No Criminal Inquiry of Firm, Drexel Chief Says : Acknowledges Subpoenas to Company, Employees for Documents in Insider Trading Investigation

The chief executive of Drexel Burnham Lambert said Wednesday that U.S. authorities have directly told him the firm is not a target of a criminal investigation into insider trading violations.

Frederick H. Joseph acknowledged in an interview that the firm and a number of its employees have received subpoenas for documents to be delivered to a federal grand jury in Manhattan. The panel, he said, has been investigating insider trading since May, or about the time that U.S. prosecutors charged Dennis B. Levine, then a Drexel investment banker, with having turned more than $12 million in profits by trading securities on secret information about merger deals.

Levine’s arrest led directly to Friday’s charges that stock speculator Ivan F. Boesky had made $50 million in illegal profits from tips delivered by Levine. Since then, speculation has focused more sharply on the role played in the scheme by Drexel, which has financed many of the largest corporate takeovers of recent years and listed Boesky among its clients.

Boesky has agreed to pay $100 million in penalties, plead guilty to a federal felony and accept being permanently barred from the U.S. securities industry except as a private investor.

Joseph, in his remarks, was responding to reports that the firm itself is a target of a federal criminal investigation and could be liable for millions of dollars in fines and penalties. He said that although U.S. authorities have assured him that the firm itself is not a target, they did not say whether any Drexel employees are targets of the inquiry. The firm itself issued a statement Wednesday adding that “the fact that an individual or firm has received a subpoena does not in any way imply guilt or wrongdoing.”

A government source told The Times on Wednesday, however, that the investigation may be closing in on one of Drexel’s key employees--Michael Milken, head of the firm’s renowned “junk bond” trading operation in Beverly Hills. Milken is known to have received a subpoena for documents from the Securities and Exchange Commission shortly before the SEC disclosed its charge against and settlement with Boesky last Friday afternoon.

Milken is thought to have so much information, the source said, that it would take investigators a month or more to debrief him, assuming he agrees to cooperate.

Milken’s unit contributes an estimated 25% of Drexel’s revenues and a greater share of its profits. Milken himself is regarded as virtually the creator of the modern-day junk-bond market, which allows companies with low credit ratings to borrow money in the bond market by paying unusually high interest rates. Junk bonds have also been a key financing vehicle for corporate raiders in the wave of hostile takeovers in which Boesky invested so heavily.

Milken is so important to Drexel that the firm took steps Tuesday to specifically deny rumors he had offered his resignation. Asked Wednesday whether Drexel had given consideration to severing itself from Milken, Joseph said: “That would be silly and premature at this stage. Mike Milken is a spectacular producer.”

Milken could not be reached for comment.

Sources say that Milken was a driving force in Drexel’s decision early this year to raise more than $600 million in debt financing from its roster of institutional customers for Boesky’s latest and largest investment fund of nearly $1 billion.

Sources told The Times that before agreeing to the assignment, Drexel executives asked a private investigation firm to run a check on Boesky. The investigators reported that the stock trader was the subject of several ongoing SEC probes. But the firm proceeded with the deal, apparently at Milken’s urging.

Questions Raised

Drexel eventually made an equity investment of $3 million to $5 million in the fund, Joseph said Wednesday; he acknowledged that federal investigators have raised questions about the firm’s financial interest in Boesky’s venture.

“Given where he (Boesky) is today,” he said, “it would be amazing if they did not come to us with a series of questions.” But he added that the practice of taking an equity interest in a fund for which it has raised debt financing is “neither usual nor unusual. . . . It happens with modest regularity, I’d say.”

Others close to Drexel noted that the firm’s share of Boesky’s trading profits would be exceedingly slim as a small equity holder in a $1-billion fund.

Among other developments Wednesday in the Boesky insider trading scandal were these:

- Sources told The Times that investigators are probing whether Boyd Jefferies, the head of a Los Angeles institutional stock brokerage firm, took large positions in merger stocks on which Boesky received inside tips, after Boesky had bought as much stock as he could handle. It is not known whether investigators suspect that Jefferies, the head of Jefferies & Co., knew about illegal tips.

Jefferies and two of his corporate entities received SEC subpoenas on Friday, sources said.

Reached at his New York office, Jefferies denied that he had traded on inside information or had any such arrangement with Boesky. “Absolutely not,” he said. “We have had no arrangements with anybody. I would flatly say we have never had any inside information and never traded on inside information. I have no idea what you’re talking about.”

- Carl C. Icahn, the corporate raider who was known to have received an SEC subpoena in connection with the case, stated that he has never engaged in insider trading. It was Icahn’s first public statement on the case. In a letter to employees of two of his companies, he wrote:

“I should like to state categorically that I have never traded on inside information nor have I ever had any dealings in any way, shape, or form with Dennis Levine.” He said the SEC has “made certain inquiries” of him but added that “no allegations have been made against me by the SEC, and I have no reason to believe that any will be made in the future.”

Responding directly to a Washington Post report that he and Boesky secretly teamed up in 1985 to make Gulf & Western a takeover candidate to profit from its price rise, Icahn said: “While I have known Mr. Boesky for a number of years, these allegations of business ‘arrangements’ are completely unfounded and untrue.”

- Investment banks throughout Wall Street have taken steps to profit from takeover deals that Drexel may be forced to withdraw from, should that happen.

At Shearson Lehman Brothers, Daniel Good, the firm’s mergers and acquisitions chief, said: “We’ve told our people that we stand ready to step up to be a major player in bridge financing or junk-bond financing. I want it to be known that we are an alternative in a big way.”

- Federal Reserve Board Vice Chairman Manuel Johnson said the insider trading scandal will do no lasting harm to the nation’s financial system. He said the Fed has no plans to take any steps to respond to the Boesky scandal.

“There’s always a temporary reaction and an overreaction to these sort of things that can temporarily impair financial-market confidence,” Johnson said in Washington. “But I doubt seriously that this will have anything to do with productive investment decisions by entrepreneurs.”

- Wall Street braced itself for a new round of subpoenas from U.S. authorities in the affair. Federal sources said new requests for information may be issued within a week. Among others, executives at Goldman, Sachs & Co. are said to expect to receive subpoenas for company records shortly.

- Boesky, as expected, resigned from his post as chairman of San Diego-based Northview Corp., a hotel chain he has run partially as a speculative stock trading vehicle. His resignation was a condition of his SEC settlement, disclosed Friday. Victor O. Tufford, Northview’s general counsel, said that some of the illegal trades cited in the SEC’s complaint against Boesky “may have been made on behalf of the company.” As previously reported, the SEC has agreed not to take any action against any of Boesky’s corporate entities.

- California Rep. Pete Stark (D-Oakland), a senior member of the tax-framing House Ways and Means Committee, said he is looking into the possibility that Boesky could claim a $50-million business tax write-off as a result of paying restitution on his illegal stock trades.

Times staff writers Debra Whitefield, in New York, and Al Delugach and Jane Applegate, in Los Angeles, contributed to this story.