THE END OF AN ORDEAL In 1987, Wall Street was shocked when Bob Freeman was arrested for insider trading. Now the case is finally closed.
By Richard B. Stolley REPORTER ASSOCIATE Jacqueline M. Graves

(FORTUNE Magazine) – EARLY ON THE MORNING of May 14, 1990, Robert M. Freeman, an executive well known and respected on Wall Street, kissed his wife goodbye, flew to Pensacola, Florida, and took a taxi to jail. ''When that cab stopped outside the wire,'' Freeman remembers, ''the enormity of what was happening hit me.'' He was strip-searched along with another man, who had showed up drunk, ordered into one of the bright-orange jump suits that identify new arrivals, assigned inmate number 13691-054, and dropped into a population of 300 at the Saufley Federal Prison Camp. Thus ended Chapter 1 of an amazing parable of the financially frenetic 1980s -- the story of Bob Freeman, then 48, Dartmouth BA, Columbia MBA, former Goldman Sachs partner, rich beyond any expectation of his small-town Massachusetts upbringing, father of three, homeowner in an exclusive part of Rye, New York, friend of top executives, Little League coach, and, now, convicted felon. A month earlier Freeman had, with agonizing reluctance, pleaded guilty to a single charge of illegal insider stock trading and received a sentence of four months. His was the last in a series of sensational insider cases that began when Dennis Levine was arrested in 1986 and, hoping for leniency, fingered Ivan Boesky, who accused Martin Siegel, who charged that Bob Freeman and two other arbitragers were his partners in crime. ''The government was on a roll,'' Freeman remembers. ''It was bigger than life.'' Freeman served his sentence, did 400 hours of community service, spent two years settling his civil suit with the Securities and Exchange Commission, and , earlier this summer became for the first time in 6 1/2 years a man free of accusation and suspicion. The ordeal changed him in some profound ways, and yet he is at peace with himself, neither bitter nor angry -- nor to this day convinced he did anything wrong. At Saufley, a minimum-security institution, inmates live in barracks, not cellblocks, and in Freeman's little room were seven others: four whites, three blacks. The inmate population was an eclectic mix -- bookies, drug runners, errant S&L officers. ''Some of the inmates,'' says Freeman, ''were very interesting people, people that I felt comfortable with. Most of them were not criminals. They may have done something wrong, and most did, but only a handful were waiting to get out and do the next con thing.'' For a while, inmate Freeman worked in the mess hall, cleaned toilets, carried cinder blocks; then he applied for a job outside the prison and was assigned to operate a power mower on the golf course at nearby Pensacola Naval Air Station. He remembers a small pleasure: ''Some days, you could see the Blue Angels training up in the sky.'' The man who had been making more than $5 million a year on Wall Street earned 11 cents an hour. On the job, Freeman wore dark-green shirt and pants -- ''like a janitor's uniform'' -- but by 4:30 P.M. he was back in Saufley and had switched to civilian shorts and T-shirt for the daily workout that is so much a part of prison routine. He ran, lifted weights, and played basketball. A sharp-eyed forward in high school and college, he threw himself into competition with the younger inmates. ''I was a pretty good shooter, but I didn't dare drive hard to the basket because I didn't really trust my legs and ankles,'' he recalls with a smile. ''I'd walk back from the gym with 20 guys, and I'd be the only white, the only middle-aged.'' He had gained 30 pounds after his 1987 arrest; in prison, he says, ''I was in the best physical shape of my life, and I was getting my mental strength back too.'' He took pains not to appear superior or aloof. In the prison camp, his life had a blessed sameness about it -- so welcome after the turbulence of the recent past. But it was harsh: Rules were unbending and sometimes incomprehensible -- you could never carry more than a dollar in your pocket -- and a few guards were vindictive. ''Saufley was small and did not have the same homosexuality and violence that higher-level prisons have,'' Freeman says. ''But it was not a country club, and this was not a country club experience.'' There were moments of anger and despair. ''People were under tremendous pressure,'' he says, ''losing their families, getting turned down for parole and knowing they couldn't go back for a year and a half, running the risk of additional charges. You never knew from one day to the next whether a person was going to have a mind-blowing experience. Ninety percent of the guards were supportive, but a handful of them were out to get people, and a handful of inmates were angry at the world. There was a powder-keg feeling.'' Freeman's worst time came in June, when his accuser, Marty Siegel, was let off with a two months' sentence despite his admission that he had accepted $700,000 from Ivan Boesky for illegal stock tips. ''One of the all-time great deals,'' an attorney familiar with the case has called it. Siegel's reward for cooperating with the government outraged Freeman's lawyers, Paul Curran and Robert Fiske Jr., both former U.S. Attorneys themselves. ''It upset them more than it did me,'' Freeman admits. ''Just after that, the Wall Street Journal wrote an editorial very positive about me and very negative about Siegel, and all kinds of inmates came running in. 