Date: September 12, 1988
Location: PRINCETON
Title: The Party”s Over at Princeton/Newport Partners Author: George M. Taber
Subject: After the pre-Christmas raid, Feds bring indictments against six security traders
Jay Gatsby, the tragic symbol of the roaring 20s in F. Scott Fitzgerald”s novel The Great Gatsby, and Jay Regan, the central player in the latest Wall St. scandal, have something in common. Jay Gatsby, a pillar of the financial establishment, was famous for the parties at his Long Island estate. Six years ago, Jay Regan, a managing partner of Princeton/Newport Partners and vice-chairman of the board at Princeton Day School, gave himself a 40th birthday party at his horse farm in Hopewell. The Shirelles, a famed singing group of the 60s, sang the night away at a party still remembered by participants as one of the best ever.
In mid-August, however, James Sutton (Jay) Regan and five other men were in court, pleading innocent to federal charges of conspiracy and racketeering. What had happened to the man who had once said that making a financial killing was like “taking candy from a baby?”
The rise for Regan was fast. After graduating from Dartmouth in 1964, he began selling stocks on Wall Street. Five years later, he read a best selling book about how to win at blackjack entitled Beat the Dealer. Regan wrote a letter to the author, Ed Thorp, a math professor from the University of California at Irvine, and suggested a meeting.
The stock market can sometimes be a lot like Las Vegas, and Regan and Thorp came up with a strategy for playing the financial markets. The original plan involved warrants, the right to purchase stock at a certain price. Warrants and stocks sometimes get out of line, and a savvy arbitrageur can do well hedging between the two. And they did well. In nearly 20 years of operation Princeton/Newport has never had a quarterly loss. Computers on the west coast near Thorp”s home in Newport Beach, Calif. churn out data that traders in Princeton use to make their moves.
From its suite of offices in Princeton on the third floor of 33 Witherspoon St. above a Haagen Dazs ice cream store, Princeton/Newport has been phenomenally successful. At one point in the early 1980s, it accounted for 1% of the daily volume on the New York Stock Exchange. With a reported $250 million in capital, net profits were between 20% and 30% annually. In 1985 the two men each made an estimated $3 million to $5 million. In 1986 the earnings for each were between $8 million and $9 million.
Both men enjoy the good life. Regan, with his wife and three children, lives on his horse farm in Hopewell, and Thorp has a 10-bathroom house on a hilltop in Newport Beach.
Trouble hit abruptly a week before Christmas last year. Several dozen federal authorities, some of them armed, first convened at the post office in Palmer Square. Then they moved to 33 Witherspoon, where they showed search warrants and began seizing company records, including Rolodexes and calendars. The name on the door was Oakley Sutton Management Corp. (Oakley and Sutton are the middle names of Thorp and Regan), but behind that was the series of firms that made up Princeton/Newport Partners. The U.S. Attorney”s office in Manhattan, which was headed by Rudolph Giuliani, was trying to establish a link between Princeton/Newport and the ever-enlarging scam of insider trading that involved Ivan F. Boesky. There had been rumors that Princeton/Newport was keeping profits up with some questionable tactics. The Feds seized 60 boxes of records going back to January 1984. The material included 336 hours of phone conversations.
According to federal officials, about two weeks after the raid on the Oakley Sutton offices, three Princeton/Newport officials withdrew some $15 million that they had invested in the company. Court papers state that Regan took out $12.5 million. On the same day, wives of the three men invested $6.3 million in the firm. Defense lawyers denied that any attempt was made to prevent the seizure of assets, but the federal affidavit said that “this financial maneuvering by the defendants demonstrates their desire to simultaneously maintain financial viability of the Princeton/Newport enterprise while secreting the assets which they believe are subject to forfeiture.”
On August 4, a Manhattan grand jury indicted Regan and four other Princeton/Newport officials in addition to one former Drexel Burnham Lambert trader. Thorp, however, was not charged. In a stunning move the six were accused under the Racketeer Influenced and Corrupt Organizations Act (RICO), a law originally designed to fight organized crime. The five Princeton/Newport officials were charged with 35 counts of racketeering, mail fraud, tax fraud, securities fraud and stock manipulation. Princeton/Newport and Drexel were accused of creating false tax deductions through rigged securities trades that produced $13 million in fictitious capital losses. Charged the indictment: “The purported sales were not bona fide, but rather were sham, fictitious and bogus sales, lacking economic substance.” If convicted, the defendants face 20 years in prison on each of two RICO counts, five years on each of the remaining counts, and $250,000 in fines on each count. Said Giuliani: his is a multimillion-dollar crime. It happened not once, not twice. It was a classic pattern of criminal activity.”
Serious controversy, however, already surrounds the Princeton/Newport case. For starters, the use of an anti-racketeering law is being challenged. Joseph Lawless, a partner in the Philadelphia law firm Donaghy & Lawless and a former prosecutor who now specializes in corporate crime, disputes Giuliani”s handling of the case. Says Lawless: “You”re dealing with two gray areas of the law here. On the enforcement side, the government is operating in a gray area by misapplying the RICO statutes. On the other side, the defendants were operating in a gray area of the law because we don”t yet have a clear black-or-white definition of insider trading. It”s possible that some of them might not have known they were in a gray area.” Lawless says that he would not be surprised if one or all five Princeton/Newport officials challenge the RICO indictments on constitutional grounds.
In mid-August when the six defendants officially pleaded innocent, their lawyers took an usually sharp slap at the government”s tactics. They claimed that “the RICO charge alleging the conduct of a racketeering enterprise is unprecedented, totally unwarranted and an example of reprehensible government overreaching.” In addition, the lawyers charged that the government was only trying “to bludgeon and coerce people to implicate others” in inside trading cases.
Security industry officials also say that the case involves shades of gray. Said one person close to the company: “Regan cuts close to the edge, but he is too smart to do anything without talking to his lawyers.” This person agrees that Princeton/Newport was operating in a questionable area of the law. The industry source also charged that federal officials were trying to get Princeton/Newport officials to testify against bigger traders such as Drexel or Goldman Sachs.
After pleading innocent, the five Princeton/Newport officials had to surrender their passports and were released on bond. Federal officials have indicated that more indictments may be on the way, and speculation centers around Coniston Partners, a firm with which Regan had heavy dealings. No trial date has been set, and the case is likely to wind its way slowly through the courts.
Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that”s no matter–tomorrow we will run faster, stretch out our arms farther….And one fine morning–
