No Parking

Most of the charges against Drexel Burnham Lambert involve stock parking. Put simply, a parking arrangement is one where stocks are owned by one person for the benefit of another. That's not illegal unless it's used to evade securities laws, and the charges against Drexel illustrate just about all of the ways this can be done. Some of them are:

• Drexel "parked" a chunk of Fischbach stock with Ivan Boesky for the benefit of Drexel client Victor Posner, who wanted the company but was temporarily barred by agreement from buying shares.

• Boesky bought enough stock in MCA to raise the price so Drexel client Golden Nugget could unload its shares at a profit.

• Boesky parked Phillips Petroleum stock with Drexel to avoid the SEC's net capital limits.

There are other cases. Stock parking is easy to understand but exceedingly difficult to prove in any fair sense. If the parties make the same purchases and sales with no prior agreement, it is legal.

So what is an agreement? Prosecutors in the Drexel case made much of Boesky's decision to purchase $5.3 million worth of investment services from Drexel following Boesky's profitable maneuvers in Fischbach and other Drexel deals. Was this lucrative arrangement Boesky's way of remitting to Drexel profits from stock that was parked with him, or merely Boesky knowing who his friends are?

Proving an illegal agreement of this type is never easy. Boesky might have dinner with someone from Drexel who mentions offhandedly that Posner is interested in Fischbach (already a well-known fact). Is this idle speculation or an illegal hint that Boesky should buy?

Since the prosecutors used the devastating threat of the RICO statute to intimidate Drexel into settling the case against it, we may never hear the government's evidence. No doubt much of it was based on testimony from Boesky, who knows that he might escape further charges if he says what the prosecutors want to hear. It is quite possible, however, that Drexel and Boesky never made explicit agreements, which both parties knew to be illegal and, in any case, unenforceable. They may simply have been exchanging favor for favor.

Drexel's attorneys must have expected that the average juror would find it difficult to believe that Boesky would speculate millions of dollars on Fischbach stock without some promise that Drexel's client would launch a takeover of the company. But broker-dealers like Boesky are in the business of speculating, on people as well as on financial markets. Boesky could have bet millions that Michael Milken of Drexel is a stand-up guy who would reward loyalty.

That wouldn't be stock fraud, just as it is not prostitution when a man buys dinner for a woman who later has sex with him. Despite what cynics say, a large but immeasurable number of business transactions occur every day based on trust, loyalty, and expectations of reciprocal generosity. It is these intangible values, rather than legally enforceable, written agreements, that provide the basis for business transactions of all sizes.

The government's efforts to eliminate these invisible agreements are hopeless. Unsophisticated investors hear about the laws that are supposed to protect them, and they read about a few high-profile convictions, and they are fooled into thinking their market investments are free from Drexel-Boesky-style risks. The SEC's rules create an illusion of safety. Thousands of lawyers who attempt to apply these amorphous securities laws would be out of work tomorrow if Congress spoke the words "caveat emptor." But small investors would be fairly warned.