Back in the news after 42 years On March 6, 1973, Ray Dirks got an unexpected phone call in the morning from an ex-employee of a West Coast life insurance company he was following called Equity Funding Corporation of America. Dirks, 39, was the top insurance analyst on Wall Street at the time and EFCA was its hottest stock.

1. Ray Dirks, Whistleblower
By Stephen Bornstein
May 2, 2015
http://aroundwallstreet.com/2015/05/ray-dirks-whistleblower/
Back in the news after 42 years
On March 6, 1973, Ray Dirks got an unexpected phone call in the morning from an ex-employee
of a West Coast life insurance company he was following called Equity Funding Corporation of
America. Dirks, 39, was the top insurance analyst on Wall Street at the time and EFCA was its
hottest stock.
The caller was Ron Secrist, a controller of the company who had just been fired for belly-aching
about his tiny Christmas bonus. Secrist told Dirks that he had just met with the New York State
Department of Insurance and wanted to tell him something important about EFCA. He would
not do so on the phone, however, and asked to meet in person.
At Dirks’s suggestion, they met that afternoon for lunch. Secrist told Dirks that most of EFCA’s
life insurance policies were complete fabrications. The policies were being created out of
whole cloth solely to inflate the company’s revenues and pump up the price of its stock. EFCA
management owned a large chunk of EFCA stock and intended to take advantage of the steady
rise in its market value. The fraud had been going on for almost ten years and EFCA’s top brass
– who Secrist claimed had Mafia connections in Chicago – were physically threatening company
employees participating in the scamto keep their mouths shut. Secrist wanted Dirks to verify
his claims and then notify large EFCA shareholders who Secrist hoped would dump their stock
and create a significant imbalance in market orders that would trigger a full-scale investigation
of the company.
From that call unfolded the biggest financial scandal of its day and, ten years later, a landmark
Supreme Court decision on insider trading that has shaped -- and now shaken -- our
understanding of the crime.
A massive pyramid scheme
Based in Beverly Hills, EFCA had risen to prominence in the life insurance industry by packaging
its policies with equity mutual funds. Under its innovative program, policyholders could make
annual fund investments and then borrow against them to pay their policy premiums. If the
stock market rose (as expected), policyholders could later sell their fund shares to pay off their
loans and pocket the difference.

2. At lunch, Secrist told Dirks that EFCA picks names at random from telephone directories at late-
night “phonebook parties” and turns them into insureds. The phony policies are then sold to
re-insurance companies that do not verify the existence of the policyholders. When the re-
insurers are due the premiums from their policies, EFCA simply fabricates new policies, sells
them to different re-insurers and passes the proceeds on to the prior-round re-insurers. In
other words, EFCA was a massive pyramid scheme.
Secrist also gave Dirks the names of four other EFCA employees who could vouch for his
allegations. The employees were based at the company’s headquarters in Beverly Hills, so, over
the next few days, Dirks spoke with each of them by phone. All four corroborated Secrist’s
claims about the company and added color on the lavish lifestyles of its top brass.
Given how rapidly EFCA had grown into a major player in the insurance industry, Dirks was
astounded by Secrist’s charges. He had been following EFCA since the company’s founding
(when he was just starting out as an analyst at Goldman Sachs) and, as EFCA evolved into a Wall
Street darling, was keeping an even closer eye on it at Delafield, Childs, the New York broker-
dealer where he was working when Secrist called.
EFCA had gone public in 1964 and, Dirks says, its stock had become a “high-flyer . . . like a
dotcom in the late ‘90s.” By 1973, EFCA had $500 million in assets, $26 million in annual
earnings and 64,000 (bogus) life insurance policies face-valued at more than $2 billion. Fortune
magazine called EFCA the fastest growing company on the New York Stock Exchange.
The alleged “tip”
Over the next few days, Dirks found out which institutions owned large positions in EFCA –
mostly hedge funds as it were – and told more than 20 of them about the fraud allegations.
The majority of investors, such as The Boston Company, sold their stock immediately, but a few,
like Lawrence Tisch of Loews Corporation, disbelieved the story and held onto theirs. One
hedge fund manager, Michael Steinhardt, actually increased his EFCA position after Dirks’s call.1
Dirks also got in touch with Bill Blundell who managed the Los Angeles bureau of the Wall
Street Journal and failed to persuade him to investigate the story. Blundell thought the claims
were too fantastic to go undetected by EFCA’s outside auditors. Dirks also got nowhere with
Barron’s and the LA regional office of the SEC.
Since no one else would check out Secrist’s story, Dirks decided to do it himself.
“Don’t worry, the windows are locked”
The CEO of EFCA was a man named Stanley Goldblum whom Dirks had met before at an
insurance industry event and for whom he had later hosted an investor luncheon. Goldblum
had co-founded EFCA in 1960 with a hot-shot mutual fund salesman by the name of Michael
1 Dirks chuckled when he told me how Steinhardt had reacted to his call.

