Wednesday, February 23, 2011

Historic Criminals of Wall Street

Wall Street Sharks

Over the years Wall Street has had it's share of criminals, who left behind despair and loss. To fully understand what these criminals did we must examine the individuals themselves, what they did and what is the legacy that they leave behind as a result of their misdeeds. While no two are alike the lasting effects of their crimes can still be felt by Main Street to this very day. In the article below we will examine as well as gain a greater understanding of some of the largest Wall Street shar to include: Ivan Boesky, Michael Milken, Bernard Ebbers and Richard Whitney.

Criminals of Wall Street

A criminal is someone who has committed a crime and been found guilty in a court of law of committing that crime or others. Since the beginning Wall Street has always had the criminals trying to hide themselves among the honest business people. The crimes or scams that they have committed have been everything from insider trading to fleecing the companies they run and investors of hundreds of millions of dollars. Below are some of the most famous and unscrupulous Wall Street criminals.

Ivan Boesky 

Ivan Boesky in Time magazine
Ivan Boesky's career on Wall Street began in 1966 as a stock analyst. In 1975 he had started his own arbitrage firm. By the 1980's his net worth was estimated to be in the hundreds of millions. Ivan looked for companies that were the target of takeovers. He would then buy a stake in the company on speculation that news of a takeover was going to be announced and then sell the shares after the announcement for a profit. Throughout the 1980's corporate mergers and takeovers were enormous. It 1986 there was almost 3,000 mergers worth $130 billion. Before the deals were announced the price of the stocks were rising as a result of someone acting on inside information that a takeover or leveraged buyout was going to be announced. When something like this happens it a sign insider trading (where you are acting on information that is not made available to the public) and is illegal. This was indeed the case with the Pacific Lumbar three days before the deal was announced Boesky had purchase 10,000 shares. As result of these and other insider trading activities Boesky was charged with stock manipulation from inside information on November 14, 1986. He agreed to pay $100 million fine along with being banned from trading stock professionally for life and serve time in a federal prison . He cooperated with the SEC, taping his conversations with Junk Bond Firms and others. This led to both Drexel Burnham and Michael Milken being charged with securities fraud. The legacy that he leaves is one where greed at any cost does not work. If you break the law eventually you will be caught. As result of these actions of Boesky and others, Congress passed the Insider Trading Act of 1988. The act increases penalties for insider trading, provides cash rewards to whistle blowers, and allows individuals to sue for damages because of insider trading violations.




Michael Milken: In the 1980's Michael Milken was known as the junk bond king. A junk bond is nothing more than those corporations who have a high probability of not paying the money back. If you wanted to raise money through high yield or junk bonds Milken was the person to call. He used these bond to finance merger and acquisitions as well as leveraged buyouts (LBO's) for corporate raiders. What he was doing was nothing more than a complex pyramid scheme. When one company would default he would then refinance some more debt. In turn both Milken and the Drexel Burnham would continue to make their fees as a result of this action. Drexel Burnham had made at least half of it's profits from the work of Milken. Later on Milken also started purchasing stock in companies that he knew would become potential takeover targets. When Ivan Boesky was charged with insider trading in 1986 he helped implicate both the firm and Milken in several insider trading scandals. This led to criminal charges against the firm and over 70 charges against Milken. He plead guilty and was sentenced 10 years in prison and paid $1 billion in fines. It is argued that the Savings and Loan crisis in the late 1980's and early 1990's resulted because so many of the institutions held large of amounts of Milken junk bonds. This resulted in a huge government bailout. After he was released from prison he focused his attention on his foundation which supports cancer research, an economic think tank and education.




Bernard Ebbers


Bernard "Bernie" Ebbers was the CEO of a small long distance company called World Com. With in 17 years he had taken the company to a position of dominance in the telecommunications industry. By 2002 the company had filled the largest bankruptcy in U.S. history. What happened is that over a six year period is the company had made 63 acquisitions the largest one was MCI in 1997. This created several problems for the company in that it can be difficult to integrate the old company with the new. Second it threw massive amounts of debt on the company's balance sheet. To keep earnings growing the company would write millions of dollars in losses of the company it acquired in the current quarter and then have smaller losses going forward so that there was the perception that the company was making more money than it really was. This gave World Com the ability to take smaller charges against its earnings every year and spread the large losses over decades. All of this worked great until the Justice Department denied the company's acquisition of Sprint in 2000. When the company filed for bankruptcy they admitted that it inappropriately booked these losses from previous acquisitions from the period of 1999 to 2002. Ebbers also took personal loans from the company and resigned as CEO in April 2002. He was convicted of fraud, conspiracy and filling false documents with the SEC (Securities and Exchange Commission). He was sentenced to 25 years in prison. Ebbers legacy created tighter reporting standards with the creation of the Sarbanes Oxley Act in 2002 as well as the forbidding of personal loans to officers of the company and stiffer penalties for financial related crimes.

Richard Whitney 


Richard Whiteny was the President of the New York Stock Exchange from 1930 to 1935. On October 24, 1929 he bought shares in many companies and the market had dramatic turnaround. This allowed him to be viewed as a hero to the market but did little to prevent it's inevitable crash five days later. By 1930 he was made the President of the New York Stock Exchange. Whitney, was an unlucky gambler who played penny and blue chip stocks aggressively. To cover his losses he would borrow money from friends and business acquaintances. This would allow him to buy even more stock in a market that was collapsing, which made his problems even worse. In spite of all of this happening he continued to live a lavish lifestyle. When he could no longer borrow any more money he began to embezzle money from the from his customers as well as an organization to help widows and orphans. As time went on his fraud continued to become more perverse when he looted the New York Stock Exchange's Gratuity Fund of up to $1 million. This was fund was suppose to pay $20,000 to each members estate upon death, as treasurer he decided that it was proper for him to steal from it. After an audit discovered the embezzlement he was charged with two counts of embezzlement and sentenced to 5 to 10 years in prison. The newly formed Securities and Exchange Commission required more frequent audits, it set caps on how much debt firms can have and customer accounts are now separate from the property of brokerage firms. This is the legacy that Richard Whitney left to Main Street.

Conclusion

Since Wall Street's earliest days there have been criminals who will try to disguise themselves as honest business people. Many of these crooks rose quickly to power only to have a hard crash landing in the end. This was exactly the case with Ivan Boesky, Michael Milken, Bernard Ebbers and Richard Whitney. While nothing will ever excuse what they did it, in Milken's case he has tried to do some good by having a foundation for the benefit of cancer patients, economics and education. What their examples show us is that in spite of all the regulations people will still try to find loop holes around them or simply disregard the law for one purpose greed at all costs. When these criminals have been exposed the government will then enact laws to protect the public from this happening again. This is the legacy that the criminals of Wall Street have on Main Street.

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