Goldman's head of risk arbitrage — and the analysis that showed the trades did not fit the accusation
This is Jonathan Hare's account, with its provenance shown. The person or organization named has not yet claimed or corrected it.
Head of risk arbitrage at Goldman Sachs, arrested in February 1987 in one of the most publicized actions of the insider-trading prosecutions, and eventually pleading guilty in 1989 to a single count of mail fraud arising from one sentence about the Beatrice buyout.
Goldman maintained his innocence throughout, and paid Cornerstone Research roughly eight million dollars to demonstrate it. The analysis was Jonathan Jonathan Hare's.
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The chain ran Boesky, then Martin Siegel of Kidder Peabody — who took payment from Boesky in cash — and then outward. Siegel was offered a reduced sentence in exchange for naming anyone he had traded with, with the reduction scaling to how many names he produced.
He named a great many. In risk arbitrage everybody traded with everybody, on every rumor of a merger or buyout, in every window. Siegel could recall which deals he had been in and who else was in them, and that recollection became the accusation.
He analyzed every risk arbitrage deal Freeman had traded — by his recollection around thirty-nine of them — and he did it at the level of the whole portfolio, not the visible stock position.
That distinction is the entire argument. A risk arb desk does not only buy and sell shares; it takes options, shorts, futures and other derivative positions around the same event. Looking only at the equity trades tells you almost nothing about which way the desk was actually facing.
When the complete position is reconstructed for the specific dates on which Siegel alleged he had passed information, the result is the opposite of what the accusation requires: on the majority of those dates Freeman's positions lost money. A man trading on good inside information does not systematically lose on the days he receives it.
Taken across the full trading history, Hare's conclusion was that the pattern is inconsistent with trading on inside information. That analysis is what Goldman had paid for, and by his account it proved the point.
The single count came down to one sentence.
Freeman had heard from Bernard “Bunny” Lasker — a former chairman of the New York Stock Exchange — that the Beatrice buyout was in trouble. He rang Siegel to check. Siegel confirmed it. Freeman said: your bunny has a good nose. Then he sold.
That is what he pleaded to. Confirming a rumor he had already heard from somebody else, in a business where, as Hare puts it, everybody traded with everybody on every rumor of every deal in every window.
Hare's assessment is that the exchange probably happened as described — and that it describes something the entire industry did continuously. The count was real. Whether it was the reason for a three-year prosecution is a different question.
He pleaded to that one count.
Hare's reading: Freeman was not prepared to stake twenty years on whether a jury — in his phrase, of plumbers and retired firemen — would follow a portfolio-level derivatives analysis to its conclusion. The press never worked it out. And the prosecution had no reason to stop.
A plea establishes that the risk of trial was unacceptable. It does not establish what happened. This record notes the plea, notes the analysis, and does not pretend the two are the same kind of fact.
Hare's view, and it is stated here as opinion rather than as finding: that the person who should have faced consequences was Rudy Giuliani, then US Attorney for the Southern District, for what Hare characterizes as false and vindictive prosecution.
The contemporaneous record around the February 1987 arrests — the initial charges against Freeman and two others were dropped months later before Freeman was separately re-indicted — is a matter of public record and has been argued over since. Hare's characterization of motive is his own.
It is the first time Hare's work changed anything, at twenty-three, and the method is the one he has used ever since.
The visible surface of a position tells you almost nothing. You have to reconstruct the whole thing — every instrument, every leg, the full lineage — before you can say what it means. That is the argument in the entangled token design, in the insistence that attribution survive transformation, and in this record's own practice of publishing sources rather than conclusions.
He learned it proving that a man's trades did not say what a prosecutor claimed they said.
The reason this case sits in an architecture record rather than only in a memoir is that Hare's conclusion about it is structural.
Freeman pleaded to confirming a rumor, in a business where confirming rumors was the business. Prosecuting individuals for collecting an informational rent does not remove the rent; it selects, more or less arbitrarily, who bears the cost of its existence.
The Universal Exchange removes the rent instead — by rewarding what a contribution caused rather than who knew first, and by verifying without disclosing. The full argument →
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Expert testimony, and where arguments learn to survive attack
Open →whose firm it wasCofounder of Cornerstone Research, and an old friend
Open →the same method, applied to a lifeDictated, unresearched, and rough on purpose — which is the evidence
Open →whose rumor it wasThe nose in question
Open →the structural answerRemove the informational rent and the crime has nothing to steal
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The account this page was distilled from, preserved as dictated.
Read the source →Primary source · S-040The account this page was distilled from, preserved as dictated.
Read the source →Primary source · S-041The account this page was distilled from, preserved as dictated.
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Open the explainer →Consilient Innovators NetworkThe mechanism, set out in full with the condition that would defeat it.
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