3. Riordan who died five years later in a Los Angeles mudslide.2 After Riordan died, Goldblum
picked Fred Levin, an EFCA staffer and experienced insurance investigator, to head EFCA’s
insurance operations. Together, Goldblum and Levin had (ostensibly) grown EFCA into the
tenth largest insurance company in California.
After speaking with the EFCA stockholders, Dirks called Goldblum, told him what he had heard
from unnamed EFCA employees and asked for a face-to-face meeting. Goldblum told Dirks he
was aware of the rumors Dirks was spreading among institutional investors and warned him not
to interfere with the company’s 1972 audit which was ongoing. Goldblum agreed to meet with
Dirks the following week in Los Angeles and suggested they have breakfast together at the
Beverly Wilshire hotel where Dirks would be staying. Afterwards, Goldblum would take Dirks
over to EFCA’s offices in Century City to meet with the auditors.
Over six feet tall, solidly built and nattily attired, Stanley Goldblum cut an imposing figure.3 Ray
Dirks, on the other hand, is a much smaller man, less expensively dressed and then known on
Wall Street as the ”hippie analyst” because of his long hair and sideburns.
Goldblum arrived at the hotel in his Rolls-Royce. He was joined by Levin in his Bentley. Dirks
had spent the previous few days in Los Angeles confirming their stories with the EFCA
informers. Goldblum and Levin started right in grilling Dirks about the fraud allegations. They
also demanded that Dirks stop spreading nasty rumors about EFCA in such a threatening tone
that Dirks was reminded of Secrist’s comment about the Mafia.
At the end of the meeting, Goldblum told Dirks he would drive him to EFCA’s offices to meet
the auditors. Dirks asked what floor Goldblum’s office was on and was told the 28th. Dirks must
have reacted palpably since Levin’s parting words to him were “don’t worry, the windows are
locked.”
Exposing the scam
Stanley Goldblum’s office took up almost the entire 28th floor of a Century City skyscraper, and
two of its walls were made entirely of glass. As he entered the office, Dirks admits to being
intimidated. Levin and three other EFCA executives joined Goldblum and the group spent the
next several hours brushing aside the fraud allegations and pressing Dirks for the names of his
informers, which Dirks never gave up. Goldblum also warned Dirks not to “spook” two
insurance company deals EFCA was engaged in.4 Unbeknownst to Dirks at the time, Goldblum’s
long-range plan was to exit the pyramid scheme by buying other life insurers and gradually
legitimizing the company.
Dirks did not get to meet EFCA’s auditors that day because Goldblum told him “they were too
busy closing the company’s books.” The next day, he returned to EFCA’s offices and met the
outside auditors, Seidman & Seidman. Dirks thought the company’s auditors were a Big-8 firm
2 Goldblumhad been a butcher in Pittsburgh before founding EFCA with Riordan.
3 Dirks described himas someone who “obviously spent a lot of time at the gym.”
4 New York-based Executive Life and Fidelity Life Insuranceof Virginia.

