The Gordon Gekko era: Donald Trump’s lucrative and controversial time as an activist investor

New York (CNN)At the height of the US economic boom in the 1980s, there was one clear star of Wall Street: the corporate raider, high-flying takeover artists registering big headlines and even bigger paydays. Naturally, real estate magnate Donald Trump wanted in on the game.

    For Trump, his brief period as an activist investor of sorts was a lucrative turn in his career — at one point netting him more than $200 million for just a handful of targets — but also a controversial one. His profits were real, but so was the appearance of strategy that brought allegations of stock manipulation from rivals, regulators and lawmakers.
    It’s a four year-period Trump, now the Republican presidential nominee, never mentions on the campaign trail. Yet his venture into the high-risk, high-reward world of the “Barbarians at the Gate” offers a window into the deal-making strategy that forms the basis for Trump’s presidential campaign — and remains the stated approach the New York billionaire plans to deploy with vigor from the Oval Office should he win.
    Trump had a contentious relationship with Holiday Corp. before he ever started buying stock in the company. The Trump Organization and Holiday skirmished repeatedly over their joint ownership of a casino in Atlantic City. They traded lawsuits, one of which included Trump’s description of himself as “an entrepreneur who has achieved national and international prominence, reputation, and recognition as the result of the outstanding success he has achieved in conceiving, developing, and promoting various enterprises.”
    Eventually, Trump would buy out Harrah’s ownership in the property in March 1986, seemingly putting an end to the drama.
    Five months later Trump went after the casino operator’s parent company.
    Trump quietly began buying Holiday Corp. stock that August, and shortly after, instructed investment bank Bear Stearns to do the same — just not under his name. It was a deliberate effort to dodge federal reporting requirements that would have tipped the company off to his intentions, according to a complaint the Federal Trade Commission later filed.
    “He wanted to accumulate as much as possible before he had to notify the target,” said Jeffrey Zuckerman, the former director of the FTC’s Bureau of Competition, who oversaw the suit. “That’s what this was all about.” By the time Trump was done, he would hold 4.9% of the company’s shares — and send the company’s management scrambling to block what appeared to be a takeover attempt.
    That reaction wasn’t off-base. Trump had amassed the reputation and cachet crucial to pulling off the kinds of hostile takeovers then dominating the headlines with names like Carl Icahn, T. Boone Pickens and Nelson Peltz. He was a newly minted billionaire with his own plane, helicopter, Fifth Avenue skyscraper and an oceanside compound in Palm Beach. He was the largest developer in Atlantic City and had the type of relationship with Wall Street banks that all but guaranteed he could get financing to take down any target.
    There were also clear strategic reasons why Trump would want to acquire the company. Trump had long been looking for a way into the Nevada gaming market, and Holiday, with two casinos in the state, offered the opportunity to make that happen.
    As Trump finalized his stake in the company, articles started to appear with “well-placed sources” in Trump’s orbit attacking the company’s management and threatening a takeover. A former Trump Organization official who worked with Trump during the period told CNN “it was almost always Trump who was the unnamed source or sources” in these stories.
    The effort had its intended effect. Holiday Corp.’s board would, by that November, propose a $2.8 billion plan to restructure the company’s debt — one that gave shareholders a $65 per share dividend. The intent was clear: Block Trump’s takeover effort. The company’s stock price jumped. Trump sold his stock. He made more than $30 million in four months, having never presented a tender offer to the company.

    ‘A gaming license is not a hunting license’

    It was one of two deals Trump pursued that directly affected the gaming industry and, as such, drew scrutiny from gaming regulators. Takeover efforts — or feints in that direction — were center stage at Trump’s April 1987 casino license renewal hearing in New Jersey.
    “A gaming license is not a hunting license,” Walter N. Read, the Republican-appointed chairman of the New Jersey Casino Control Commission, told Trump’s lawyers at a 1987 hearing, according to a transcript CNN obtained. The state’s gaming rules, Read pointedly continued, do “not encompass the use of a casino license as a weapon to weaken or undercut the financial integrity of its competitors.”
    Yet that, according to Read, was exactly what Trump had done over the course of the previous year.
    Trump’s emergence on the scene in Atlantic City had been generally welcomed by state gambling regulators. A fair-haired New York developer, Trump had a laudable attention to detail, a focus on building the best — and most competitive — casinos, and perhaps most notably, no sign of ties to the organized crime families that caused endless headaches for state officials, according to Carl Zeitz, a commissioner at the time.
    Trump repeatedly told regulators his goals in accumulating the stock of his competitor and former partner were not only benign, but also not at all informed by his past relationship or deep knowledge of the company. “I purchased it as an investment in a company that I thought was undervalued at the time,” Trump said of his sizable stake.
    Asked if he thought he was the reason the company moved quickly to restructure, he pleaded ignorance. “I mean, it’s possible it did, to be perfectly honest, it’s very possible, but I don’t know.”
    Asked if he thought the restructuring was good for the company, Trump said simply: “I don’t think it was.” He was right. Holiday Corp. was wounded. By 1988, the company’s management was forced to engineer the sale of its Holiday Inn franchise and the company’s parts were sold off for significant value for shareholders. Thousands of employees at the company’s Memphis, Tennessee, headquarters eventually would be laid off in the process.
    Trump, for his part, took to pointing out that by definition, his actions with Holiday Corp. weren’t greenmailing. He sold his stock on the open market, not back to the company at a premium. But that was more luck than strategy. As Trump made clear in his testimony, the stock jumped so much it was the only logical move.
    Despite his claims to the contrary, he’d explicitly broached the idea of selling his stock back to the company for a premium, the company’s CEO, Michael Rose, told the commission.

