(This is not unlike how a modern hedge fund works, only with many investors instead of one.)

Duer’s favorite means of speculation was the Bank of New York, the state’s sole bank at the time. Rumors abounded that the Bank of the United States, which Hamilton intended to be the nation’s central bank, would take it over, a move that would cause the stock to rise. Duer used Macomb’s money to buy Bank of New York stock and let that fact be known publicly. Unbeknownst to Macomb, Duer was also shorting the stock on his own account. If the merger failed, Macomb would lose money and Duer his share of the nonexistent profits. But Duer would make money on his own account. In other words, he was hedging at his partner’s expense.

The rise in new bank charters created a bubble in bank stocks. When the newly created Tammany Bank announced that it was issuing 4000 shares, it received subscriptions for 21,740. Duer was at the center of this frenzy. He saw to it that his trades quickly became public knowledge. When other speculators duplicated them, it looked as though he could do no wrong.

Duer apparently began to believe as much himself and started to use leverage to increase his profits. He borrowed from banks and individuals, including $203,000 (a huge sum at the time) from Walter Livingston, of one of New York’s most powerful families. He also began to buy stock for future delivery, hoping that rising prices would allow him to pay for it when the time came.

Other members of the Livingston family had shorted Bank of New York stock and thus had an interest in seeing the price fall. To help it along, they began withdrawing specie (gold and silver) from their bank deposits. This contracted the local money supply, forcing the banks to call in loans and causing a credit squeeze. This proved ruinous for the speculators, especially Duer, as interest rates soared to as much as 1 percent a day. By March 1792, he was desperate. On March 22, he wrote to Walter Livingston that “I am now secure from my enemies, and feeling the purity of my heart I defy the world.”

He was, of course, no more secure than his heart was pure. Just one day later, in fact, he was in debtors’ prison, from which he never emerged alive. Duer’s fall precipitated a panic. Bank stocks that had been flying high now fell to earth. The day after Duer’s incarceration, 25 brokers announced their insolvency. Walter Livingston, one of New York’s richest men, was broke. Alexander Macomb also went to debtors’ prison, unable to pay his obligations.

 

Robert Schuyler

By the 1850s, the American economy had both flourished and diversified, 13 states had grown into 31, and the population had increased by a factor of five. The discovery of California gold in 1848 started a great boom that powered the American economy for several years.

But nothing changed the economy

more than railroads. By 1850 more than 9,000 miles of railroad track crisscrossed the country, predominantly in the Northeast. But railroads were expensive to build, averaging around $30,000 a mile. Locally raised capital built some short, early lines, but longer routes needed financing from Wall Street or London. Railroad mileage tripled in the 1850s, and activity on Wall Street also increased markedly. By 1854 volume on the New York Stock and Exchange Board, a name shortened in 1863 to the New York Stock Exchange, often exceeded 7,000 shares a day.

One prominent member of the Wall Street community was Robert Schuyler, from one of New York’s most distinguished families of the old Knickerbocker aristocracy. His grandfather had been a major general in the Continental Army, and his aunt had married Alexander Hamilton. In 1836 Robert became a founding member of what swiftly became New York’s most exclusive social organization, the Union Club.

Educated (Harvard, class of 1817), personable, and well connected, Schuyler opened a brokerage firm and became interested in railroads. He served successively as president of the Illinois Central and the New York and New Haven railroads and of the much smaller Harlem Railroad.

The boom began to falter in 1854, threatening some weaker Wall Street firms, including Schuyler’s. That July a regular audit of the books of the New York and New Haven Railroad revealed some minor discrepancies. Schuyler assured the press and stockholders that they could be explained. No one doubted him. When Schuyler’s brokerage firm failed, several friends offered assistance, including “Commodore” Cornelius Vanderbilt—nobody’s fool—who loaned him $600,000 on the security of New York and New Haven stock.

But the directors of the railroad soon reported a huge shortfall. It turned out that Schuyler had privately printed 20,000 shares of stock and sold the bogus securities (or used them for collateral on loans) for nearly $2 million—in a year when the entire federal government had total revenues of only $74 million. By the time this news became public, however, Schuyler had fled the country.