4. called Haskins & Sells, but Goldblum told him that EFCA had recently acquired another life
insurer and had replaced H&S with its auditors, S&S. At the meeting, S&S refused to discuss
their client’s affairs with Dirks or delay their 1972 audit report while Dirks investigated the
fraud allegations. Dirks later spoke directly to H&S who told him that they had resigned their
audit engagement (which Dirks presumed was because they were suspicious of what was going
on at the company).
Convinced now more than ever that EFCA’s books were cooked, Dirks reported his findings to
Bill Blundell at the WSJ who thereupon arranged a conference call with Stanley Sporkin, head of
the enforcement division (the “top cop”) at the SEC. The Sporkin call prompted a meeting in
Blundell’s office with two officials from the LA office of the SEC and one from the NYSE. Shortly
thereafter, both the SEC and the California Department of Insurance began investigations of
EFCA.
Barron’s, the WSJ5 and The New York Times all broke the EFCA story that same week and the
NYSE suspended trading in EFCA stock on March 27th, just three weeks after Secrist’s call. The
stock never traded again. It took only a few more weeks for the regulators to uncover EFCA’s
pyramid scheme and the company to be placed in receivership and eventually liquidated. The
shareholders were wiped out in what the press reported to be a $2 billion fraud, the biggest
swindle of its day by far. Stanley Goldblum, Fred Levin and 20 other EFCA executives were
indicted for accounting fraud and every one of them pled guilty or was convicted.6 Goldblum
and Levin were sentenced to five and four years respectively in the federal prison at Terminal
Island in San Pedro, California.7
Hero or goat?
Instead of paying him a whistleblower’s bounty or even thanking him for his good citizenship,
the SEC turned on Ray Dirks and charged him with rumor-mongering and aiding and abetting
insider trading.8 Unfortunately for Dirks, G. Bradford Cook, the recently-appointed chairman of
the SEC, had just made insider trading on Wall Street his top enforcement priority.
Dirks was convicted on both counts at his SEC administrative hearing, but his punishment was
reduced to an SEC censure because of the role he played in exposing the EFCA fraud. He was
nevertheless barred from association with a NYSE member firm and lost his job at Delafield,
Childs. The big investors who sold their stock on his tips were also sanctioned by the SEC as co-
conspirators.
While the regulators thought they were done with Dirks, however, he was not done with them.
Dirks was determined to overturn his conviction even if he had to take his case all the way to
the Supreme Court and announced to his wife and everyone he met that “I’m growing my
5 Bill Blundell of the WSJ was later nominated for a Pulitzer Prizefor his coverage of the EFCA scandal.
6 Hundreds of EFCA’s 4,500 employees apparently knew of the scambut were not indicted. Three of the S&S
auditors,however, did serve time in jail.
7 Each of their sentences would probably be more than ten (or even twenty) years today. Think of Bernie Madoff.
8 Dirks claims theSEC simply couldn’tdecide which of the two securities violationsapplied to his clientwarnings.

5. beard until I’m cleared.” Though well-meant, that gesture was pretty fanciful since Dirks had
nowhere near enough money to finance such an appeal.
On to the Supreme Court
Dirks’s first call was to Ralph Nader, the public interest lawyer he thought would be best
positioned to attack the SEC’s ruling. A couple of years earlier, Dirks had helped Nader try to
scuttle a merger between Hartford Fire Insurance Company and ITT. Nader didn’t like the deal
because he was from Hartford and ITT had the reputation of an ‘asset-stripper.’ Dirks also
questioned ITT’s earnings in his research reports and opposed the merger on the ground that it
was being financed by overpriced stock and excessive debt. Knowing Dirks’s negative view of
ITT, Nader engaged him to testify as an expert witness in what turned out to be an unsuccessful
lawsuit to block the deal.
Dirks flew down to Washington, D.C. to meet Nader in his office. Nader told Dirks that none of
the lawyers in his firm was right for his case, so he introduced him to Harry Huge and David
Bonderman9 at the Washington firm of Arnold & Porter. The lawyers told Dirks that his appeal
might cost as much as a million dollars and Dirks told them that he’d be lucky to come up with
“ten grand.” Fatefully for Dirks and legal history, Huge and Bonderman found Dirks’s case
sufficiently interesting to take it on a pro bono basis.10
Dirks’s lawyers initially appealed his censure to the SEC administrative law court that had
convicted him. They argued that Dirks should be acquitted because Ron Secrist had received no
personal benefit from tipping Ray Dirks about the EFCA scamand therefore did not breach a
fiduciary duty to the company’s shareholders, a key element of the crime of insider trading (to
this day). They claimed that, since there was no breach of duty on Secrist’s part, Dirks’s
subsequent tips to his clients did not constitute insider trading. The court rejected that
argument and affirmed Dirks’s conviction.
The next stop was the D.C. Circuit Court of Appeals which also rejected Dirks’s argument in an
unwritten, 2-1 opinion. According to Dirks, both the SEC and the D.C. Circuit Court at the time
construed insider trading as applicable to anyone who either trades on or passes along a known
insider tip to the disadvantage of public stockholders. It didn’t seem to matter that neither
Dirks nor Secrist bought or sold EFCA stock or benefitted in any way from telling others about
the scam.
It took exactly ten years to the day from Dirks’s meeting with Stanley Goldblum at EFCA’s
offices in Beverly Hills to the start of his hearing before the Supreme Court. Bonderman argued
the case and succeeded in convincing the Justices, 6-3, that Dirks had no duty to refrain from
passing on the tip from Secrist because Secrist had no duty to keep it confidential in the first
place. Secrist received no personal benefit for the disclosure and was motivated solely by the
9 David Bonderman later gave up the practiceof lawand founded a highly-successful privateequity firm called TPG
Capital fromwhose investment activities hehas become a billionaire.
10 It was later reported that Dirks’s legal fees,if charged, would have come closer to $100,000 than $1 million.

