The Biggest Fraud on Wall Street

There's a reason why many of the best finance movies are set in the 1980s. It was the greatest period of rampant Wall Street fraud, but also the decade where regulators began cracking down on white collar crimes in a meaningful way, ultimately gracing us with countless stories of greed that are better than any fictional ones a scriptwriter could dream up. One of the great things about this nation is that we can seek profit. Even the fictional Wall Street villains have a deep grounding in reality. Greed, for lack of a better word, is good. Gordon Gekko in the 1987 movie Wall Street gives the iconic Greed is Good speech, a speech that actually happened. Just a year earlier, one of the biggest names in finance, Ivan Boski, spoke at UC Berkeley to the graduating business school students, telling them that greed is all right, by the way. I think greed is healthy. You can be greedy and still feel good about yourself. Of course, the irony of this speech was that just five months later, he was facing a record-setting $100 million SEC fine for securities violations. And a year later, he was sentenced to federal prison, the exact same week that Wall Street premiered in movie theaters. I actually started making this video because I watched the brilliant Oliver Stone film, and I wanted to explore the insane rise and fall of one of the frauds who inspired the Gordon Gekko character. But I quickly found out that Ivan Boski was just one piece of a much bigger stock market scandal. Once upon a time in the 80s, four men nearly destroyed Wall Street. A syndicate of illegal stock tips, offshore bank accounts, and stock manipulation that was dubbed the largest insider trading conspiracy ever. I do see your comments about the lack of videos recently. Well, this is why. And even though I'm posting this video about a month late, I'm sure that you'll see that it's been worth it. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence. I've spent weeks putting this together, and that's possible thanks to the sponsor of today's video, Surfshark VPN. If you're not worried about being hacked in 2025, well, you should be. No, but seriously, even if you consider yourself a relatively safe internet user, you are vulnerable to having your accounts hacked or your data stolen. Surfshark offers you an extremely cheap and easy way to make it much harder for hackers to breach your accounts. It acts as a sort of middleman to receive your internet traffic and scramble it to keep you anonymous to whoever is hosting the network. Beyond safety online, I also use Surfshark to unlock region-specific content on streaming services. For example, at the moment, I'm watching How I Met Your Mother without having to subscribe to Disney Plus in Australia. You also get access to their antivirus software, a private ad-free internet search, and Surfshark alerts, which can tell you if your data has been compromised. Click the link in the description or head to surfshark.com forward slash hodda and get yourself a massive discount and four extra months free. Your subscription also comes with a 30-day money back guarantee, so you've got nothing to lose giving it a try. The scale of coordinated financial crimes that were orchestrated in the 1980s is mind-boggling, and it all began years earlier during a much less glamorous period on Wall Street. Less glamorous for sure, but it definitely still had its moments. The stock market surged in the late 60s as investors piled into the latest technology companies that were destined to grow forever, and as 1970 rolled around, most people got burned. Even the brokers themselves suffered a paperwork crisis. In a shorthand jargon, trades take only a few seconds. There are no written contracts, no handshakes, just a brief note on a pad. Trades were still being recorded manually, and when trading volumes surged in the 60s, brokers couldn't keep up and just lost track of who owned what stocks. The New York Stock Exchange had to remain closed every Wednesday just to allow brokers to catch a breath. Brokers eventually started using mainframe computers to manage orders, but the new technology was expensive, and when the boom for high-growth stocks came to an end, many brokers were forced to merge or file for bankruptcy protection. But the crisis certainly did help speed up the transition from slow manual trading to more efficient automated systems. In 1971, the Nasdaq Stock Exchange was launched, spurring an increase in the volume of trades being executed. At the time, Ivan Boesky's Wall Street career was just getting started. After moving to New York in 1966 and bouncing around from job to job, he found his lifelong obsession, risk arbitrage trading. Risk arbitrage is a trading strategy that aims to make profits from big corporate events, like mergers and acquisitions. Back then, there weren't many deals to trade on, and the profits were pretty tiny. But this boring corner of Wall Street was about to become the springboard for rampant financial crime. There's a lot of different risk arbitrage strategies depending on the type of takeover, but the simplest version is an all-cash acquisition. For example, Stock A announces that they're bidding to acquire Stock B for $100 per share in cash. If the deal closes under those terms, anyone who holds Stock B will receive $100 per share. But since the deal might fall through, or the terms might change, usually Stock B will trade at a price below the bid. So traders could buy Stock B and speculate on the likelihood of the deal being finalised. Ivan's first deal of this kind was a complete disaster, losing his firm $20,000, and then he was fired. In 71, he got a job at the brokerage firm Edwards & Hanley. He didn't get fired from this one, but that's only because the firm collapsed just four years after he joined. While there, he broke a very black and white trading law by doing something called naked short-selling. It's essentially where you sell a stock without actually owning it. Ivan was hit with a $10,000 fine, which looks like a parking fine given what he did next. Now as I said, risk arbitrage was basically a snooze at this point in time. While the number of corporate