Further revelations scandalized not only Wall Street but society as well. The secretary of the Harlem Railroad admitted forging 5000 shares of railroad stock and swapping them for New York and New Haven securities. He had even helped Schuyler find an apartment for Schuyler’s mistress. It eventually turned out that Schuyler not only had a mistress but also a secret wife and several children, living a few doors away under the name of Spicer.

Schuyler was never captured, nor was the money he had stolen recovered. A year after he fled, he mailed a letter from England that said he was much weakened in body and disturbed in mind. The New York Times noted drily that this condition was “what we might expect.”

Daniel Drew

Daniel Drew was raised in a family of hardscrabble farmers 60 miles north of New York City and received hardly any education. By the time he was in his teens he was working for a circus—perhaps where he learned the arts of flimflam

he was to practice for so long.

But while Drew seldom missed a chance to separate the unwary from their money during the week, on Sundays he seems to have been a genuinely religious man. One contemporary wrote that “he seemed actually to draw aid and inspiration from his faith for the execution of the schemes in which he appeared at his worst.”

By the 1850s, Drew had made a fortune in steamboats and Wall Street speculation and served on the board and as treasurer of the Erie Railway, one of the nation’s largest railroads. During the Civil War, the price of Erie stock moved up and down almost without regard to its profits or prospects. Instead it moved according to Drew’s manipulation. It is impossible to trace Drew’s complex speculations in Erie stock in any detail, but one maneuver will illustrate his techniques.

In 1868, Drew, several fellow directors, and a few others formed a pool to bull the price of Erie upward. The members of a stock pool—a speculative technique subsequently outlawed in the 1930s—bought and sold stock among themselves to make it look as though the stock was rising, thus luring in outsiders. If the timing was right, the pool would unload its stock at a profit and then the artificial price would collapse.

Drew was in charge of the pool’s funds. But the stock did not move the way some pool members thought it should. While the early acquisition phase of the pool was supposedly still in progress, and the price should have been rising, it broke suddenly from 79 to 71. It looked as if a bear raid—one of Drew’s favorite tactics—was in progress. (In a bear raid, short sales of stock cause the price to drop, causing others to dump the stock as well, making the price decline further. The bears aim to buy in at the bottom, closing out their shorts and making a tidy profit.)

One pool member had borrowed pool funds from Drew so he could buy Erie stock, but he became suspicious and investigated the origins of the stock he had purchased. It had come from the pool’s own brokers. In other words, Drew was dumping the stock on one of the pool’s own members.

The pool members demanded that Drew put the price of Erie up as agreed. “I sold all our Erie at a profit,” Drew told his partners, “and am now ready to divide the profits.” As Charles Francis Adams explained in a newspaper article, “The controller of the pool had actually lent the money of the pool to one of the members of the pool to enable him to buy up the stock of the pool; and having thus quietly saddled him with it, the controller proceeded to divide the profits, and calmly returned to the victim a portion of his own money as his share of the proceeds.”

In 1869, the New York Stock Exchange issued rules forbidding many of the practices Drew had pioneered. Wall Street’s Wild West days, which

Drew had personified, soon ended. A few years later Drew was himself outmaneuvered in Erie stock and lost a fortune. The panic of 1873 took much of the rest, except those assets he had transferred to his son. In March 1876 he was forced into personal bankruptcy. It was a sad, if hardly undeserved, end for a man who had once been among the richest in the country.

Jay Gould

Jay Gould was quiet, unhealthy, small, and thin (he would die of tuberculosis at the age of 56), with eyes “that freeze and fascinate.” But he combined a fierce ambition to succeed with perhaps Wall Street’s best brain ever. Born in upstate New York, he had come to Wall Street in the early 1860s, having worked as a surveyor and in the leather tanning business. By 1869 he was the president of the Erie Railway. That’s when he decided to corner gold.

In the mid-19th century, gold was the same as money: legal tender throughout the world. The value of all major currencies were figured in gold, and the British pound, then the world’s most important currency, had been on the gold standard since 1819. The United States, however, had gone off the gold standard in the Civil War when it issued about $450 million in “greenbacks” to help finance the war. This “fiat money” was money only because the government said it was, and it could not be converted into gold.