'Bob, have you seen the Journal? This vindicates you!' I guess there was a plus and a minus to it.'' If the Siegel wrist slap was the low point, a visit by Freeman's family the next month was the high. They were very nervous, his wife, Margo, remembers, not knowing what to expect. ''They search your purse, they tell you what you can wear, what you can say, what you can do, and it's basically a hug and that's it.'' ''When my daughter, Carrie, first saw me, tears came to her eyes,'' Freeman says. ''But she held it. Everybody knew that this was not the time to break down.'' The Freemans -- Margo, Carrie, then 16, and younger sons Clayton, 13, and Ned, 9 -- went outside, sat at a picnic table in the Florida sunshine, and ate lunch bought at the canteen. ''There were a lot of families and young children,'' Freeman says, ''everybody trying to make it as normal as possible. The prison assigned the nicest guards to this duty, and most of them understood and were very good about it. Inmates were proud to have the other men meet the families they had only heard about.'' The Freemans from Rye, the women dressed up, the boys looking quite suburban? ''My family was very different,'' he admits. Yet, Margo Freeman says, ''Everybody was so nice to us, it was a wonderful surprise. It went so well we came back a second time.'' ^ THEN FREEMAN'S SENTENCE was over -- 109 days with time off for good behavior. His roommates threw him a farewell party the evening before -- ''obviously no alcohol'' -- and at 5:30 the next morning, the Friday before Labor Day 1990, he simply walked out the gate in the dark wearing jeans and T-shirt. Not until his plane landed at LaGuardia ''did the impact of being home become real.'' Margo and the children met him at the airport, and they went home for a quiet Labor Day weekend. It was not to be. As they drove past the Apawamis Country Club, they realized that their front lawn was hung with balloons and yellow ribbons and full of people -- friends from Rye who had conspired without Margo's knowledge (or consent) to welcome their neighbor home. ''It took away any of the awkwardness of seeing people,'' she says, ''because Bob had no choice. Everybody was there.'' That weekend he was invited by the Kohlberg Kravis Roberts firm to sit in a corporate box at the U.S. Tennis Open. Bob Freeman was back, but his legal battle was far from over. It had begun at 10:30 A.M. on February 12, 1987, when a U.S. marshal and two postal inspectors came onto the Goldman Sachs trading floor, asked Freeman to step into his glass office, lowered the blinds as his co-workers stared in astonishment, and told him he was under arrest. They ordered him to empty his pockets and recited his Miranda rights. Then, as he sat there, they searched his desk and arbitrage files, and confiscated his Rolodex. ''I was having a hard time fathoming what was going on. I felt almost like Dorothy ((in the Wizard of Oz)).'' Then the officers took Freeman down to their car, where they handcuffed him -- routine procedure, they explained -- and drove him to the federal court for arraignment before a judge. There was much criticism later on -- from the Wall Street Journal, among others -- that the arrests of Freeman and the two other executives were unusually abrupt and made without a full investigation beforehand. For these warrants, the government acted on Siegel's allegations alone. Rudolph Giuliani later called his decision to order such public arrests without investigation his most serious mistake as U.S. Attorney. At the courthouse, reporters and photographers, especially TV crews, were rushing in for a just-called Giuliani press conference. The chief of security at Goldman Sachs, who had driven himself there, threw his raincoat over Freeman's manacled hands, sparing him the journalists' frenzied notice. Upstairs he was photographed and fingerprinted, ordered to surrender his passport, and released on $250,000 bail. ''I thought I was being remarkably cool,'' Freeman says, ''but when they asked me my Social Security number, I couldn't remember.'' That evening the report of the three traders' arrest dominated the news, especially since Freeman came from Goldman Sachs, perhaps the most respected of the big investment banking houses. ''I remember standing in the kitchen,'' Freeman says, ''and listening to my name and the description of this alleged conspiracy on national television. It was like an out-of-body experience because I knew it wasn't true.'' NEXT MORNING, with the court's permission, he left for a long-planned family ski vacation in Colorado, but was so distraught he returned home after a few days. The legal battle began in earnest. He and the two other traders, Richard Wigton and Timothy Tabor of Kidder Peabody, were indicted in mid-April on two counts of insider trading. His lawyers demanded a speedy trial, as required by federal law, and closeted themselves with Freeman to construct his defense. Then a strange thing happened. In