THE ORDEAL OF BOB FREEMAN Wall Street was shocked when the head of arbitrage at Goldman Sachs was arrested for insider trading. Now he is buckling down to fight the charges.
By Richard B. Stolley REPORTER ASSOCIATE Marta F. Dorion

(FORTUNE Magazine) – BOB FREEMAN was relieved. As the head of arbitrage at Goldman Sachs & Co., he had been identified in the press last November as a possible target in the spreading insider trading scandal. A lengthy internal investigation by Goldman's outside lawyers had just absolved him. ''Bob,'' a close friend recalls, ''thought he was okay.'' He wasn't. On February 12, Freeman was arrested without warning in his office, taken to the U.S. Court House in handcuffs, and charged with securities fraud. Wall Street went into shock. Goldman Sachs has long been perhaps the most respected of the big investment banking houses. If anyone seemed beyond suspicion, it was Goldman, and Freeman was well known on the Street as one of its most highly prized partners. For them to be caught up in this sleazy affair seemed almost beyond belief. The scandal began in May 1985 with the arrest of Dennis B. Levine, then a managing director of Drexel Burnham Lambert. Levine was charged with using inside information -- information not generally available to the public -- to make more than $12 million in illegal stock market profits over a five-year period. Nailed by an anonymous tipster, Levine became a central figure in the mushrooming investigation. To simplify a tangled sequence of civil and criminal charges, this is how it went. Levine implicated the celebrated arbitrager Ivan F. Boesky. Boesky fingered Martin Siegel, a former Kidder Peabody executive. Siegel accused Freeman, and with him Richard Wigton, 52, a vice president at Kidder, and Timothy L. Tabor, 33, a former vice president at the firm. Although the government has released few details of its investigation, it is said to have . evidence that the three men repeatedly broke the law by using inside information to trade the stocks of companies involved in takeover attempts. If found guilty of the charges already made public -- and others are expected to follow -- they could go to prison for up to 20 years. The case of Freeman et al. is different from those that have appalled America for the past year. All three executives insist they are innocent, unlike Levine, Boesky, and Siegel, who pleaded guilty and turned in other alleged malefactors in exchange for lenient sentences. Freeman, in addition, has had the militant support of his firm. Goldman says not only that it believes he is innocent but also that it will cover his legal expenses and keep him on the payroll while he awaits trial. Kidder Peabody paid the legal fees of both Wigton and former employee Tabor until their indictment, but then stopped. Following a policy set by parent company GE, Kidder has also suspended Wigton without salary. Goldman's almost defiant support of Freeman has surprised Wall Street. Some investment bankers suggest it is because the partners at Goldman could theoretically be held liable for massive damages by companies whose stocks were affected if Freeman is convicted. A general partner denies that is the reason and offers another: ''It is not very complicated. People really believe in Bob. He has been with the firm since 1970 and a partner for quite a number of years. Letting him fight alone just isn't the way Goldman Sachs deals with people.'' And so the battle lines are drawn in the dramatic case of United States of America v. Robert M. Freeman, indictment 87CR293, Southern District of New York. MUCH IS MADE these days of fast-track yuppies on Wall Street. Freeman, 44, is not of that generation; in many respects he is from another age. Job- hopping is not his style; he has worked at Goldman for almost 17 years. Other investment bankers like and respect him. A competitor calls Freeman ''very thorough and sharp-witted.'' In Rye, the affluent suburb where he lives with his wife and three children, he is known as a do-gooder. He coaches Little League and raises money for the library. When a casual acquaintance got sick on a commuter train, Freeman helped him home. Thomas Murphy, C.E.O. of Capital Cities/ABC, is a neighbor. ''I like everything I know about the guy,'' says Murphy. ''He's a fine family man. It's very hard for us to believe he did anything wrong. He doesn't seem the type.'' One friend and one business colleague use the same term to describe Freeman: all-American boy. That certainly is how he is remembered in Winchester, Massachusetts, the Boston suburb where he grew up. His father was a builder, and the Freemans lived on the wealthier west side of town. On the east side were the Italians, other ethnics, some blacks. The two populations, according to a former resident, ''stayed to themselves.'' Freeman was an exception. A high school classmate, Paul Ganchi, remembers fondly, ''Bobby was one of the few kids from the other side of town that I spoke to and got along with. He wasn't stuck up. He didn't think he was better than us.'' Says Ganchi about Freeman's current troubles: ''I wish him the best of luck. In plain English, I hope he gets his ass out of the bag.'' Freeman earned good but not spectacular grades. Another classmate, Evander French, now a school principal in Winchester, remembers him as ''more of a jock than a bookworm.'' He won his letter in baseball as a left-handed outfielder and pretty fair hitter, but basketball was his best sport. ''He had a tremendous set shot,'' French says. ''Bobby was a very good competitor. He was someone you could depend on.'' The Freeman family had five sons, no daughters. One of the boys, Steve, was crippled by polio. ''Bobby was great with him,'' French recalls. In high school, Freeman's eye was caught by a pretty blond field hockey player named Margaret Jean Harmon, described in the yearbook as ''pert'' and ''flirtatious.'' Two years