Thus there were two forms of money circulating in America: gold (in the form of coins) and greenbacks. Wall Street soon created a market, the so-called Gold Room, in which the two forms of money could be traded. Just before the Battle of Gettysburg it took nearly $280 in greenbacks to buy $100 in gold. After the end of the war, the price of greenbacks settled down to about $130 for $100 gold dollars. Speculators flocked to the Gold Room to gamble on the movement of gold, but respectable businessmen also had no option but to trade there and often be short of gold.

The reason was that foreign commerce was conducted strictly on a gold basis, and tariffs had to be paid in gold, not greenbacks. To protect themselves from losing money, merchants would short gold, knowing that if the price of gold went up, they would make up the loss when the transaction was completed; if the price went down, they made money on the short while losing it on the transaction. In either case, they were sure of a net profit.

While the amount of gold traded in the Gold Room was often $70 million or more a day, most was bought on paper-thin margins. Gould knew that the amount of actual gold available in the New York market was quite small—no more than $20 million. Cornering it long enough to squeeze the merchants who were short would be relatively easy. They couldn’t afford to risk their reputations with a default, however brief.

But there was one big if. The

federal government held tons of gold in the Treasury. So a single telegram from Washington could break a corner in seconds. To make sure that didn’t happen, Gould tried to convince President Ulysses S. Grant of the need not to interfere with movements in the gold market so as not to interrupt foreign trade, especially the grain that flowed every fall to Europe. Grant, economically naive and too trusting of operators such as Gould, seemed to go along. To make sure, Gould in effect bribed two others so as to know in advance of any action on the part of the president. The first was Grant’s brother-in-law, for whom he bought $1.5 million in gold on no margin whatever. The second was Gen. Daniel Butterfield, whom Gould arranged to be appointed subtreasurer in New York. It would be the subtreasurer who would receive any orders from Washington to break a corner in gold. Gould loaned Butterfield $10,000 at no interest.

Gould and his allies began to buy gold during the summer, and by September they held many times the total floating supply. Gould’s associate, Jim Fisk, began to put his world-class histrionic talents to work, bulling the price of gold. “Gold! Gold!” he exhorted one writer, “Sell it short and invite me to your funeral.” The price began to rise inexorably. Around 130 at the end of August, it was at 136 by September 14. By Wednesday, September 19, it was at 141½, and the shorts were feeling the pressure. By the close on Thursday it was at 1433/8 and volume was huge, three times normal. Everyone knew that the next day—soon known as Black Friday—would be the climax.

By 10:30 the next morning, gold was at 150 and Wall Street was in utter bedlam. Thousands of people jammed Broad Street, outside the Gold Room: “staid businessmen, coatless, collarless, and some hatless, raged in the street, as if the inmates of a dozen lunatic asylums had been turned loose. Up the price of gold went steadily amid shouts, screams, and the wringing of hands,” reported Charles T. Harris, an eye witness, in his memoirs.

But Gould knew that the jig was up. Grant’s brother-in-law had warned him that the president knew what Gould was up to, and Gould had been quietly settling with men who were short gold all morning, while Fisk had stayed on the floor of the Gold Room, loudly bulling the price upward.

At 11:20, the price of gold reached 158; at 11:40 it reached 160. Businessmen who had made comfortable livings for years faced imminent ruin. But then, just as a telegram was sent from Washington instructing Butterfield to sell $4 million in gold, a broker on the floor sensed a turning tide and sold $5 million in gold at 160. The market instantly turned, and by noon Butterfield was able to telegraph Washington that the price had dropped to 140. The gold corner—and the single most exciting day in the history of Wall Street—was over.

The mess created by

Gould and Fisk was never really cleared up but instead more or less swept under the rug and so we will never know if they made or lost money. Three years later, Jim Fisk would be murdered in a love triangle. Jay Gould would live on, getting richer and sicker by the year until 1893. But the great corner in gold had shown that having two currencies, one backed by gold and one not, was an invitation to market instability. By 1897 the nation was back on the gold standard, and the greenbacks disappeared.

