Welcome to The World of Sleaze

Federal prosecutors were popping champagne corks in New York City as well last week. A Manhattan jury convicted five executives of Princeton/Newport Partners and a former trader for Drexel Burnham Lambert of 63 felony counts stemming from illegal stock-trading schemes. They were fined a total of $3.8 million. The case marked the first time the Racketeer Influenced and Corrupt Organizations Act has been used against Wall Street executives, and thus lays the groundwork for the Government's prosecution of junk-bond king Michael Milken, formerly of Drexel. Since Drexel was Princeton/Newport's main partner in the illegal trades, evidence from the trial is likely to be used again, against Milken.

For nearly two decades Princeton/Newport paid investors a 19% annual return by using computers to take advantage of small discrepancies between the prices of stocks and their associated warrants, which are the rights to buy stocks at a certain price. But then founding partner Jay Regan got greedy. According to the Government's case, the Princeton/Newport executives tried to manipulate the market, starting in mid-1984, through a technique called stock parking. They arranged to sell some securities at a loss and then repurchase them at the same or slightly higher prices. The party ended one wintry day in 1987, when 50 federal marshals burst into the firm's offices, situated above a Haagen-Dazs shop in Princeton, N.J., and confiscated 255 boxes of company records and 336 hours of taped phone conversations.

The most damning -- and colorful -- evidence was on tape. In one casual exchange between Drexel's Bruce Newberg and Princeton/Newport partner Charles Zarzecki, the prosecution saw evidence that the co-defendants knew exactly what they were up to. Newberg teasingly calls Zarzecki "a sleaze bag." Zarzecki's retort: "You taught me, man." Replies Newberg: "Welcome to the world of being a sleaze."