Raymond Dirks, whose whistleblower case redefined insider trading, dies at 89


Raymond L. Dirks, a maverick Wall Street analyst who was accused of insider trading by securities regulators but later vindicated by the U.S. Supreme Court as a whistleblower of major fraud, died Dec. 9 in Manhattan. He was 89 years old.

His death, in a nursing home, where he had lived since being diagnosed with dementia in 2018, was confirmed by his brother Lee.

Dirks, whom Bloomberg News once called “arguably the most famous securities analyst on Wall Street,” was involved in exposing one of the largest corporate frauds in U.S. history.

He was a 39-year-old senior vice president of Delafield Childs, a research-oriented New York brokerage firm, when, in 1973, he received a tip from a former executive of the Equity Funding Corporation of America that the firm had sold bogus policies. to reinsurance companies, transactions that inflated his assets and profits.

After conducting his own investigation into Equity, a Los Angeles-based company, Dirks told a Wall Street Journal reporter about the fraud and advised his clients who were institutional investors in Equity to dump their holdings.

Equity financing collapsedand several of its officials were prosecuted and imprisoned.

While Dirks was hailed as a folk hero in some circles (The New York Times called him “flamboyant, restless and persistent”), the SEC ultimately censured him for insider trading and for violating the law's anti-fraud provisions by exploiting information. privileged. information and share it with investors. Investors sold their Equity shares before the information became public.

The threat of suspension by the commission and other possible sanctions, along with the $1.5 million (in today's dollars) that Dirks said he spent on legal fees from 1973 to 1983, when he challenged the SEC in the federal court system, severely affected his earnings, his brother said.

That ten-year odyssey ended in 1983, when the Supreme Court overturned the SEC's censure, rejecting the agency's interpretation of insider trading. (The interpretation had also been challenged by the Justice Department in a strongly worded brief.)

Writing for a 6-3 majority, Associate Justice Lewis F. Powell Jr. said the commission's broad definition of what constituted insider trading “threatens to harm private enterprise by uncovering violations of the law.” .

Liability, the court ruled, depended on whether the original source of the information, or “informant,” had breached its legal duty to the corporation's shareholders by passing on the information. In this case, Judge Powell concluded, the tip was motivated by a desire to expose fraud, and “there was no consequential breach” on the part of Mr. Dirks, who had not personally benefited from the sale of company stock.

While the court he sided with Mr. DirksHis decision drew criticism from securities industry regulators and some investors, who warned that it would undermine public confidence in stock trading and make it more difficult to prosecute insider training cases.

“While the SEC will still be able to bring 'hard' cases,” Stanley Sporkinwrote the commission's former compliance director in 1983, “their efforts to reduce tipping and improve market integrity have been considerably weakened.”

Raymond Louis Dirks Jr. was born on March 1, 1934 in Fort Wayne, Indiana. His father, Raymond Sr., was an Army artillery officer who moved his family frequently as he was assigned from base to base. He later was a salesman for an industrial chain manufacturer. Raymond's mother, Virginia Belle (Wagner) Dirks, was a homemaker.

After graduating from Needham High School in Needham, Massachusetts, Mr. Dirks earned a bachelor's degree in history from DePauw University in Indiana in 1955. In 1956, the draft board in Wellesley, Massachusetts called him up for military service. , but successfully. He resisted, despite pleas from his father, an Army veteran, and his brother, who was in the Air Force at the time, claiming that he was a pacifist.

In 1955, Dirks joined the wealth and trust division of Bankers Trust in New York and then moved on to other firms as an insurance stock analyst. He and Lee Dirks (who specialized in newspaper stocks) founded the Dirks Brothers analyst firm in 1969, serving institutional clients. Later merged with Delafield Childs.

He left Delafield after the stock fraud episode and eventually joined John Muir & Co., where he rose to general partner.

But in 1981, regulators ordered Muir's liquidation because he lacked sufficient capital after underwriting stock offerings in highly speculative companies and hosting extravagant parties for clients. One of the underwriting companies involved the Cayman Islands Reinsurance Corporation.

Six months later, the SEC accused that Mr Dirks had failed to disclose in a prospectus for that company that a third of the proceeds from the sale of a new share issue by the Cayman Islands company would be invested in other shares backed by Muir.

A federal judge ruled that Mr. Dirks had violated federal securities laws and had to forfeit company profits. But the judge refused to exclude Mr. Dirks from the securities business.

Mr. Dirks' first marriage, in 1959, ended in divorce after two years. In 1979, he married to Jessy Wolfewho died in 2015. In addition to his brother, he is survived by a daughter, Suzanne Dirks.

Dirks wasn't necessarily destined to end up on Wall Street, but he had been a genius with numbers since childhood.

When he was 12, he devised a complex formula to predict the outcome of football games and, as his brother recalled, “outperformed the football tipsters who were syndicated columnists.”

Working at a car rental agency during a summer break from college, Ray analyzed stock charts and applied his statistical skills to predict the trajectories of individual companies.

At age 19, he began investing the $800 he had saved as a carrier for The Indianapolis News. His father was horrified. As a recent graduate of Purdue University, Raymond Sr. had purchased some AT&T stock in 1928, lost his investment in the stock market crash of 1929, and never participated in the market again.

His son bought 10 shares of Indiana Standard for $780; an hour later, the stock split two-for-one and rose several points.

“I thought he was a genius,” Dirks said. The times in 1983.

He invested his profits in the Gulf, Mobile and Ohio Railroad, and after the stock posted another solid gain within weeks, he sold them.

“At that point,” he said, “I was convinced I was a genius.”

By 1973, after nearly two decades of investing, Dirks had accumulated more capital than he had squandered. Everything he would say, However, it was: “I'm doing much better than average. “I’m not losing as much as everyone else.”

Ten years later, he predicted that the Supreme Court's decision would improve the reputation (and compensation) of stock analysts like him.

“As a result of the Dirks case, analysts may no longer be seen as gnomes with graphs and charts full of outdated numbers and squiggly curves,” Dirks wrote in the Business section of The times. “Perhaps the analyst will now be seen for what he really is: the market research reporter, an essential conduit of information to the investment community.”

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