Fernidad Ward

After President Grant left the White House in March 1877, his son, Ulysses Jr., entered into partnership with a Wall Street speculator named Ferdinand Ward. The elder Grant, although entirely ignorant of finance, decided to join his son in the partnership of Grant & Ward, putting up $200,000 as capital, nearly his entire net worth. Ward invested a similar amount. The problem was that Ward was lying. The “gilt-edged” securities he put up turned out to be worth much less than he claimed.

Ward hoped that Grant Sr. could steer government contracts to companies in which Grant & Ward held positions. Grant adamantly refused to do any such thing, but Ward simply implied to potential investors that such contracts would be forthcoming. He thus attracted many new clients to Grant & Ward and was able to borrow money to facilitate further speculation as well. The president of Marine National Bank, where Grant & Ward did much business, asked Grant whether Ward was telling the truth. Grant replied with an incautiously worded letter that the bank president took as confirmation.

Ward began urging friends to deposit money with Grant & Ward, promising large dividends. These were forthcoming, which encouraged the investors to put in more money and new investors to come into the deal. But it was a Ponzi scheme. Ward was paying the dividends out of the new investments.

By the end of 1883, General Grant figured he was worth $2 million, enough in the 1880s to make one a rich man indeed. In reality, the firm of Grant & Ward was nearly bankrupt by May 1884. The Marine National Bank was also in deep trouble because its president had misappropriated funds to invest with the firm. Ward, his back to the wall, told the general that a sudden withdrawal by the city of New York had left the bank dangerously short. If the bank closed its doors, the resulting panic would bring down Grant & Ward.

Ward asked Grant to raise $150,000 from his friends to save the situation. Grant, ever naive, accepted Ward’s story and went to see William H. Vanderbilt, the son of the Commodore and the richest man in the world. Vanderbilt, like his father, was nobody’s fool and did not trust Grant & Ward. But he told the former president, “I’ll lend you $150,000 personally. To you—to General Grant—I’m making this loan and not to the firm.”

Grant turned the check over to Ward, who

cashed it and fled. The Marine National Bank failed and took Grant & Ward along with it. It turned out that Grant & Ward had assets of $67,174 and liabilities of $16,792,640. Ward was soon arrested and spent 10 years in jail for grand larceny.

Desperate for money, Grant at last began writing the memoirs he had so long resisted writing. He finished them three days before dying of throat cancer. The Personal Memoirs of U. S. Grant became a titanic best seller, and Grant’s widow received about $450,000 in royalties, a comfortable fortune by the standards of the day.

The Memoirs are also regarded as one of the greatest works of military history, the equal, perhaps, of Julius Caesar’s Commentaries . It is ironic that a second-rate Wall Street crook should have been partially responsible for the creation of one of the masterpieces of American literature.

Richard Whitney

In the 1930s Richard Whitney was probably the most famous stockbroker in the nation. As acting president of the New York Stock Exchange, he had single-handedly stopped a panic when the market seemed to be in free fall on October 24, 1929. There was no stopping the great crash that happened five days later, but Whitney’s heroics had provided some time to get out of the market while the getting was good. He was elected president of the exchange in his own right the following year, serving until 1935, and was the public face of Wall Street as it resisted the reforms of the New Deal.

Whitney headed the brokerage firm of Richard Whitney & Company, which handled J. P. Morgan & Company’s needs in the stock market. He lived in considerable splendor, spending at least $5,000 a month at a time when $2,500 a year was a middle-class income and millions of American families lived on far less, thanks to the Great Depression.

There was one big problem: he couldn’t afford it. In mid-1931, Richard Whitney & Company actually had a net worth of only about $40,000. In the prosperous, high-flying 1920s, Whitney had managed to keep afloat by frequently borrowing from friends and acquaintances, especially his brother George, who was a Morgan partner. He would quickly pay them back and then borrow again just as quickly.

He also tried to recoup through investments, but he was a lousy investor. As the repeal of Prohibition seemed increasingly likely, Whitney helped establish a company to distribute a type of applejack called Jersey Lightning. From a high of $45, the stock sank by 1937 to $3.50. Whitney and his brokerage firm owned 134,500 shares.

Whitney had, of course, borrowed on the stock, and as the price declined he had to put up more securities to maintain his margin. When he no longer could put up his own money, he began stealing from others, including his wife’s trust fund and the New York Yacht Club. He also misappropriated securities from the New York Stock Exchange Gratuity Fund, a life insurance program for the widows and orphans of exchange

members.