mid-May 1987, a week before Freeman's trial was supposed to begin, Giuliani's office asked the judge to dismiss the indictments, promising to return soon with a superseding indictment, a broader array of charges alleging an 18-month conspiracy between Siegel and the traders, especially Freeman. Giuliani spoke ominously to reporters of ''the tip of the iceberg.'' The iceberg never materialized, not even the tip. No further formal charges were ever brought against Bob Freeman, despite persistent rumors, hints, and leaks that indictments were imminent. This period of uncertainty lasted for more than two years, during which Freeman ostensibly went back to Goldman Sachs -- in merchant banking, not arbitrage -- but worked virtually full time on his defense. (The company paid all six years of his legal bills -- ''in the millions,'' one lawyer acknowledged.) His legal defense followed two distinct routes: The first was an appeal to logic by demonstrating that Freeman could not have received inside tips because if he had, his pattern of buying and selling would have been different, often 180 degrees different, from the trading that records showed he actually did. The second was a denial of any wrongdoing because the alleged insider information was in fact known to the public. To gather evidence, Freeman plunged into the past. For every trading day during the year and a half of the alleged conspiracy, he went back and read all the market stories in the newspapers. He studied the trading records of both Goldman Sachs and Kidder Peabody for the same period. He tried to reconstruct all the conversations he had ever had with Marty Siegel. ''I had to prove what didn't happen,'' Freeman recalls. Then on February 12, 1988, precisely one year after his arrest, his case took another turn. A Wall Street Journal anniversary article appeared, summing up the progress, or lack thereof, in the investigation. It contained a quote that, ultimately, literally sent Bob Freeman to jail. The words were uttered by his accuser, Marty Siegel, in a conversation with Freeman on January 8, 1986. At the time, Wall Street arbitragers were closely watching, and investing heavily in, a $6 billion leveraged buyout of the huge Beatrice food company by the investment banking firm of Kohlberg Kravis Roberts. But a snag in negotiations had reportedly developed, and the price of Beatrice stock hung in question. Another arbitrager, Bernard Lasker of Lasker Stone & Stern, who was nicknamed ''Bunny,'' called Freeman to discuss the situation. It was worrisome; many millions of dollars of stock were involved, including $66 million for Goldman Sachs and $1.5 million for Freeman personally. Freeman then telephoned Henry Kravis, an old friend, and found him uncharacteristically brusque. Freeman's apprehension deepened. He finally put in a call to Siegel, who as head of mergers and acquisitions for Kidder was representing KKR. He described his conversation with Lasker and, expecting reassurance, asked if there was any basis for concern. Siegel responded cryptically, ''Well, your bunny has a good nose.'' That conversation took place in early afternoon. A few hours earlier, a concerned Freeman had begun selling Beatrice stock for Goldman Sachs and calls and stock for his own account. After Siegel's quip, Freeman ordered the sale of Beatrice calls for his firm -- the single new action taken as a result of the conversation -- thus getting Goldman Sachs off the hook if the Beatrice deal were delayed.

That Wall Street Journal story was apparently the first time the U.S. Attorney's office had heard about Beatrice and Bunny. Siegel, who had been cooperating so enthusiastically with the government, did not remember making the remark -- and does not to this day. How is it possible that his memory is blank? Freeman has a theory, perhaps far-fetched but provocative. ''In all of Siegel's allegations about me concerning deals,'' Freeman says, ''I believe he simply substituted my name for Boesky -- on Transway, on SCA, on Storer ((three corporate takeovers of the time)). You'd think the government would have asked not just what I did in those stocks, but what Boesky did. The reason Siegel didn't remember our Beatrice conversation was that he wasn't focusing on me but on Boesky. He had not tipped Boesky on Beatrice, so it never occurred to him to say that he had tipped me.'' Freeman recalled the Siegel quote when reminded by an assistant during an internal Goldman Sachs investigation of Freeman's trades, an inquiry that concluded the conversation did not involve inside information. ''That doesn't mean we didn't think there were some legal risks relative to Beatrice,'' Freeman remembers, ''but this was such a marginal thing that nobody thought it was a problem.'' He could not have been more wrong. The government regarded the phone call -- which Freeman consistently acknowledged making -- as an exchange of inside information, and he pleaded guilty to that one count in September 1989. It was, he still insists, ''a very gray area.'' The statutes governing inside information clearly forbid transactions like Siegel's sale of tips to Ivan Boesky for cash, but then the law gets murky. Arbitragers by nature ''fish for information,'' as Columbia