younger than Freeman, Margo Harmon went on to the University of Colorado, then moved to New York as an administrative assistant in an investment banking firm. Their paths crossed again, and in 1969 they were married. Freeman attended Dartmouth, where he majored in Spanish, played interfraternity sports, and made one friendship that endures to this day. The friend is Sven Karlen, a money manager in New York. After graduation, he and Freeman and two other Dartmouth men shared an apartment in Manhattan. The year was 1967. Freeman worked briefly and unhappily in advertising. The other three went to Wall Street. ''We were having a hell of a lot of fun,'' says Karlen, ''and Bobby was not enjoying his career the same way. He wanted to change, and decided to go to business school.'' While at Columbia he took a lot of finance courses, fell in love with the field, and after getting his MBA headed for investment banking. His first choice was Goldman Sachs. Freeman's immediate boss at Goldman was Robert Rubin, then chief of arbitrage and now one of the firm's top managers. It was the early Seventies, and arbitrage was in the doldrums. Deals were scarce because stocks were high and corporate scouts were finding few companies attractively priced. For Freeman, the timing could hardly have been better. ''He was learning like crazy from one of the top arbitrage guys on the Street at a time when there was no pressure,'' says old friend Karlen. ''When the market recovered in 1975 and 1976, Bobby already had several years of experience under his belt.'' He took full advantage. In 1978 he was made partner at Goldman, a promotion that guaranteed he would become a rich man. Today Freeman is one of 106 partners and his stake in the company is worth more than $10 million.

Risk arbitrage (basically, speculating on the stocks of companies involved in takeovers) is probably the most competitive business on Wall Street, and Bob Freeman is surely one of the fiercest players in that tense arena. Fellow commuters at Rye station knew better than to approach him as he waited for the 7:05. He was furiously marking up his Wall Street Journal and New York Times, looking for signals of possible takeovers. In the office, he was a meticulous researcher, digging through financial reports and proxy statements, making phone calls to company officers, bankers, lawyers, and other arbitragers (Boesky among them). He was, as a Wall Street executive puts it, ''soaking up information, evaluating it, and then making his bets.''

He drove his department hard. A colleague acknowledges that Freeman could lose his temper ''when he felt people were not doing what they ought to be doing,'' but adds, ''In the context of a trading room, where the atmosphere is highly charged, I think he got angry less often than most.'' Karlen calls Freeman ''a fiery competitor who hates to lose. But he's always fair. When you compete in sports with people over a period of time, you get to know the guys who'll roll the ball out of the rough to win. Bobby is not one of those guys.'' IN RYE, Freeman's life centered on his family -- Margo, now 42, Carrie, 13, Clayton, 10, and Edward, 6. They live in a private enclave tucked behind the exclusive Apawamis Country Club, reachable only by a single narrow road. Their lifestyle is very comfortable without being ostentatious. Over the years, Freeman sometimes talked with friends about morality on Wall Street -- ''the subject of leaks, how people knew about things, what's right and wrong, what's appropriate and not appropriate,'' as one of them describes it. Freeman seemed especially concerned about young people and how unsophisticated they could be about efforts to extract information from them. ''To me,'' says this friend, ''he was not putting on a theatrical performance. He really felt that way.'' In mid-1986 Wall Street was seething with rumors about illegal insider trading. ''I kept hearing that Boesky was in trouble,'' Sven Karlen recalls. ''My antenna went up immediately.'' Then, in November, the Wall Street Journal reported that Freeman might be subpoenaed. ''His reaction was fear,'' Karlen continues. ''Everybody in that business knows that you constantly deal with insider information. The question is what you do with it. If a guy like Boesky is singing songs to the feds in order to reduce his sentence, and if you've had some conversations with him over the years, you've got to be concerned that he can say anything he wants to say. It was a very tough situation.'' Goldman's internal investigation was conducted by Lawrence Pedowitz of Wachtell Lipton Rosen & Katz, a big New York law firm. Pedowitz refuses to give any details, but one of Freeman's friends says the lawyer checked files and grilled Freeman about why he made specific trades. He did not question anyone outside Goldman. The investigation lasted more than two months and in effect exonerated Freeman. Then at 10:30 A.M. on February 12, two postal inspectors and a special deputy U.S. marshal, all armed, showed up at Goldman headquarters at 85 Broad Street. They took Freeman to the basement of the federal court house, where he went before a judge and was then fingerprinted and photographed. To represent him, he quickly hired Paul Curran, a tough former U.S. prosecutor who is a partner at Kaye Scholer Fierman Hays & Handler. Bail was set at $250,000 and Freeman was ordered to turn in his passport. The next day, remarkably, he took his family to Colorado for a long-planned ski vacation; he said he did not want to disappoint the kids. Friends reacted to his arrest with disbelief. One was boarding a plane for London when he heard the news. ''They must be talking about a different Bob Freeman,'' he thought. As for Freeman himself, ''It absolutely scared the daylights out of him,'' says Karlen. FREEMAN WENT through several brutal weeks. ''Some days were okay,'' one . friend explains, ''some were awful. My children