January 2, 1983 WALL STREET RASCAL: RAYMOND L. DIRKS
WALL STREET RASCAL: RAYMOND L. DIRKS; HE'S DOWN, BUT NOT OUT
By TOM GOLDSTEIN
TWO years ago, for 30 cents a share, the public was given a chance t o invest in a rather unusual company. It had no operating history a nd no assets beyond 150 minutes of film footage of Muhammad Ali. T he company, Meridian Productions, was going to produce movies and t elevision shows. One series, called ''For Love Not Money,'' was to f eature lawyers and judges awaken during the middle of the night to p lay ice hockey. Another would focus on Wall Street boxers who p racticed during their lunch hour and fought matches for charity.
It takes something of a Walter Mitty with a rich imagination to have faith in such ideas. In this instance, Meridian's Walter Mitty was underwriter Raymond L. Dirks, the man who steered John Muir & Company from obscurity to prosperity by bringing to market young and highly speculative companies that other brokerage houses would not touch.
But such imagination has landed Mr. Dirks in Federal Court in Manhattan, where he is on trial for allegedly misusing funds from Cayman Re, one of the company's underwritten by John Muir, to prop up other securities that Mr. Dirks helped bring to market. If found quilty, the Securities and Exchange Commission could then seek to bar Mr. Dirks permanently from the securities industry.
For Ray Dirks, who has achieved fame, if not lasting fortune, since he exposed shenanigans at the Equity Funding Corporation of America and joined the now-bankrupt John Muir, his trial seems to be part of a never ending string of charges and accusations. And once again, his explaination of his current legal trouble is that he is being persecuted by the S.E.C., which, he says, still bears a grudge because it was he, not it, who exposed the widespread fraud at Equity Funding, an insurance firm that sold fictitious policies.
At 48 years of age, Mr. Dirks, a short pudgy man with a cherubic face and belly that hangs perilously close to the middle of his thighs, seems to be without politics, religion, feeling of guilt, grand ambitions or money. ''For a brief period, when I had a lot of money, I had no time, and now I have a lot of time, but no money,'' says Mr. Dirks, who appears singularly unperturbed by his relative penury and the fact that he claims to be nearly broke after earning $990,000 in 1980.
He spends much of his time in bed, reading and watching athletic events on television - his favorite and probably most valuable possession. He once bet heavily on football games. No longer, but he carefully keeps track of the outcome of games the he would have bet on, had he the money. On the Sunday before the beginning of his trial, which is set to resume tomorrow, he was anxious - anxious because his career was at stake and anxious because the time spent with his lawyer preparing for the trial meant he could not watch football games. That day, 10 of his choices won.
His apartment, a small duplex on a peaceful courtyard on Barrow street in Greenwich Village, is now his office, and he is beginning to develop a consulting business with his wife, Jessy, a stockbroker, whom he married two years ago.
Mr. Dirks moved to the apartment 19 years ago when it was decorated in a style thought to be suitable for a bachelor. It is largely unchanged. On the second floor, a wobbly cast iron couch, with a hard uncomfortable cushion covered in a synthetic fabric with a leopard skin pattern blocks the fireplace. Above the fireplace hangs the hollow skull of an animal that Mr. Dirks thinks is a water buffalo. Dozens of frayed dress shirts - some 20 years old - sit in neat piles on top of a dresser. The bed is the major piece of furniture.
A native of Fort Wayne, Indiana, and a graduate of DePauw University in Greencastle, Indiana, Mr. Dirks arrived in New York City in 1955 and went to work as an insurance analyst in the investment department of Banker's Trust. At first, he lived in a rooming house in Staten Island, and he read. ''I read about Clarence Darrow and Gandhi. Those people I admired. They were willing to take on the government, to take on large institutions.'' IN 1956, he tried to register as a conscientious objector, which b ecame complicated becuse he did not believe in God, a prerequisite f or conscientious objector status at the time. It was also the last y ear he voted. Since Adlai Stevenson, says Mr. Dirks, ''there is no p olitician I have liked.''
In his years on Wall Street, Mr. Dirks may have tweaked and annoyed the establishment, but he also gained the reputation of a shrewd researcher and tireless analyst of insurance stocks, and so it is one of those small ironies that Mr. Dirks's defense in the Cayman Re case is that he did not know what was going on between John Muir and Cayman.
He says that if there was wrongdoing, the fault belongs with others, some of whom already have settled with the S.E.C. ''I should not be afflicted with the sins of other people,'' says Mr. Dirks, who estimates he spent 2 percent of his time in bringing Cayman Re public.
After the Government completed the presentation of its case in December, Mr. Dirks's lawyer, Stanley Arkin, felt the commission presented no admissible evidence linking his client to any fraud. Therefore, Mr. Arkin felt it would be needlessly risky, especially in light of the ongoing grand jury investigation, for his client to take the witness stand.
But Mr. Dirks, who sat through the trial fidgeting, slouching, examining exhibits, whispering into Mr. Arkin's ear, making notes and craning his neck to see who was in the spectators' gallery, disagreed. ''My overall position is I don't hide from anything,'' said Mr. Dirks. He initially said he was going to retain a new lawyer and take the stand in his own defense when the trial resumed this week. Now, he has decided to keep Mr. Arkin as his counsel and he is uncertain whether he will take the wintess stand.