Whitney had been named a trustee of the fund, and his firm handled the fund’s brokerage business. In March 1937 the fund instructed Whitney to sell $225,000 worth of bonds and to buy other securities with the proceeds. Instead Whitney used the bonds as additional collateral on his Jersey Lightning stock. He managed for several months to put off the Gratuity Fund clerk’s requests for the new securities, but in November the clerk informed the board, which ordered Whitney to produce them forthwith.

Whitney now confessed to his brother. George Whitney was profoundly shocked. He informed Thomas Lamont, J. P. Morgan & Company’s managing partner, and together they decided to lend Whitney the money he needed to buy the missing securities. They feared that the revelation of such a scandal would profoundly damage the Wall Street community.

George Whitney also insisted that his brother come clean about all his finances, sell Richard Whitney & Company and his Jersey Lightning stock, and retire from business. But no buyers were interested in either the firm or the stock. On March 7, 1938, the president of the New York Stock Exchange announced that Richard Whitney & Company had been suspended for “conduct contrary to just and equitable principles of trade.”

Events moved swiftly thereafter. Whitney was arrested on March 10 and pled guilty. On April 11 he was sentenced to five to 10 years and taken into custody. The next day, 6,000 people turned out in Grand Central to watch the former president of the New York Stock Exchange board the train to Sing-Sing Prison, where he spent the next three and a half years. His brother and father-in-law made good on all the money he had stolen.

Anthony De Angelis

Anthony De Angelis grew up in the Bronx, the son of Italian immigrants. By his teenage years, he was working in a meat and fish market and showed a flair for business, although no great concern with ethics, selling substandard beef and other commodities to a government lunch program.

By the late 1950s, he was a major player in the vegetable oil markets, speculating in the futures markets and exporting large quantities of soybean, corn, and cottonseed oil. He stored the various oils at a tank farm in Bayonne, New Jersey.

In 1962 he decided to corner the market in vegetable oils, aiming to control the entire supply so that all dealers would have to buy from him at a price he named. There is nothing illegal in itself about cornering a commodity or a security, but modern rules make it difficult to achieve, and there has not been a corner on the New York Stock Exchange since the early 1920s.

De Angelis needed leverage to finance his corner. Commodities, unlike stocks, can be bought on tiny margins, but to achieve a corner, one must control a vast supply.

The American Express Company had recently gotten into the business of warehouse receipts, which, in effect, guaranteed that a storage facility held a given amount of a commodity. The owner could then

use a receipt as collateral for loans. De Angelis used his receipts to obtain massive loans from several banks and also from two major brokerage firms, Ira Haupt & Company and Williston & Beane.

The warehouse receipts were based on the oil stored in Bayonne. American Express inspected them periodically, but De Angelis was cunning and the inspectors were lax. He filled some tanks mostly with water, leaving only a float of oil on top. A maze of pipes enabled him to switch oil from one tank to another, making it appear that they were all full when most were empty.

The scheme fell apart in November 1962. Tipped off, inspectors found the water. The result was a massive crash in salad oil futures in the commodities market, while De Angelis’s company declared bankruptcy. Now Ira Haupt and Williston & Beane found themselves in mortal peril. Indeed, Ira Haupt owed banks $37 million it had loaned in turn to De Angelis, which he now had no means of paying back.

The New York Stock Exchange suspended both firms from trading. This caused their customers to begin withdrawing their cash and securities, in effect starting a run on the two firms. The exchange worried that this might create a full-blown panic. Then President John F. Kennedy was assassinated on Friday, November 22, 1963. The market closed early, and it remained closed on Monday for the national day of mourning. The exchange used the time to assess its member firms to cover the debts owed to customers by the two firms, to liquidate Ira Haupt, and to have Williston & Beane taken over by Merrill Lynch. A trust fund was established to meet such emergencies in the future.

American Express could have put its warehouse subsidiary into bankruptcy and escaped much of its liability. But it chose to honor its subsidiary’s commitments instead. The young Warren Buffett took advantage of the resulting plunge in the price of American Express stock to buy 5 percent of the company for a mere $20 million, an investment that paid off handsomely.

