Is Wall Street Changing Its Ways?

ON Jan. 7, 1986, Goldman Sachs stock trader Robert Freeman became nervous that there might be a problem with Kohlberg, Kravis, Roberts & Co.'s (KKR) takeover of Beatrice Companies. Beatrice Companies stock was falling and Mr. Freeman, a Goldman partner, had invested $66 million of the firm's money in the deal and millions more of his own.

To try to find out why Beatrice stock was falling, Mr. Freeman called Henry Kravis, the head of KKR. Freeman then called another major stock trader who had unloaded a huge stock position, and eventually the investment banker working on the deal. Last Thursday, Freeman pleaded guilty to insider trading for making the last phone call - to the investment banker, Martin Siegel, then at Kidder, Peabody & Co.

Today, investment bankers and Wall Street traders say such access would be highly unusual. ``Back then, you had to talk to the arbitrageurs [such as Freeman] to get them on your side of a takeover,'' says one investment banker who used to work at Kidder, Peabody & Co.

John Castle, a partner in the investment banking firm of Castle Harlan Inc., says communication between traders and bankers is now done ``much more discreetly.'' Mr. Castle says some arbitrageurs - individuals who try to make money on differences in stock prices and on takeovers - now don't want to hear nonpublic information. ``They are now involved in more independent analysis,'' he says.

However, Perrin Long, a Wall Street analyst with the firm Lipper Analytical Inc., says arbitrageurs still operate with one ear to the telephone. ``That's the way Wall Street runs, it's the biggest rumor mill in the world,'' Mr. Long says. But Long also agrees it would be unlikely today for the investment bankers to talk to Wall Street pros like Mr. Freeman. ``They would be very reluctant to talk to the arbs,'' he says.

Former US Attorney Rudolph Giuliani, who brought the case against Freeman, says the changes on Wall Street have come about because his office ``convicted more people than any US attorney before me.'' He estimates he prosecuted more than 50 cases involving securities fraud, mail fraud, and wire fraud. The most famous case was the conviction of Ivan Boesky, a former arbitrageur who paid a $100 million fine and received a jail sentence.

Mr. Giuliani, now running for New York City mayor, maintains, ``Those cases changed the way in which the ethical and legal climate on Wall Street now operate.''

New York Stock Exchange officials, however, say they have no evidence that all the cases have diminished insider trading. ``You really can't measure if it has abated or not. We've had run-ups [in the number of investigations] before and run-ups now,'' says an exchange spokeswoman. Exchange officials who oversee the markets declined to be interviewed.

There is no doubt that individuals like Freeman will always have an advantage over the ordinary investor.

For example, he was able to call Mr. Kravis, who would be difficult for the ordinary investor to reach. Although Kravis gave him no inside information, Freeman concluded that ``his [Kravis's] tone had been considerably different than in other conversations we had had. When he spoke with me on Jan. 7, he was very abrupt and appeared anxious to end the conversation quickly.''

Even knowing an individual's normal tone of voice is important. ``When I talk to the president of a brokerage house, I can tell a lot in the tone in which he answers a question,'' Long says.

Then, on that same day, Freeman noticed that a block of 350,000 shares of Beatrice stock exchanged hands. Since the sale was executed by Goldman Sachs, he knew the seller was an arbitrageur by the name of Dick Nye. He called Mr. Nye to ask him why he sold the stock. Freeman recalls, ``He denied knowing of any problem, but that didn't convince me that a problem didn't exist.''

There is almost no way an individual could find out who had traded a block of securities. Although firms report they traded blocks of stock, they never disclose the name of the customer. One trader at a Wall Street firm says such information is now screened from other parts of her firm.

On the next day - after Freeman had reduced his personal holdings and Goldman's position, he received a phone call from Bernard (Bunny) Lasker, a trader on the floor of the New York Stock Exchange. Mr. Lasker told him that he had heard from another arbitrageur that there was a problem with the Beatrice deal.

Freeman then called Martin Siegel, the investment banker representing KKR. ``I told Mr. Siegel that I had heard there was a problem with the Beatrice LBO [leveraged buyout]. He asked from whom I had heard that. When I answered Bunny Lasker, Martin Siegel said, `Your Bunny has a good nose.''' Freeman then sold his stake in Beatrice.

Freeman did not think about the conversation with Siegel again until federal agents marched onto Goldman Sachs's trading floor and arrested him.

(At the same time, they also arrested Timothy Tabor and Richard Wigton - Mr. Wigton in handcuffs. Last Thursday, the government formally dropped the investigation of Mr. Tabor and Wigton. Although the acting US Attorney, Benito Romano, refused to apologize for the arrests, Giuliani offered something of an apology at an informal press conference on 42nd Street.

(``It was a mistake to move with that case at the time I did and to that extent I should apologize for that,'' Giuliani said.)

Although it's not impossible for a Wall Street pro like Freeman to get into trouble again, as a result of the publicity, it appears to be a lot less likely. Goldman Sachs says it has now strengthened its own compliance procedures to ensure that its employees ``adhere to the highest standards.''