University law professor John C. Coffee Jr. put it in a 1989 article in Manhattan Lawyer. The professor then added: ''There are few bright lines by which to separate permissible from impermissible forms of information-fishing. Ultimately, the fewer the bright lines in a field, the more careful we should be about resort to criminal sanction.'' FREEMAN'S GUILTY PLEA was, by his account and those of his lawyers and friends, the most difficult decision he had ever made, or ever expects to make. There were several reasons for it, he says. At the time, he was in the worst physical shape of his life, overweight and tired -- ''the terror for 2 1/2 years, the wearing down; I wanted closure.'' In July a story appeared that hinted the government was considering racketeering charges against Freeman that, if sustained, could have meant a huge fine and a long prison sentence. The campaign of threat and innuendo, in the absence of formal indictments, inevitably affected his fiercely loyal family. ''We kept waiting for the other shoe to drop,'' Margo Freeman says. ''It was a witch hunt.'' Two of the children were targets of unpleasant remarks by schoolmates, but under the circumstances they bore up well. ''That's a tribute more to Margo than to me,'' Freeman says. His friends at work and in Rye, and many strangers, rallied to his side, but there were ''whispers.'' Freeman remembers deciding to march through downtown Rye in a Little League parade even after the publicity of his arrest but admits, ''Margo had to push me out the door.'' Perhaps most chilling, Freeman looked around at other securities trials and saw avenging juries returning convictions in highly complicated cases, sometimes in a matter of hours. ''The atmosphere,'' Freeman recalls, ''was extremely poisoned. For anyone who had anything to do with the Eighties, there was no sympathy.'' (Surveys of potential jurors done on Freeman's behalf verified that.) His defense was admittedly sophisticated, based on proving a negative -- that a conspiracy never occurred -- but he and his lawyers felt that they had a powerful, plausible argument. ''The problem,'' Freeman says, ''was that a lay jury which didn't understand the arbitrage business might feel that it was morally wrong for one person to have an advantage over another. In addition, the dollars were large. I was highly compensated. Our fear was that we would never have gotten to the facts, however strong our case.'' The verdict in one trial was particularly disheartening. Jay Regan, a friend and Dartmouth classmate of Freeman's who was CEO of Princeton/Newport, a brokerage company, was convicted along with several of his colleagues on 63 of 64 charges after less than two days' deliberation. ''I believed Jay and his people were innocent,'' Freeman says, ''and in fact all but a handful of charges were eventually thrown out on appeal, but of course I didn't know that at the time. One of my lawyers was quoted as saying, 'When Bob heard the Princeton/Newport decision, the fight just went out of him.' It was true.'' On and off for weeks, he and Margo talked about what he should do. At first, they were determined to fight. ''I don't care if I have a penny to my name,'' Margo told him. ''What's important here is your reputation.'' But they had to be realistic. ''What would happen if I went to trial on multiple counts, which the government was threatening, and was found guilty, with a long jail sentence and treble damages? What would happen if we were really wiped out? How would we educate our children? We were dealing with our family's security.'' From his years as a Goldman Sachs partner, Freeman was a multimillionaire. But his wealth was vulnerable. Martin Siegel, for instance, was fined $10 million. After the shock of Princeton/Newport, Arbitrager Bob Freeman took a long, rational look at Defendant Bob Freeman. ''When I balanced the risks and costs, both legal and personal, it was, to put it in financial terms, a very high negative expected value.'' ONE FINAL ARGUMENT for pleading guilty was that after 2 1/2 years, the government seemed ready to close its investigation. The charges against Wigton and Tabor had long since been dismissed. Giuliani was running for New York City mayor ''as a law and order candidate,'' as Freeman recalls it. ''The election was in November. The government was anxious for a settlement.'' So, for that matter, was Goldman Sachs. After negotiations with his lawyers, the U.S. Attorney's office agreed to the single charge, and Freeman -- with Margo's reluctant concurrence -- pleaded guilty in September 1989. He also resigned from Goldman Sachs, ending a 19-year career. He was sentenced the following April 17, 1990. His lawyers hoped he might get only probation. Freeman himself calculated there was a one-third chance of probation and a two-thirds chance he would get six months, which in his mind added up to 4.1 months in prison. He was off by three days. In a short speech from the bench, Judge Pierre N. Leval said, ''I have received scores of letters that speak very eloquently in favor of a man who is obviously a human being of value. The particular crime was a matter of temptation, an indiscretion, all of which took place so far as I can see in a matter of