De Angelis went to jail for seven years.

Cortes Randell

The 1960s saw the development of what can only be called a corporate fashion: the conglomerate. These were companies assembled out of formerly independent parts that had nothing in common other than their ownership. Previously, acquisitions had usually been either vertical (companies gaining control of their suppliers and customers) or horizontal (companies buying their competitors). Antitrust laws had made both of these means of corporate growth difficult if not impossible.

The origin of the conglomerate craze involved two factors. One was the growth of institutional investing. Individuals can afford to wait for their investment in a stock to pay off. But mutual funds, in competition with each other, must show results every quarter or risk losing their investors. Pension funds likewise need to show results quickly, or the financial companies managing them might find their funds moving elsewhere. Buying quickly growing companies was one way to achieve positive short-term results.

The second

factor was that accounting rules then in place made it easy for conglomerates to make it look like their profits were rising quickly, even when their growth was often more illusory than real.

Cortes Randell founded the National Student Marketing Corporation (NSMC) in 1964 to tap into the exploding U.S. youth market, especially college students. He sold such youth-oriented items as college coffee mugs, a guide to summer employment opportunities, a computer dating service, and discount airline tickets. In the bull market of 1968, he took NSMC public at an initial price of $6 a share.

Randell was a born promoter, and such savvy institutions as Morgan Guaranty Bank and the Harvard and Cornell university endowment funds bought his stock. Gerald Tsai’s Manhattan Fund, then the hottest mutual fund on the Street, purchased 122,000 shares at an average of $41 a share in 1969.

Over the next two years, Randell arranged a dazzling series of 27 mergers with companies such as a student insurance company and the publishers of Europe on $5 a Day . By acquiring so many companies, some of which were profitable, he gave the impression that NSMC and its profits were growing quickly. But most of these mergers were achieved through stock swaps, poolings of interest, and other no-cash arrangements. When it needed cash, NSMC sold lettered stock (unregistered stock, which is legally difficult to resell) at a bargain price to an institution.

The acquisitions made the quarterly reports look great, and NSMC’s stock rose to $122. Randell promised to triple its earnings every year. Then Alan Abelson, the gimlet-eyed editor of Barron’s , wrote a column in December 1969 pointing out that only the previously earned profits of the acquired companies, which rules allowed to be shown as profits of the acquiring company, gave NSMC any profit, and that the company itself was losing money. The stock fell 20 points the next day.

Some firms that had invested in NSMC—including Bear Stearns—protested Abelson’s column, but insiders—including Randell—began selling. Randell boldly predicted that sales would double in 1970 and that profits would grow from 11 cents a share to $2. In the next quarter, however, the company lost $859,889. NSMC claimed that a “mechanical error” had resulted in $4 million in accounts receivable going unbilled.

The stock crashed, never to recover, and Randell’s reputation crashed with it. He was forced to resign in February 1970. A Securities and Exchange Commission (SEC) investigation showed the books to be a farrago of creative accounting, and Randell was charged with stock fraud. He pleaded guilty and was sentenced to 18 months in jail. In 1979 he was convicted of both mail and stock fraud in connection with another company and spent another five years in jail. His business ventures since have frequently attracted the attention of both state and federal regulators.

The takers of all that lettered stock, meanwhile, ended up with nothing. The rules of accounting in mergers and acquisitions were reformed, and conglomerates soon went out of corporate fashion.

Ivan Boesky

Ivan Boesky

was born in Detroit in 1937 and attended law school there. By the 1980s he had become an arbitrager. Arbitrage in the classical sense meant taking advantage of different prices in different markets. If a commodity sold for more in one market and less in another, an arbitrager bought in the latter market and simultaneously sold in the former, pocketing the difference. With the advent of instant global communications beginning in the mid-19th century, opportunities for such deals began to dwindle. Today arbitrage is often highly technical, involving complex strategies with different securities.