    ‘When I do research on things, they never work out well’

    Trump didn’t let his Holiday Corp. payday sit for long. Within days he’d picked out another target, one that just so happened to be another competitor in the casino business: Bally.
    Again, he instructed Bear Stearns to do the same on his behalf, but under its name. He would use his Holiday proceeds to purchase $14.8 million in Bally stock, Trump acknowledged in his casino commission testimony. The total fell deliberately just short of the $15 million line that would trigger a need for federal notification. The whole strategy, according to Zuckerman, the former FTC official, was simple: “You’re trying to keep it quiet.”
    But while Trump’s ability to establish a major position in these companies quietly was clearly strategic, his rationale for doing so appeared less so — at least according to him. In fact, when it came to Bally, he got the idea of going after the company from a single conversation with a single analyst — Dan Lee, his trusted confidante from Drexel Burnham, Trump told a Bally lawyer in a deposition reviewed by CNN.
    “He was certainly greenmailing,” said Zeitz, now a Democrat supporting Hillary Clinton. “There’s no doubt that was going on. That’s why Bally went out and made a really stupid deal.”
    Asked during his casino license hearing if he had greenmailed the company, Trump said no.
    “If I really wanted to, to use your term, greenmail, I could have probably done this a lot sooner and a lot easier and not have to go through all of the expensive litigation and the expense of, you know, the fight,” Trump told the casino commissioners. “I’m not a person that, despite what people think, particularly loves litigation.”
    Asked if he considered himself a greenmailer, Trump demurred: “I would rather say I sold my stock back to the company as opposed to greenmail, if I could do that. I’m not sure. I hate to refer to myself as a greenmailer.”
    Behind the scenes though, Trump was blunt about what he’d accomplished, according to John O’Donnell, a former Trump Organization executive.
    “Donald had bought a sizable chunk of Bally stock, then induced the company to buy it back at a premium to avoid a takeover — ‘greenmail,’ as the practice is known,” O’Donnell wrote in his 1991 book “Trumped! The Inside Story of the Real Donald Trump — His Cunning Rise and Spectacular Fall.”
    Trump’s lawyer at the time, Nicholas Ribis, made their position clear: “The record is clear in Mr. Trump did not buy stock with the intent of seeking a premium but, rather, to make a sound investment.”
    In 1990, Trump agreed to pay out $2.25 million to Bally shareholders who sued the billionaire and the company for allegedly artificially inflating the stock’s price during their negotiations over Trump selling the stock back to the company.

    American Airlines — one target too many?

    Over the course of three years, with Holiday Corp. and Bally and followed by companies including Allegis Corp. and Federated Department Stores, Trump netted more than $200 million.
    But complaints about his tactics continued — so much so that Nevada state legislators pushed legislation explicitly designed to block Trump from targeting casinos in their state. And in 1988, Trump agreed to pay a $750,000 federal fine the same day the FTC filed a complaint alleging he dodged federal stock notification requirements due his agreement with Bear Stearns — though Trump admitted no wrongdoing.
    Zuckerman, now the chair of the antitrust practice at Curtis, Mallet-Prevost, Colt & Mosle LLP, said the fault for that civil suit lies more with the investment bank, which pitched several of its clients the idea, than Trump himself — a fact not lost on Trump, who at the time said he planned to force Bear Stearns to pay him back for the fine.
    By 1989, Trump launched his biggest — and most brazen — effort of his career, notifying American Airlines executives via fax that he’d acquired a significant amount of the company’s shares and was preparing a $7 billion takeover bid.
    “Donald was playing a favorite game, a carbon copy of his raids on the gaming industry three years before,” O’Donnell, the former Trump executive, said in his book. “The plan, as I saw it, was to spotlight the airline’s value, force its board of directors to restructure, thus inflating the price of the stock, or make them run up the white flag and submit to a greenmailing. Either way, he was hoping to stuff millions of dollars into his pocket.”
    Market analysts questioned whether Trump could actually muster the financing for the deal. Airline insiders couldn’t figure out how Trump could ever pull it off. The airline’s hard-edged CEO, Bob Crandall, made it clear he wouldn’t negotiate or pay ransom. It turns out, he wouldn’t have to.
    That very weekend, the financing of a separate, unrelated takeover effort of another airline by another investor fell through. A market crash followed, with airline stocks leading the way. Trump’s nascent effort never recovered, and he dropped it altogether within nine days. Analyst estimates at the time pegged his paper losses at more than $100 million.
    It was an unfriendly capstone to Trump’s corporate raider period — one punctuated by impressive success for a market first-timer but also plagued by controversy.
    As he told the New Jersey casino board: “I think my only goal was, as an investor, it’s a game that we all have to play, I guess is, to try and come out with more than what you put in. In that sense, yes, I achieved that goal.”

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