The Return of Gordon Gekko

The sequel to the 1987 film "Wall Street" is on its way, tentatively called "Money Never Sleeps". Personally, I think it should be renamed "The Return of Gordon Gekko" instead -- to capture the popularity of the character played by Michael Douglas.

But what I would like to do is make the following case; very few of the actions which Bud Fox (played by Charlie Sheen) and Gordon Gekko carried out and traded on were actually illegal under securities law at the time. In fact, any sequel to this film should have started with the premise that Gordon Gekko was acquitted on all charges of securities fraud.

Securities law has been materially tightened since the 1980s. I'm judging Gekko against the general principles which operated during that period rather than specific post-Boesky rules. And, Gekko was presumably charged with both securities fraud and tax fraud in the film; since Oliver Stone doesn't show us any material details of his tax arrangements, I can't comment on whether he was guilty on these counts.

All in, the charges against Gordon Gekko would be grouped into six general areas.

1. Trading in BlueStar Airlines (first operation). This is the firm where Bud Fox's father (Carl) works. Carl has become aware, as the union representative, that the FAA is about to rule in BlueStar's favour in a safety case, which will open up a few big routes to them. Bud Fox passes on the information to Gekko, who orders twenty thousand shares.

Potential charge: Insider dealing. Gekko is trading on the information provided via Bud Fox's dad. This is material and non-public information, and it would probably be illegal to trade based on it today. However, under the standards prevailing in 1987, "inside information" has to be "information coming from an insider", and an "insider" used to be defined quite narrowly; it would not have been at all clear that Carl Fox was an insider for securities law purposes. In any case, Bud Fox is certainly not a BlueStar insider; although Gekko actually finds out that his dad is a union rep, he would not therefore have been assumed to have known he was dealing on inside information. Given that at least two people (the comptroller and Carl Fox) have already blabbed about this decision, he would be within his rights to assume that, despite Bud Fox telling him it was incredibly secret, it was actually common knowledge in aviation circles. This charge would never stick.

2. Trading in Anacott Steel. Gekko tells Bud Fox to come up with some more hot tips. He suggests that looking into the activities of Sir Larry Wildman would be a good source. Bud follows Wildman about for a day, then finds out that he has boarded a plane bound for Erie, Pennsylvania (the headquarters of Anacott). Bud passes the information to Gekko, who sees a chance to greenmail his old rival. He instructs Bud to buy substantial block of the stock, then to call the Wall Street Chronicle with the codephrase "Blue Horseshoe loves Anacott Steel".

Potential charges: Insider dealing, market manipulation. Frankly, I don’t see how the insider dealing charge could ever have got off the ground on this one. It is not illegal to follow somebody into an elevator, and it is not illegal to ask their chauffeur where they are flying to. And that is all that Bud does with respect to Larry Wildman. They work out that his target is Anacott by an act of deduction from his aircraft's destination, which is public knowledge (in the sense that anyone who was in the right place at the right time could have got it; if you see a train crash, you do not have to wait until it appears on the evening news before selling the stock of the railway company). Insider information has to be specific information, and the fact that a man has flown to a town is not specific. This is the deal at which the film marks the beginning of the corruption of Bud Fox, and it is, as far as I can tell, completely honest.

The market manipulation charge is a bit more dubious. I must say that I don't like the way in which Gekko handles his relationship with the media, and I suspect that he would be caught today under the rules brought in to deal with "pump and dump" stock manipulations. But rules were significantly more lax in the 1980s, and people did indeed feed tips to the WSJ's "Heard on the Street" column about the dealings of big investors. And note that there is no false information here; Blue Horseshoe is the name of Gekko's trading company, and at the time Bud calls in the tip, it was substantially long the shares of Anacott Steel. It's a gray area, but I suspect that it would have been dealt with via an SEC disciplinary arrangement rather than a criminal charge. The actual greenmail which annoys Larry Wildman so much is not a criminal offence and never has been. It's just not against the law to buy something that you think other people will pay you a lot of money for.

3. Trading in Fairchild Foods and Roarker Electronics. It's not clear quite what goes on here, but it seems to me that Bud bribes the owner of a cleaning service to get a job which allows him to wander round the offices of his college friend Roger's law firm at night. He basically xeroxes documents relating to forthcoming mergers and acquisitions and uses the information to trade on behalf of Gekko.