Mr. Dirks first found himself in the limelight in the early 1970's, when he published a newsletter, ''Insurance Confidential,'' and his criticism of the Hartford Fire Insurance Company, which had been absorbed by International Telephone and Telegraph Corporation, came to the attention to Ralph Nader, who remains a hero of Mr. Dirks.
Then, in 1973, came Equity Funding. ''A helluva fascinating thing'' is how Mr. Dirks now views his role in making a public splash of how officials of the large California-based financial holding company had created extensive fictitious insurance policies to inflate the company's assets.
An unsolicited tip had put Mr. Dirks on the trail of the fraud, and he told just his major clients and a reporter, who wrote a story of his discovery.
The S.E.C. marked Mr. Dirks as a man who knew too much, and the agency argued he had improperly used inside information that should have been made available to the public. At one point, the S.E.C. threatened to suspend him, but in January 1981, the agency issued a censure instead. That did not satisfy Mr. Dirks, who appealed the sanction to the Federal appeals court in Washington, D.C. He lost. He appealed again, this time to the Supreme Court.
For nearly a decade, he has fought the S.E.C. over his role in Equity Funding, and, this fall, by agreeing to hear his case, the Supreme Court gave a strong signal that at last he may be vindicated. This triumph, perhaps his sweetest, may be dwarfed by his other legal problems. He also the defendant in several lawsuits claiming millions of dollars, and for several months, a grand jury has been looking into his role in the underwriting of Cayman Re, or the Cayman Islands Reinsurance Corporation to determine of criminal charges are warranted.
Since his wrangling with the S.E.C. began, Mr. Dirks has been the beneficiary of skilled legal representation by Arnold & Porter, a Washington firm. He has also been the beneficiary of two unrelated and largely unanticipated phenonmena: the change to a more laissezfaire Administration in Washington and a 1980 ruling by the Supreme Court that loosened the definition of inside information in securities dealings. (That case, involving a financial printer, was successfully argued by Stanley Arkin).
Still, it was something of a surprise this fall when the Supreme Court, with the blessing of the Justice Department, agreed to hear the Dirks appeal. The brief submitted by the S.E.C. argued that the Supreme court should not grant review, but in a highly unusual footnote, Rex Lee, the Solicitor General of the Justice Department, took Mr. Dirks's side, saying that the analyst had no obligation to disclose his discoveries.
Of paramount importance to a law enforcement agency, the footnote said, is the unfortunate message that the S.E.C. position would send to other whistle blowers: By punishing the person who had uncovered the fraud, others who might be willing to report scandal would be deterred. The Supreme Court will most likly hear the appeal in April. M
R. DIRKS cannot capitalize fully on his anticipated vindication, for his days as a high roller ended abruptly with the bankruptcy of John Muir. Mr. Dirks blames his favorite nemesis, the S.E.C., for the decline of John Muir, a once staid firm that had been transformed by Mr. Dirks into an aggressive underwriter of public offerings of highly speculative companies.
By planting rumors and unfavorable stories and by launching investigations into companies brought public by John Muir, ''the S.E.C. was the major instrument in our downfall,'' says Mr. Dirks.
Just before John Muir ceased operations, one old-line broker commented: ''There's not a high degree of linkage between Muir and investment banking.''
If nothing else, Mr. Dirks had fun while he was making money, and the lore and legends of John Muir live on. Waitresses, stewardesses and models were hired to sell stocks. So was Jerry Rubin, the Yippie leader of the late 1960's who once tossed dollar bills on the trading floor of the New York Stock Exchange. There were limousines and parties and high living. It was once reported that on a really big day Mr. Dirks might leap on top of the desk in the John Muir boardroom, and, borrowing from the lyrics of a rock 'n roll song, exhort his sales staff: ''Get it while you can.''
Now, a slightly subdued Ray Dirks, sipping champagne over Sunday brunch, says most of these tales are exaggerated. ''I never said, 'Get it while you can,' '' begins Mr. Dirks. ''That's not so. ... Well, it may be so. ... Well, it might have happened once. ... I don't remember ever getting on a table . ... If it did happen, it was not in normal business hours.''
All told, John Muir brought to market 48 new issues totaling $250 million. They are worth more than that now, says Mr. Dirks. But John Muir left a trail of disgruntled customers as many of these highly speculative stocks suffered precipitous drops. (For example, Meridan Productions, after spurting to 40 cents, now rests at 1/16 of a dollar.)
In a 1980 interview, Mr. Dirks said: ''We recognize some of these new issues may turn out to be very poor investments. But we don't advise anybody to put a big percentage of their money in them.''
Now, Mr. Dirks says, his conscience is clear. ''People come up to me and say I cost them a lot of money. I sympathize with them, but it is not my fault they lost.'' --------------------------------------------------------------------- Tom Goldstein is a freelance writer in New York.
Illustrations: photo of Edward L. Dirks |