buyouts had increased due to innovations in deal structuring, there were still too few trading opportunities, and there wasn't much money to make on each deal. Once a tender offer is publicly announced, the stock price of the target company would surge. So making consistent profits was difficult, unless of course you were able to buy the stock before the acquisition bid was public information. But you'd need someone on the inside who could tell you about the bid before it was officially announced, and trading on that information would be illegal. Contrary to the name, insider trading doesn't just apply to the executives and owners within a company. Even if you have no relation to the target company, trading on non-public information in most cases is still a crime. Especially if you pay for the information. And doubly especially if you execute the trades in an offshore Swiss bank account under a fake name. In 1975, Ivan Boesky started the first ever investment firm that specialised in risk arbitrage. A surprising move because risk arbitrage wasn't that profitable, when done legally. But Ivan was a star. He took the $700,000 of startup funds, mostly from his wife's wealthy family, and started making huge bets on buyouts. One notable trade was the $30 million he made trading Babcock and Wilcox stock in 1977. The company found itself in the middle of a bidding war between United Technologies and J. Ray McDermott. Their back and forth bidding drove the stock from $20 to $60 per share within two years. After flaunting his success in the media, his firm's assets surged. $700,000 to $500 million in just six years. He just needed more deals to trade on. Which is where we introduce the second villain of our story, Michael Milken. It's actually quite funny that I haven't mentioned him until now, because he's a bigger criminal than all of the other people in this story, combined. Insider trading, tax evasion, stock manipulation, racketeering, mail fraud. These are just some of the 98 indictments he faced in the end. But I'm getting a little ahead of myself. In the mid-70s, Milken essentially pioneered the junk bond market. When a company borrows money by selling a bond, it's given a rating from AAA to C, depending on the likelihood of them failing to pay what they owe. A rating of BB or lower is considered speculative, or junk, since there's a high chance of default. Before Milken, most of the junk bonds on the market were what are called fallen angels. Imagine a company that's in good financial condition, selling some bonds at a BBB rating. But then business conditions change, and the ratings agencies downgrade them to a C. That would be a fallen angel. But Milken's genius idea was to create bonds that were junk and incredibly risky from the get-go. In the late 70s, Milken started a junk bond department at the investment firm Drexel Burnham Lambert. By the mid-80s, the market for risky debt was thriving, and I found what is maybe the most absurd example of just how this debt was being used. In 1984, Texas oil man T. Boone Pickens began buying up First buying a block of 8.8 million shares, and then making an offer to buy another 15 million shares, and then possibly 8 million more, a total ownership of 20.6% if successful. Pickens wasn't just investing in Philips. He was buying up a large piece of the company, with the intention of forcing the existing management team out and running it himself. This is called a hostile takeover, and Pickens didn't even need to have the money to buy it. His own oil company, Mesa, was tiny compared to Philips. But with a now thriving junk bond market, he was able to borrow a ton of money for the takeover attempt. That's called a leveraged buyout. If Pickens was able to get control of Philips, then he'd be able to pay the loans back by cutting staff, selling assets, or by just redirecting cash flows. Just two weeks later, Philips agreed to buy all of Pickens' shares back from him to prevent the hostile takeover, for a $90 million profit. Pickens effectively walked into Philips' head office, and held a shotgun to the CEO's head until he paid him to leave. Oh, and Philips had to pay him another $25 million for expenses. And guess what? Just two months later, they had to do it all over again. Carl Icahn is back in the news. An $8.1 billion bid to buy all of the shares of Philips. Half the money was his own cash, but he teamed up with Michael Milken for the other $4 billion. Milken's firm, Drexel, created the bonds and found investors willing to finance the deal. Icahn told Philips that if they declined his offer, he would just take over the company by force. A month later, Philips paid Icahn $46 per share for the 7.5 million shares he owned, for a $52 million profit, with Drexel making about $20 million for financing the deal. This insane battle showed the entire world that even big companies weren't safe from corporate raiders. What Pickens and Icahn did was walking the line, morally speaking. But Ivan Boski was willing to step right over it. The timeline of Ivan's crimes that I'm about to explain is insane. It started in 1982, and T. Boone Pickens was orchestrating yet another hostile takeover. This time, the target was another oil company, Citi's Service. The oil industry hated Pickens, and so another major oil company, Gulf Oil, jumped in with a bid of their own. The idea being that Gulf could drive up the bidding price and force Pickens to back out. Watching from the sidelines, Ivan believed that there was going to be a bidding war that would drive up Citi's Service stock price, so he invested more than $100 million into the stock. Unfortunately, he was wrong. Gulf Oil withdrew its offer, and Citi's stock price plummeted. Ivan was left holding the bag, and according to insiders, was unable to sell the stock without becoming insolvent. His firm survived by the skin of its teeth, and he was not going to let that happen again. Just weeks after nearly losing everything, he became friends with Martin Siegel, and paid him $750,000 in cash in exchange for a steady stream of inside information. Siegel was an investment banker, and therefore had access to all kinds of non-public information about corporate