Potential charges: Conspiracy to theft, insider dealing. Bud Fox has clearly gone way over his head here and is guilty of burglary and securities fraud. But how much of it can be pinned on Gekko? Not much, I'd say. Gekko calls Bud from his beach-house and says "You done good, but you gotta keep doing good. I showed you how the game works, now school’s out […] You don't understand. I want to be surprised …astonish me, sport, new info, don't care where or how you get it, just get it […] This is your wake-up call. Go to work". In the context of the film, it's clear what he means, but I think you would have a very hard time indeed in court proving that Gekko meant "Commit numerous counts of felony burglary" when he said "don't care where or how you get it, just get it".

Gekko clearly appears to be structuring his affairs in order to reduce the appearance of a paper trail linking him to Bud Fox; he asks Fox to trade through a number of nominee accounts, and to act with limited power of attorney over the money he manages. But in the absence of any non-circumstantial evidence, there are a million and one reasons why he might do this. Indeed, Gekko might say that he specifically arranged his affairs this way in order to bring home to Fox that he alone would bear the consequences of any illegality, in order to ensure that he didn't break the law. The point at work here is that Bud Fox is never an employee of Gordon Gekko (he keeps his job at the brokerage throughout the film), and so Gekko has next to no duty of supervision.

4. Conduct surrounding the tender offer for Teldar Paper. This is the centerpiece of the film, where Gekko makes the "Greed is Good" speech. Teldar is a paper company that Gekko regards as poorly managed, and he wants to take it over to break it up.

Potential charges: None? Corporate raiding is not illegal, and Gekko is perfectly within his rights to buy a lot of stock in a company if he thinks he can run it better than the incumbent management. Gekko was buying stock in Teldar before he ever met Bud Fox, and by the time of the meeting, he is the largest single stockholder. Teldar paper is "leveraged up to the hilt like some piss-poor Latin American country", but this can't possibly be Gekko's fault; he isn't in charge of it at the time of the shareholders' meeting. Oliver Stone clearly put this scene in the film in order to point out that most of what Gekko does which he considers harmful, he does within the bounds of the law (this is also true of Ivan Boesky, the financier upon whom Gekko appears to be loosely based. Boesky was sent to jail on relatively minor insider dealing charges, but his real fortune and reputation was based on perfectly legal, if sometimes spectacularly ill-advised, junk bond issues).

5. Trading in BlueStar Airlines (second operation). Gekko decides to take over BlueStar in order to carry out a similar breakup. He uses Bud as his intermediary, in order to ensure that he will have co-operation from the unions for doing so. In the course of the negotiations, he makes a number of promises; he claims that he wants to turn the company around with Bud as President (why the company is in need of a turnaround is not clear; I thought that the FAA decision was meant to mean that it was all systems go for BlueStar). Bud later learns that Gekko has no intention of keeping these promises; he simply intends to raid the pension fund and then break up the company. As Gekko buys stock, Bud and the unions announce that they no longer stand by the informal commitments they have given, and the price plummets. This allows Larry Wildman to step in and take the company away from Gekko.

Potential charges: Insider trading, market manipulation, breach of takeover regulations. Again, Bud Fox is the villain here, and he has been scandalously unprofessional in his treatment of Gordon Gekko as a client. It is not against the law to carry out due diligence on an acquisition you are thinking of making, and that includes talking to union representatives. The only price-sensitive information Gekko has is his own intention to make a bid, and that is privileged information; it can't be inside information by definition. What is highly illegal is for someone like Bud Fox to take that information to a third party (like Wildman), and having received it from what he explicitly knows to be a privileged source, for Wildman to act on it. I have no idea why Wildman is not indicted toward the end of the film; he has clearly been responsible for creating a false market in this stock in order to get it at a lower price (particularly, Bud encourages Gekko to part with a block at $17 when he knows that Wildman intends to tender $18; this is about as blatant as fraud gets).

I note that it is usually not illegal for the acquirer of a company with an overfunded pension fund to buy "minimum annuities" for the fund members and pocket the surplus, although this issue is academic as Gekko never gained control of BlueStar. Of course, these days, the likelihood of finding a US regional airline which still had an overfunded defined benefit pension plan to plunder would be pretty low.

6. Trading in Fulham Oil, Brent Resources and Geo Dynamics. These are the companies that Gekko mentions to Bud shortly before punching him on the nose. They aren't mentioned anywhere else in the film. But given the context, I have no reason to believe that anyone could make a charge stick on these companies either.

So that's basically the plot of the film. Gordon Gekko, an aggressive but perfectly legal financier, makes a mistake in hiring a thoroughly dishonest stockbroker to act for him, is made the victim of a scandalous securities fraud and then, for unknown reasons, is indicted along with the person who defrauded him, while the main conspirator in that fraud walks free. It's a travesty of justice.

Keep in mind that I did not condone what Gordon Gekko has done in the film. The points I just mentioned are just to clear a way for Gordon Gekko to start afresh in the new sequel.