Dark Clouds Over Wall Street

Dennis Levine was one of Wall Street's hottest young investment bankers. A managing director with Drexel Burnham Lambert, Levine, 33, was glib and gregarious, and had a knack for cultivating clients. In addition, he had a particular gift for obtaining information about impending hostile merger bids and then persuading takeover targets to hire his firm for their defense. According to federal law-enforcement officials, Levine also used his expertise for a less innocent pursuit: buying stock in companies that he knew were about to be acquired, and then selling the shares at a profit after a takeover bid sent the prices sky-high.

This illegal practice, known as insider trading, caught up with Levine last week. The Securities and Exchange Commission filed a civil complaint charging him with 54 violations of federal securities law that were part of an elaborate scam involving fictitious names, phony Panamanian corporations and a Bahamas-based broker. Soon thereafter, U.S. marshals arrested him in Manhattan on the criminal charge that he had obstructed the SEC's investigation. If the SEC's civil charges are upheld, Levine could be forced to hand over $7.6 million in illegal profits and pay a $22.8 million fine. He could also be sentenced to as many as five years in prison and fined another $250,000 if he is found guilty on the criminal charge.

The Levine case was the largest insider-trading complaint ever filed by the SEC, and it spurred anxiety and soul-searching in Wall Street boardrooms. Levine had allegedly amassed a total of $12.6 million in illicit profits while working for three investment firms--Drexel Burnham Lambert, Lehman Bros. and Smith Barney--during the past 5 1/2 years. Insider-trading cases come and go like stock-market rallies, but never has such a high-level executive been accused of using privileged information for so much personal gain over so long a period of time. Wall Streeters think that Levine must have been trading tips with a group of moneymen and fear that his arrest may be the first installment in a spreading scandal, especially if he or his confidants name accomplices in exchange for clemency. Indeed, Government sources told TIME that several more insider-trading charges against high-profile individuals will be filed soon. Some brokers are talking nervously about a Wall Street Watergate.

Illegal insider trading can take many forms. Advance knowledge that a company is about to introduce a new product, issue a spectacular earnings report or even be the subject of a flattering story can enable investors to reap easy profits on timely stock trades. But the bread and butter of inside traders is tips about takeover bids.

As a merger specialist, Levine was privy to valuable information week in and week out. Curiously, in 35 of the 54 insider-trading cases cited in the SEC charges, the investment bank that Levine worked for was not involved with the merger bid. The implication is that he may have been exchanging information with other investment bankers or stock traders.