In the mid-1980s Boesky sought a way to exploit the roaring bull market that followed the recession of 1980–81. Because money is easy to find in a bull market, a wave of mergers and acquisitions began sweeping the American economy, and Boesky took advantage of it by specializing in what economists call “merger arbitrage.” When a company tenders an offer to buy the stock of another company, it usually offers to buy the stock at a higher price than the market price. Once the offer becomes public, the stock of the company to be acquired rises to near the level of the offer, while the stock of the acquiring company typically falls a few points. If one bets right, buys stock in the company to be acquired, and sells stock in the acquiring company, one can make big money in a short period, especially if borrowed money is used to finance the speculation.

The trick, of course, is to guess right as to who is going to buy whom, ahead of the public announcement. Boesky had enormous success in this risky business. By 1986 he was worth $200 million and was well up on the Forbes 400 list. His method was simple: he used inside information.

Inside information is as old as free markets, and for a long time it was regarded simply as a perk of office. In the 1920s, specialists on the exchange routinely provided friends with information from their order books so that their friends could make near-risk-free speculations. When the SEC began to regulate Wall Street more closely, the use of inside information became illegal, even though it has yet to be precisely defined. There is no question that someone with a fiduciary duty, such as corporate management has to its stockholders, may not violate that duty by leaking inside information or taking advantage of it personally in ways that would damage the stockholders. But beyond that lies a large gray area.

Boesky operated mostly in that gray area, but he attracted the SEC’s attention by making large bets on mergers that were announced only a few days later. It turned out that he was receiving inside information, sometimes by providing leakers with suitcases full of cash. Caught dead to rights, Boesky agreed to provide information on others and to let investigators tap his telephone and listen in on his negotiations.

The story broke in mid-November 1986, and dozens of Wall Street figures received subpoenas. Some, such

as Carl Icahn and Michael Milken, were famous; many were not. In the end Boesky served two years in jail and forfeited $100 million in “ill-gotten gains.” Milken, who had pioneered the modern high-risk bond (often badly misnamed “junk bonds”) to finance such risky start-up companies as the Cable News Network (CNN), eventually pleaded guilty to several counts and was sentenced to 10 years, but he served slightly less than two. He also paid a fine of $200 million and disgorged over $500 million in ill-gotten gains. His firm, Drexel Burnham Lambert, once the most profitable investment bank on Wall Street, went bankrupt.

Boesky could have done worse without some help from the SEC, which allowed him to sell $440 million worth of securities out of the about $2 billion he then controlled, before his situation became public knowledge. The market was sure to respond adversely to Boesky’s fall (in fact the market fell over 2.3 percent on the day the news was released). In effect, Boesky was permitted to trade on inside information, this last time with the blessing, indeed active cooperation, of the SEC.

Those on Wall Street who took a hit were outraged. But the regulators said their actions were necessary to prevent an even bigger decline. Had Boesky not sold ahead of the announcement, the SEC argued, his margin debt would have forced a much larger liquidation of his securities, and a full-blown panic might have resulted.

Bernard Madoff

The full extent of Bernard Madoff’s crooked dealings will not be known for a considerable period, but it already promised to be the biggest scam in the Street’s long history, unprecedented in both size and longevity.

By Madoff’s own admission, he was operating a Ponzi scheme, paying steady dividends to early investors out of the principal paid by later investors. The steady, large dividends then attracted more investors, and the cycle escalated. The scheme fell apart in early December 2008 because the bear market created demands for redemptions that Madoff could not meet, but by then it had reached around the world.

It appears to have been what is known as an “affinity fraud,” when the defrauder himself belongs to the groups he bilks. In this case, many of Madoff’s victims were members of the Palm Beach Club, the luxurious, largely Jewish country club in Palm Beach, Florida, to which Madoff himself belonged. Sadly, many of his clients were charities and eleemosynary institutions such as colleges. Some have been wiped out by Madoff’s peculation. One particularly successful aspect of the scheme was its exclusivity. Madoff deliberately made it difficult for people to become his clients, adding to the cachet.

It is fitting, perhaps, that the biggest fraud in Wall Street history should be exposed at the end of the Street’s greatest extended bull market, which saw the Dow Jones Industrial Average rise from under 1,000 in 1980 to over 14,000 in 2007. The bull market made tens of millions far richer than they ever thought they would be. Madoff’s Ponzi scheme made a

few thousand of them poorer than they ever thought they would be.

Both outcomes, it would seem, are inherent aspects of capitalism.