Broker, Trader, Lawyer, Spy - Eamon Javers [56]
JULES KROLL NOW had a vision for the future. Almost on cue, opportunity presented itself. The investment house Drexel Burnham Lambert underwent a damaging episode. The firm had taken the lead in underwriting a $25 million debt offering for a charter airline company, Flight Transportation, in 1982. Just a few weeks later, the FBI announced that Flight Transportation was a sham company—an airline without airplanes. Law enforcement officers rounded up the top executives. That Drexel had missed this obvious scam was embarrassing to its chief executive officer, Fred Joseph. He vowed that Drexel would never again be taken by surprise by such criminality. “Fred Joseph was appalled,” Kroll remembers. “He said, ‘we’re going to check out everyone we underwrite in a way that has never been done before.’” Kroll got the contract to do the spadework. It was his firm’s entrée into high-level Wall Street wheeling and dealing, and it was an opening to a huge new market.
“That’s when ‘Kroll’ became a generic name on Wall Street,” he says. From then on, firms on the verge of a huge transaction would hire Kroll to dig into the backgrounds of the people sitting on the other end of the conference table. Solomon Smith Barney hired Kroll. Other big names followed. Fred Joseph made Kroll, setting up a firm that began with one man to become a business earning hundreds of millions of dollars a year. And Joseph wasn’t shy about trumpeting his new investigative firm in the press, telling one reporter, “Kroll signals red flags, like the time we were told a company used underworld connections to solve some labor problems. We decided not to do the financing.”4
But there was one problem: Fred Joseph’s firm, Drexel Burnham Lambert, was increasingly dependent on the junk bond trader Michael Milken, who was based in Los Angeles. And in all the time Kroll worked for Fred Joseph and Drexel, its veteran law enforcement sleuths never figured out that their big client was running what amounted to, in many respects, a criminal enterprise based on insider trading in the junk bond market. Milken turned out to be one of Wall Street’s worst crooks. Kroll didn’t catch him, or even have a clue that fraud on such a vast scale was going on inside the prized client’s office. It was all the more embarrassing because Drexel had hired Kroll to do internal investigations of people the firm’s top executives suspected of insider trading. Those were limited, narrowly defined investigations. Drexel didn’t hire Kroll for a systemic analysis of its own business. For the most part, Drexel hired Kroll’s detectives to look out, not to look in. Kroll would continue to work for Drexel until the day the firm went bankrupt in February 1990.
To this day, Jules Kroll has a difficult time reconciling the two sides of his most important client. Fred Joseph presided over one of the most spectacular corruption implosions on Wall Street during the 1980s, and he was barred from ever serving as a CEO on Wall Street again. Drexel pleaded guilty to six felony charges and paid $650 million in fines in 1988. But Kroll sees only the good side of his old friend: “Fred is a very dear personal friend of mine,” he says. “Fred Joseph is a very, very, straight shooter.” In Kroll’s eyes, Joseph was simply another victim of Milken’s scheming. “Fred was riding a tiger, and Michael Milken was a genius.”
The late 1980s were a boom time for Jules Kroll, and his firm continued to expand its services. Kroll sent an undercover operative into the mailroom of the Wall Street law firm Davis Polk and Wardwell to help investigate a cocaine dealer suspected of selling drugs to employees. Kroll conducted