Drexel Distribution of Data on Takeover Targets Probed
Federal investigators are apparently looking into the role of Drexel Burnham Lambert and its clients in as many as three takeover deals where the investment firm sent thinly disguised information about the identities of potential target companies to dozens of large institutional investors.
Although the clients were warned by Drexel not to trade stock on the basis of the information, some may have done so. That may have been the cause of sharp run-ups in the stock prices of those targets before announcement of the takeover bids, according to sources connected with the firm.
Drexel has become a focus of the investigations inspired by the illicit trading of stock speculator Ivan F. Boesky, a client of the firm. The Securities and Exchange Commission announced Nov. 14 that Boesky had settled insider trading charges by paying a $100-million fine and agreeing to plead guilty to a federal felony charge.
The SEC charged that Boesky had illegally traded stock in at least seven transactions on the basis of illegal tips from Dennis B. Levine, a former Drexel investment banker who pleaded guilty in June to making more than $12 million in insider trades.
‘Milken Not Resigning’
The entanglement of Drexel executives in the spreading investigation forced the firm on Friday to deny for the second time in three weeks that Michael Milken, head of its prized “junk bond” department in Beverly Hills, had resigned or been fired.
Milken has been subpoenaed to provide documents to federal investigators in connection with the Boesky case. Milken “is not resigning nor are we asking him to resign,” said Drexel Chairman Robert Linton. “We have no reason to believe he has done anything wrong.”
The rumor spread shortly before noon, at about the time the stock market experienced an upsurge of jitters over the Boesky affair. Wall Street rumors were that a major financial figure would be charged in the case after the market’s afternoon close. No such action took place. The Dow Jones industrial average closed at the end of Friday’s trading at 1925.06, down 14.62.
Drexel’s practice of distributing somewhat disguised information in sealed envelopes to its network of customers was disclosed Thursday by Frederick Joseph, the firm’s chief executive, during an industry convention in Boca Raton, Fla.
Inquiry Into Envelopes
Sources say that one key transaction in which the method was used was a 1985 takeover bid for American Natural Resources, a gas pipeline company, by Coastal Corp., a Drexel client. That deal was cited by the SEC as one on which Levine tipped Boesky to the impending bid.
Other transactions included the takeover bid for Gulf Oil by T. Boone Pickens Jr. and his Mesa Petroleum and Saul Steinberg’s 1984 bid for Walt Disney Productions. The extent to which the other transactions are the focus of SEC or Justice Department probes is unclear.
“I’m sure that to the extent that some are the subject of inquiry, the SEC is asking to whom the envelopes were sent,” said Irwin Schneiderman, Drexel’s outside counsel, “and I’m sure they’ll get a response” from Drexel. But another source said the SEC has so far not expressed interest in the other deals.
Schneiderman and other Drexel officials say the envelopes bore written warnings that trading on the enclosed information would be illegal. But Drexel sources said the firm never took steps after the apparent leaks to determine if its confidentiality had been breached by any clients.
Drexel’s practice of issuing financial data about the targets of takeover bids stemmed from its technique of financing hostile takeovers by lining up commitments from dozens of big investors to buy risky, high-yielding junk bonds if and when a raid was successful.
When T. Boone Pickens opened his hostile assault on Gulf Oil in 1983, Drexel sought written commitments from its clients by sending them slightly disguised information about Gulf. The idea was to assure the clients that the target’s assets were sufficient to cover the junk bonds.
“The documents disguised Gulf but not well enough so that people couldn’t see through the disguise,” said one investment banker familiar with the practice.
Consequently, Drexel tried to better disguise the target in the two following deals, including Steinberg’s bid for Disney and the Coastal-ANR bid, in which the information provided about the target was designed to be so sketchy, one source says, that researchers could not have identified it beyond the fact “it could have been one of five or six pipeline companies.”
Customers expressing interest in helping to finance Coastal were given a second set of documents, these specifically identifying ANR as the target, about 24 hours before the bid was formally announced on March 1, 1985.
Although the full list of who got the envelopes is unavailable, the number of Drexel clients who ultimately participated in the ANR financing is large. Included were Steinberg’s Reliance Insurance Co.; First City Trust Co. and First City Financial Corp., controlled by the Belzberg family of Canada and Southern California; MacAndrews & Forbes Group, controlled by Ronald Perelman; Maxxam Group, controlled by takeover entrepreneur Charles Hurwitz; Golden Nugget, the owner of casinos in Las Vegas and Atlantic City, N.J.; Triangle Industries, controlled by Nelson Peltz, and Schenley Industries, controlled by Meshulam Riklis. Also involved were several major insurance companies and financial institutions.
Drexel officials noticed in dismay that ANR stock was rising well before Coastal’s formal bid and apparently suspected that the confidentiality of their documents had been breached. The firm ended the distribution of such information after that. Since then, the SEC has established that Levine and Boesky both traded on Levine’s own information.