all know him, and they often ask, 'Is Mr. Freeman going to be okay or is he going to jail?' You can imagine what this does to his own kids.'' Today, Freeman's life has settled down a little. He still has his office at Goldman but rarely goes there. He spends most of his time working on his defense, alone and with Paul Curran. In an even more exhaustive reprise of the Pedowitz investigation, he is going back over his investment decisions, ''trying to recall all his conversations, whom he dealt with and what the rationale was for all his trading for Goldman and his own account,'' a friend says. The fiery competitor that Sven Karlen has known for 25 years is feeling increasingly competitive. Karlen explains: ''He feels that this is all a bad dream, but he's said to himself, 'I'm going to do what I've always done. I'm going to be the best prepared guy I can be.' Basically, Bobby realizes he's got a new job now, and the job is to fight the charges.'' Life in Rye is as normal as Freeman can manage. His Little League team has begun its season. Though he and Margo have never been suburban social butterflies, they go to parties occasionally. And at Karlen's urging, the two men are running together more than ever. ''You've got to be not only mentally prepared, but physically fit,'' Karlen told him. ''You'll be able to handle the strain better.'' The trial is expected to take place by the end of the year, maybe sooner, after the usual legal maneuvering. Freeman, Wigton, and Tabor will be tried together on the charge that they exchanged illegal inside information through Martin Siegel, who pleaded guilty February 13 to participating in such a conspiracy. The stocks of two corporations, Unocal and Storer Communications, were identified. Freeman specifically is accused of giving out inside information on Unocal, a Goldman client, in exchange for information on Storer, whose stock he bought, earning ''substantial amounts of money for Goldman Sachs, the defendant Freeman, and members of his family.'' A second indictment, presumably naming the stocks of other companies, is coming this month, the government has said. Directing its case is Rudolph Giuliani, the politically ambitious U.S. Attorney for the Southern District. Though Wall Street has generally applauded Giuliani's campaign against crooked traders, his pursuit of the Freeman case has been criticized as unnecessarily harsh and publicity seeking -- especially his decision to arrest the three executives as if they were most-wanted desperados about to flee the country. Giuliani blandly dismisses the complaints: ''The impression has been created that they were the first people arrested for white-collar crime or insider trading. That isn't true.'' Indignation in the financial community persists, but traders and investment bankers got the message the government wanted to send: Securities fraud defendants will not get white glove treatment. The case against Freeman is expected to depend largely on the testimony of Siegel and whatever corroboration the government can provide through other witnesses and documents. There are persistent reports that Giuliani has another important witness up his sleeve, and Boesky's name has been mentioned. Says a rival arbitrager who knows and respects Bob Freeman: ''I'm afraid in my heart that Giuliani has some compelling, corroborative evidence against Freeman. Giuliani is not a free shooter. He wouldn't take on an institution like Goldman without something substantial.'' (In so doing, Giuliani, a Republican, has turned Robert Rubin, Freeman's former boss and an important fund raiser for the Democratic party, from a mere political opponent into a personal enemy.) Siegel could be quite credible on the stand. He is remembered on Wall Street as a very smooth, very successful salesman -- what one of his business school classmates calls ''a hell of a presenter.'' Although insider trading regulations are murky, the government's case is not likely to be mired in the gray areas of the law. ''My guess,'' says one of Freeman's associates, ''is that they have Siegel saying Freeman told me this, this, and this, and I told him that, that, and that. It's all going to look pretty black and white.'' The defense will have no choice but to try to dismantle Siegel, concentrating on his admission that he was paid handsomely to supply Ivan Boesky with inside information. Freeman's lawyer, Paul Curran, bitingly suggests how he intends to challenge Siegel's credibility: ''Siegel is a confessed felon who was picking up tons of cash on street corners. Wigton and Tabor were his flunkies.'' The trial will be the first of the current scandal -- if it actually takes place. Some Wall Street lawyers doubt that it will and predict that the pattern of plea bargaining will continue. As one of them puts it, ''I think these guys will probably fold somewhere along the line.'' This attorney, who & has done investigative work on Wall Street, says, ''My guess is that the government has all kinds of secret recorded conversations. It's going to really squeeze these guys, and it doesn't take much to squeeze white-collar people. They want to stay out of jail so they talk. They give up their golfing buddies, their mothers, their cousins. As the mobsters would say, there isn't a stand-up guy among them.'' Could Bob Freeman ''roll over''? At this point, it seems unlikely. Goldman Sachs has made clear it thinks he is innocent. His friends insist he will go to trial and win. And yet. Asked the question, one Wall Street executive who knows Freeman well gave this tortured answer: ''I don't think it is conceivable unless new evidence comes up. Let me put it another way. Assuming for the moment that he's innocent . . . no, I don't like that word. Assuming he didn't do what he is charged with doing, and I think the probability of that is extremely high, then I think the probability of Bob making a plea is extremely slight.''