minutes.'' But, the judge added, he felt the need for a ''public deterrence.'' In addition to the four months, Freeman was fined a million dollars, which he paid immediately by personal check. When he learned he would be leaving for prison in mid-May, Freeman chose to tell Ned, at 9 his youngest child, while they were playing catch in the backyard. '' 'Ned, I'm going to be able to go away earlier,' I said, 'and that means I'll be home sooner, actually by the end of the summer, and we can go to New Hampshire and have some fun.' And then Ned just collapsed.'' It was the worst moment of his departure. ''I don't want to sound histrionic, but when you go through the big-time prosecutors and the liars and all the rest, it finally comes down to telling your child that you have to go away. That's what it's all about.'' AFTER HIS RELEASE from prison in September 1990, Freeman went to work almost immediately for an old friend, David Murdock, as East Coast representative for his Los Angeles-based investment and real estate firm. But as before, Freeman was preoccupied with legal problems: He had to settle civil insider-trading charges leveled by the Securities and Exchange Commission. Things dragged on; Freeman's lawyers were having sporadic conversations with the SEC, but both had also become involved in other cases. Freeman himself left Murdock amicably after a year, deciding ''that I'm really a stock market person.'' He was tending his own investments and waiting for the SEC when his case zigzagged again in the fall of 1991. A book on the insider-trading scandals, Den of Thieves by Wall Street Journal writer James Stewart, was published and quickly became a bestseller. Among other things, it described conversations between Freeman and Siegel that clearly seemed illegal. The agency apparently decided it could not limit its inquiry to the Beatrice transaction alone and summoned Freeman to testify. It had already questioned Siegel. In January 1992, Freeman was examined under oath for three days. Voluminous trading records on the deals described by Siegel in Stewart's book were submitted in an effort to prove, as defense lawyer Paul Curran put it, ''that Freeman did not do these things and could not have done them in the way Siegel talked about.'' The aggressive defense worked. The SEC ruled that only Beatrice would be considered -- perhaps because it wanted to clear its docket of cases hanging over from the 1980s and had no wish to go to trial, which Freeman had vowed to do if other charges were brought. Last June the commission announced Freeman's punishment. He was fined $1.1 million -- the $548,000 he had saved by selling Beatrice options after the 1986 Bunny conversation, plus seven years' interest -- and prohibited from working for registered investment companies for three years. After that, he can petition the SEC for reinstatement. The suspension was a surprise: Other insider-trading convictions, including Siegel's, resulted in a lifetime bar from working with either registered or unregistered firms. Bob Freeman's was the last high-profile insider-trading case, and aside from the SEC suspension, he is finally clear of all legal entanglements. In the first few months after prison, he completed his 400 hours of community service at Boys Harbor, a pre- and after-school clubhouse for black and Hispanic teenagers in Manhattan, and he remains active in the organization and in a variety of other causes. Freeman is now pondering what to do with the rest of his life. His legal battle took ''a tenth of my life,'' as Freeman puts it. ''There were times when I wasn't sure I was going to get through it.'' Yet, as Thomas Murphy, CEO of Capital Cities/ABC and a neighbor, observes, ''Bob seems at peace with himself.'' His health is good, and so is his marriage. ''Margo sustained me,'' Freeman says. ''I was blessed.'' He's learning to play golf. ''That,'' Margo says, ''could ruin his disposition. Otherwise, he's back to normal.''

Their children are fine. ''I wish they hadn't gone through the experience,'' he says, ''but I think they're stronger because of it.'' Ned, now 12, is showing real interest in the stock market. He discusses Nikkei puts and calls with his father with aplomb. Freeman is pleased -- ''I want to be very careful that my children don't rule out investment banking because of what happened to me.'' He sometimes seems vaguely nostalgic about the years before the roof caved in. ''Those were very exciting days,'' he recalls, ''head of international equities at Goldman, flying around the world, head of arbitrage, one of the two biggest profit centers.'' And yet there is a sense of dissatisfaction now with that high-pressure, heedless life, or so some of his friends think. He is closer to his family than ever, and rejoices in that; he is also closer to himself. ''What he will do, I don't know,'' says one friend. ''But I suspect it will be constructive and positive. And he will lead a life of more -- what do they call it? -- of more self-examination.'' Freeman himself has the last word. A FORTUNE story that appeared shortly after his arrest was headlined ''The Ordeal of Bob Freeman.'' For this article, he proposed a change. ''Call it,'' he said, '' 'The Survival of Bob Freeman.' ''