Insider Charges: Dreams Vanish, Reputations Fall : Arbitrage Operations May Grow More Conservative as Scandal Clouds Widen

One year ago, the Timothy L. Tabor story read like a dream come true: a whiz kid making millions on Wall Street.

Only 32 at the time, the Rhodes scholar and former accountant was regarded as one of the best at the fast-paced, high-stakes game of risk arbitrage--the business of speculating on stocks involved in takeovers. After he left the investment house of Kidder, Peabody last February to form an arbitrage unit at New York’s Chemical Bank, he was reported to be earning more than the $1 million paid to the banking firm’s chairman.

But the Tabor dream began to fade somewhat last June when he left Chemical to join Merrill Lynch. It faded further during the past month, when he was fired from Merrill Lynch amid losses and a reassessment of the firm’s arbitrage operations.

Tabor’s dream turned nightmarish Thursday when he became one of three Wall Street arbitrageurs arrested by federal authorities and charged with violating insider trading laws. The others charged were Robert M. Freeman, 44, a Goldman, Sachs partner and head of its arbitrage unit, and Richard B. Wigton, 52, a Kidder, Peabody vice president and head of its over-the-counter and arbitrage trading. Tabor and Wigton were accused of receiving insider information from Freeman.

The charges against the three darken even further the cloud hanging over the arbitrage business, already tinged by insider trading charges last year against its most well-known practitioner, Ivan F. Boesky. Several firms already have reined in their arbitrage operations amid significant losses in the aftermath of the Boesky scandal.

Other arbitrage operations also are likely to become more conservative, Wall Street experts said Thursday. And more charges and arrests are likely to follow, they said.

“It’s probably just one of many more shoes to drop,� said Raymond DeVoe, an analyst at the brokerage of Legg Mason Wood Walker.

The charges will mar the reputations of Kidder, Peabody and Goldman, Sachs, two well-respected firms, and the careers of the accused employees.

Wigton had worked for Kidder for about 20 years, mostly in the over-the-counter area, and, ironically, was recently elected to the highly respected 31-member board of governors of the National Assn. of Securities Dealers, which is charged with self-regulation of the securities industry. His three-year term began Jan. 20.

A spokesman for the NASD had no comment about Wigton or his future with the NASD.

Freeman also was well respected, heading one of Wall Street’s largest and most profitable arbitrage operations at Goldman, Sachs. It has not been uncommon for the unit to take stock positions in takeover targets of as high as $500 million--much of it borrowed.

But one investment banking source said he was “not surprised� about the charges against Freeman, noting that rumors have swirled on Wall Street in recent weeks that a top Goldman, Sachs partner in its arbitrage or merger department was a possible target of a federal probe of insider trading violations.

In the complaint filed Thursday, the U.S. attorney’s office charged Freeman with receiving inside information about the proposed takeover of Storer Communications in April, 1985, by Kohlberg Kravis Roberts, a well-known firm specializing in leveraged buyouts. Kidder, Peabody was Kohlberg Kravis’ adviser in the takeover bid.

Freeman was also charged with receiving and passing along insider information about Unocal’s successful defense against a hostile takeover bid in 1985 by Texas oilman T. Boone Pickens Jr. Goldman, Sachs was Unocal’s investment adviser during that acrimonious battle.

In a telephone interview Thursday, Pickens said he had met Freeman before the Unocal bid and “he always appeared to be a good professional to me.� Pickens said he was not aware of any illegalities among Goldman, Sachs officials during the Unocal struggle but added that the firm “knew about everything that was going on� in Unocal’s strategy since it helped develop it. Pickens said that, to his knowledge, Freeman did not participate in developing Unocal’s strategy.

The youngest, and perhaps brashest, of the accused arbitrageurs is Tabor, 33, who is charged with insider trading stemming from his stint as the No. 2 man in Kidder’s arbitrage unit until last February, when he left to start an arbitrage unit at Chemical Bank, said to be the first of its kind at a U.S. commercial bank.

But Tabor left Chemical when the bank decided that the arbitrage unit should not invest in stocks involved in hostile takeovers. Tabor then joined Merrill Lynch to head its arbitrage unit but was fired amid post-Boesky losses and a reassessment of that unit’s directions.

“Risk arbitrage has always had a risk to it, but we wanted to do much more managing of the risk,� Merrill Lynch spokesman James Flynn said Thursday. Tabor “wasn’t as conservative or risk management-oriented� as the firm wanted, he said, adding, however, that Merrill Lynch was unaware of any possible wrongdoing by Tabor.

Indeed, some Wall Street insiders speculated Thursday following the charges against Tabor that part of his meteoric success could have come from insider trading. Tabor, one Wall Street source said, was far too eager to take undue risks.

“He was kind of a free-spirited gunslinger,� one Wall Streeter said.