takeovers. And when I say cash, I mean he literally paid him in cash. Three suitcases filled with $100 bills. Boesky is believed to have had similar arrangements with many others. The centre of which was his relationship with Dennis Levine. In the early 80s, he was a merger and acquisition specialist at Lehman Brothers. But when the firm was acquired by American Express in 1985, he moved to become a managing director at Drexel. Yep, Michael Milken's firm, who was selling junk bonds to finance takeover deals. The epicentre of non-public information. Boesky struck a deal to pay Levine 5% of any profits made on inside information. And Levine himself had a network of other investment bankers feeding him information. In May 1985, Levine received a tip that Nabsco was in talks to merge with RJ Reynolds. He passed the information on to Boesky, who quietly bought 377,000 shares of the company. By the 29th of May, the inside information was clearly all over Wall Street, with the stock jumping from $68 to $71 per share. The New York Stock Exchange halted trading so that Nabsco could formally disclose the deal. Reynolds would be paying almost $90 a share to merge. When the stock resumed trading, the price surged to $76, up 12% in the session. The next day, Boesky sold his shares for an estimated $4 million profit. That same month, Boesky bought 302,000 shares of the Houston company, which announced a $2.2 billion merger the next day, netting Boesky another $4 million. Back at Drexel, Michael Milken also wanted to trade on these merger announcements. But since he was the one creating the bonds for these deals, he obviously wasn't allowed to. So he arranged for Boesky to buy and hold shares on his behalf. This is called stock parking. And any profits were funneled back to Milken through fake expenses. One time, Boesky paid Drexel $5.3 million as a consulting fee. For that much money, it must have been some pretty good advice. By 1986, Boesky was managing around $2 billion and had a personal net worth estimated to be north of $200 million. But no one really knows how much money he had because they were also using offshore accounts to trade. While Levine was making money from selling information to Boesky, he also wanted to trade on the deals himself. So he set up a trading account with Bank Lu. This was a Swiss bank with a subsidiary in the Bahamas, the dream combination for an offshore account. The Swiss have a long history of banking secrecy and the Bahamas at the time had extremely protective banking laws. The most relevant was that banks weren't allowed to share any information about their banking clients with US regulators. Levine put the account under a fake name and made another $11 million in profit trading through it. You know, I started this with the infamous greed is good speech. So it's quite poetic how greed in more ways than one is what ultimately brought it all down. Levine's greed led him to trade from an offshore account and that greed spread. Some employees at the Swiss bank began to copy Levine's trades for themselves. They made some of these trades through a broker at Merrill Lynch, who was also greedy. The broker and two of his colleagues also copied Levine's trades in their personal accounts. While this did go unnoticed for a while, eventually Merrill Lynch caught on and they referred the information to the SEC on suspected insider trading. The trades could be traced back to the accounts held at Bank Lu, but their attempts to get information fell on deaf ears. Over in the Bahamas, Bank Lu was scrambling. They were fully aware that Levine had been trading illegally in his accounts and given some bank employees had copied him, there was exposure. Bank Lu hired a New York based lawyer who set up a meeting with their portfolio manager to discuss a strategy. But when the manager landed in the US, SEC investigators were waiting for him. Since he was on US soil, they were able to subpoena him directly. And after negotiations, Bank Lu agreed to reveal who controlled the accounts in exchange for immunity against prosecution. And the name they revealed was Dennis Levine. Oh, and if you're wondering about the Bahamas banking law that was supposed to protect him, authorities determined that brokerage accounts weren't banking accounts. So the secrecy laws didn't even apply. On the 12th of May, 1986, Levine was sued by the SEC in a civil lawsuit and arrested by the US attorney's office on criminal charges. Ivan Boesky was apparently completely unfazed. According to an account in Den of Thieves, one of Boesky's traders told him about the news and he just said, Dennis who? And it was just six days later that he gave the infamous greed speech at UC Berkeley. Unfortunately, Levine was also greedy and immediately implicated Boesky as a part of a plea deal. After receiving his own subpoenas, Boesky decided to make a deal. In September, he settled the civil lawsuit, including a $100 million penalty. To the public, it looked like Boesky had avoided criminal charges. But behind the scenes, he had agreed to plead guilty to one felony count of conspiracy to commit securities fraud and to help arrest an even bigger fish, Michael Milken. This was all kept quiet because Boesky wasn't just providing information. He was going to wear a wire. He also made a number of recorded phone calls with people in his network to elicit some confessions. A year later on December 20th, 1987, a federal court in New York sentenced Boesky to three years in prison. It took a bit longer to get Michael Milken, but he would finally go down in 1989. A grand jury indicted Milken, his brother, and a former Drexel trader on 98 counts. In April the following year, he pled guilty to six counts relating to securities violations and tax evasion. He was sentenced to 10 years in prison, but later it was reduced to two years and he actually only served 22 months. Boesky was also out in 22 months and just last year at the age of 87, he died. This is by far the longest video I've ever made, and I still feel like I'm just scratching the surface of the decade of greed. Hit the subscribe button if you enjoyed. A lot of late nights went into this one, and thanks for watching.