6. desire to publicly expose EFCA’s fraudulent pyramid scheme and bring its perpetrators to
justice. Dirks was finally exonerated.
Today, Ray Dirks lives in exactly the same four-story Greenwich Village townhouse he bought
when his career on Wall Street was at its peak. The place is over a hundred years old and is
reached by passing through a little tunnel abutting the building for which it once served as a
gatehouse. Dirks lost his wife to a sudden heart attack earlier this year and now lives with his
daughter, her boyfriend, two dogs and a cat. He loves to compare his somewhat musty digs
with Goldblum’s glitzy office, relishing the thought of a pesky little insurance analyst bringing
down a world-class financial fraudster. Still sharp as a tack at 81, Dirks is no longer researching
insurance stocks but is now sourcing acquisition opportunities for a cutting-edge cloud
computing company. He still remembers virtually every detail of his dramatic encounter with
EFCA, which he faithfully recounted in his book, The Great Wall Street Scandal (McGraw-Hill
1974).
Unintended consequence?
Recently, the 1983 Supreme Court case that absolved Ray Dirks served as the basis for a Second
Circuit decision, Newman (aroundwallstreet.com/2014/12/back-to-basics-for-insider-trading/),
in which two previously-convicted downstream tippees were exonerated on the ground that
neither knew the circumstances of the original tip. Unlike Dirks, however, the Newman tippees
were hedge fund managers who actually traded on the inside information they received and
made millions of dollars for their funds.
Many in the legal community are up in arms over that decision because they do not see why
professional money managers who get inside information from a chain of analysts --
information they believe to be reliable and trade on -- need to know whether the original tip
was paid for by the original tippee. Newman also opens the door to future gaming of insider
information by canny traders who are able to insulate themselves from initial tippees. Because
of the controversy Newman has aroused, the personal benefit test in Dirks is now likely to be
reconsidered by the Supreme Court or possibly even written out of the law altogether by an act
of Congress (http://aroundwallstreet.com/2015/03/whither-insider-trading/). However that
critical issue is resolved, we have Ray Dirks to thank for courageously bringing it to light.
TAGS: RAY DIRKS, WHISTLEBLOWER, EQUITY FUNDING CORPORATION OF AMERICA, WALL
STREET, RON SECRIST, NEW YORK STATE DEPARTMENT OF INSURANCE, LIFE INSURANCE,
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MUTUAL FUNDS, POLICYHOLDERS, PREMIUMS, RE-INSURANCE COMPANIES, GOLDMAN
SAXCHS, DELAFIELD CHILDS, FORTUNE MAGAZINE, NEW YORK STOCK EXCHANGE, HEDGE
FUNDS, THE BOSTON COMPANY, LAWRENCE TISCH, LOEWS CORPORATION, MICHAEL
STEINHARDT, BILL BLUNDELL, WALL STREET JOURNAL, BARRON’S, SEC, STANLEY GOLDBLUM,
FRED LEVIN, MICHAEL RIORDAN, THE NEW YORK TIMES, RUMORS, AUDITORS, HASKINS &
SELLS, SEIDMAN & SEIDMAN, CENTURY CITY, LOS ANGELES, CALIFORNIA, BEVERLY HILLS,

7. INSTITUTIONAL INVESTORS, BEVERLY WILSHIRE HOTEL, HIPPIE ANALYST, STANLEY SPORKIN,
NYSE, CALIFORNIA DEPARTMENT OF INSURANCE, SUSPENDED TRADING, ACCOUNTING FRAUD,
EXECUTIVE LIFE, FIDELITY LIFE INSURANCE OF VIRGINIA, PULITZER PRIZE, G. BRADFORD COOK,
RALPH NADER, HARTFORD FIRE INSURANCE COMPANY, ITT, HARRY HUGE, DAVID BONDERMAN,
ARNOLD & PORTER, FIDUCIARY DUTY, BERNIE MADOFF, TIPPING, PERSONAL BENEFIT, THE
GREAT WALL STREET SCANDAL, NEWMAN, DIRKS, TIPPEES, INSIDE INFORMATION, INSURANCE
ANALYST, CONGRESS