Rudolph Giuliani, seen here as mayor of New York, helped boost his political prospects by targeting a Princeton brokerage linked to Michael Milken.
|All through 1988, an ambitious U.S. attorney named Rudolph Guiliani was sending out federal agents to investigate racketeering in Princeton, not some New York Mafia hangout.
Giuliani was investigating corruption in the stock trading business, and long-established Princeton/Newport Partners was in his sights.
It was said that Giuliani wanted to nail Michael Milken, king of Wall Street junk bonds, and that he hoped to parlay his work as the federal prosecutor in Manhattan into the mayor's seat in the media capital of the world.
He succeeded in both, and in the process destroyed a Princeton company that over the previous 20 years had gained a reputation for sober investments and financial excellence — often through dealings with the $3 billion New York firm of Drexel Burnham Lambert Inc.
When indictments charging five securities professionals at the Princeton firm were announced, it marked the first time federal authorities went after alleged stock swindlers with the racketeering law, which had been established to deal with drug traffickers and other organized crime groups.
The five Princeton/Newport executives were James S. Regan, 46, a managing partner; Jack Z. Rabinowitz, 41, a general partner; Charles M. Zarzecki, 40, partner and chief trader; Paul Berkman, 41, partner and trader; Steven B. Smotrich, 33, comptroller; and Bruce L. Newberg, 31, a securities trader at Drexel's high yield bond department until a few months before the indictment.
Defense attorneys cried foul immediately, saying Giuliani and the government were using the racketeering charges to threaten the traders to testify in other cases of corruption on Wall Street, mainly by Drexel genius Milken.
The employees of Princeton/Newport, also based in Newport Beach, Calif, and Newberg said through lawyers that they refused to give in to the government's "pressure tactics" when the feds came around asking questions about Milken's securities dealing.
The charges rose from an alleged scheme involving the false sale of securities between the two firms that helped the firm avoid regulatory disclosure requirements and create more than $13 million in phony tax losses, the indictment said.
The Princeton executives were accused of aiding Drexel in hiding certain holdings by "parking" securities — a practice intended to hide the true ownership of shares to avoid reporting requirements of the Securities Exchange Commission or the Internal Revenue Service — and manipulating stocks, a Manhattan judge ruled.
The five Princeton/Newport employees, some partners in the firm, sold blocks of securities to other firms while entering into a "secret agreement" to buy the blocks back at a pre-arranged price that was set independent of the true market value of the parked stock, the judge found.
This process allowed Princeton/Newport to realize a short-term tax loss, which prosecutors estimated reached $13 million by the end of the two-year period, then buy the securities back to prevent a loss for Drexel.
The executives were snagged by numerous tape recordings and 60 boxes of documents seized in December of 1987 when about 50 federal marshals raided Princeton/Newport.
The telephone conversations, which took place in the trading rooms of the two firms. Prosecutors said the calls, which named the executives, were made by the firm in the normal course of business to assure the accuracy of the trades.
Drexel, one of the largest firms on Wall Street, had been implicated in several other cases of fraud that had sparked a full-fledged government investigation into illegal trading and other market manipulations.
The Princeton/Newport case received national attention for its precedent use of racketeering laws and for its connection to the prosecution of Drexel's former "junk bond" trader, Michael R. Milken, who was the direct superior to the convicted Drexel trader, Newberg.
Defense attorneys for the six traders claimed the government's prosecutors were threatening their clients with charges of racketeering unless they testified for the prosecution in two specific cases involving Drexel — one involving Milken, and another involving an executive at Goldman Sachs & Partners, another huge Wall Street firm.
Milken was said to have acted in stock manipulations and client de-frauding with Ivan Boesky, the prolific speculator who was convicted in 1986.
The government's widespread investigation of Wall Street insider trading throughout the late '80s gained speed when officials finally snared Boesky.
Boesky, the government found, in 1984 had entered into a secret agreement with the firm to de-fraud Drexel clients, trade illegally on insider information, manipulate the price of stocks and violate a host of other securities regulations.
The government proved Boesky had been a front for a series of securities violations for which Drexel had paid him millions under the guise of consulting fees. Officials also said Boesky had helped Milken destroy documents that proved the firms involvement in illegal insider trading.
The most serious of these allegations, and those most damaging to the firm's image in the eyes of clients and the Securities Exchange Commission, against Boeski were those that he and other Drexel employees were defrauding clients.
After gaining evidence against them, the government shifted its investigation and put the pressure on the Princeton/Newport executives in hopes they would expose their colleagues in exchange for a lesser sentence.
Boesky had already agreed to testify against the Drexel trader in exchange for parole from the sentence he was serving for these actions.
Soon after the resulting indictment of Princeton/Newport, partners began pulling out their money. After 20 years in business, Princeton/Newport was dead and its officers were screaming that nobody from the company had even been convicted yet.
Within 15 months, however, all five and Newberg would plead guilty and be sentenced to prison terms of three to six months and fines that ranged from $50,000 to over $1 million. They were also sentenced to probation and community service.
It was a lenient sentence, too, considering racketeering carries penalties of up to 20 years in prison and the confiscation of all earnings and property of the crooked business.
In the original indictment, all of the traders were charged with one count of conspiracy, one count of racketeering and one count of racketeering conspiracy. The five Princeton/Newport employees were also charged with 32 counts of mail and wire fraud, while the Drexel trader was charged with 26 counts of mail and wire fraud.
If convicted on all counts, the defendants would have faced 20 years in prison on each of the racketeering counts, five years in prison on each of the remaining counts, and $250,000 in fines on each count for a total of $18.75 million.
Some defense lawyers interpreted the lenient sentences as a sign that the judge had treated the offense as corporate crime, not racketeering, which proved the government was just trying to pressure their clients into testifying in bigger Drexel cases.
The assertion stemmed from a debate in legal circles about whether the Federal racketeering statute was being abused by over-zealous prosecutors, or whether it was a necessary tool in fighting white-collar crime.
At the sentencing of the Princeton Five the judge said there was something to that. He said he doubted the feds would ever again use the racketeering law to investigate Wall Street trading.
Their terms served, their fines paid, most of the Princeton Five remain residents of the area. They declined to comment for the article or could not be reached.
Giuliani is a probable candidate for the U.S. senate, of course.
|1988: The Princeton stock scam
|By LAUREN M. BLACK / The Trentonian|