individuals who have been subpoenaed may not be the targets of the investigation but may be in a position to supply information on the activities of others.

Focus on First Boston

Wall Street industry officials said they believed that SEC attention is focusing on the investment firm of First Boston Corp. and its co-director of mergers and acquisitions, Bruce Wasserstein. A spokesman for First Boston said, however, that no subpoenas have been issued to the firm or to any member of the firm.

Other professionals said the SEC was interested in the activities of T. Boone Pickens Jr., one of the nation’s premier corporate raiders, whose takeover bids for Gulf Oil, Phillips Petroleum and Unocal provoked a wide-ranging restructuring of the oil industry in the last three years.

Pickens, reached at his Amarillo, Tex., headquarters, said he had received no subpoenas and no inquiries of any kind from the SEC or from federal prosecutors. Referring to Boesky and Icahn, both of whom participated in his oil company campaigns, he said, “I don’t even have these people asking me things.”

The disclosure that Boesky may have been taping conversations over the last few months shocked many of his contacts. Others were bemused.

“I talked to Ivan on a deal about four weeks ago,” said one investment banker at a leading firm, “and I remember getting off the phone and thinking how strangely Ivan sounded. It was if he was speaking for public consumption.”

Law enforcement sources called the practice of having a defendant tape conversations with other possible wrongdoers “absolutely standard operating procedure” at the U.S. attorney’s office in Manhattan, in the words of one official close to that agency. Others noted that the practice is not part of the normal arsenal of the SEC but that the hallmark of recent insider trading cases has been strong cooperation between the two agencies.

Princeton Gift Withdrawn

In other developments in the Boesky case, the millionaire financier told Princeton University officials that he was withdrawing a $1.5-million gift to the institution for its construction of two buildings. The gift represented the bulk of the money pledged for the project, a Princeton spokesman said.

Boesky, whose son is a junior at Princeton, told the university in a letter that “under current circumstances” he could not provide the gift.

In New York, a special compliance officer appointed by the SEC began his task of monitoring Boesky’s stock trading. Under the terms of his SEC settlement, Boesky has until April, 1988, at the latest to wind down his participation in his securities firm. During that span, Gerald Rath, a Boston securities attorney, will oversee his trading to ensure that no securities violations take place.

Rath, an expert in brokerage litigation, said Tuesday that he will review all of the firms’ daily transactions but that his actual practice would probably evolve over the next year or so. “There is no exact precedent for this job,” he said.

Times staff writer Al Delugach, in Los Angeles, contributed to this story.