Illinois Firm Claims Drexel Manipulated Stock, Files Lawsuit
The Drexel Burnham Lambert investment firm was accused Thursday of trying to extort the management of Staley Continental Inc. into a leveraged buyout and then undermining an equity offering that the corn-refining and food-processing firm chose instead.
In suing Drexel Burnham for $200 million in U.S. District Court in Chicago, Staley Continental contends that Drexel’s alleged scheme forced the Rolling Meadows, Ill.-based company to withdraw the offering and to instead raise cash in a much more expensive manner.
The suit also accuses the firm, known for its expertise in unfriendly corporate takeovers, of violating the federal Racketeer-Influenced and Corrupt Organization statute and seeks a court injunction prohibiting Drexel from buying any more Staley Continental stock.
A Drexel spokesman, noting that the firm hasn’t yet seen the lawsuit, called the charges “totally without merit.”
The suit is “highly suspect,” the spokesman said, given that Drexel was “in the process of responding to an agreement proposed by Staley which they indicated would conclude the matter to their satisfaction.”
“We must conclude,” Drexel said, “that the filing of the suit was an ill-conceived attempt to capitalize on the current climate,” a reference to the widespread government investigation into insider trading and other securities laws abuses. Drexel is one of the firms under investigation.
Robert K. Scott, general counsel for Staley Continental, said the company decided to sue after unusual trading activity in the company’s stock prompted questions from the New York Stock Exchange and an in-house investigation by Staley Continental.
As Staley Continental details the alleged scheme, Drexel approached the Chicago area company last November when Staley and other food processors were hotly rumored as takeover stocks. Drexel allegedly tried to interest Staley in a Drexel-led leveraged buyout.
The company rejected that unsolicited proposal and, instead, resurrected a plan to sell 4 million of its shares.
Drexel Blamed
It was the second time in a month that it had offered the stock, having been rebuffed earlier by unreceptive investors. The stock price dropped sharply and the company was forced once again to drop its offer.
At the time, Wall Street immediately leaped to the conclusion that this was more fallout from the Ivan F. Boesky insider trading scandal, which had broken shortly after the Staley offering.
Speculators were worried at that time that the scandal would thwart raiders’ ability to raise money.
Staley now contends that the price dropped less because of the scandal than because of Drexel’s alleged manipulation of the stock. The lawsuit contends that Drexel opposed the offering, and threatened to “trade Staley stock in a manner to frustrate the offering,” and then proceeded to do so. It is this allegation that makes the lawsuit unusual.
“I don’t recall ever seeing before a suit that claims (a company’s stock price) was manipulated downward because someone didn’t go along” with a leveraged buyout, said Los Angeles attorney Francis Wheat, a specialist in securities law. “That could be a hard one to prove.”
The suit takes particular aim at Drexel’s notorious “junk bond” operations in Beverly Hills, headed by Wall Street’s best-known bond trader, Michael R. Milken.
Unnamed officers from that Drexel department, the suit claims, boasted to Staley Continental managers that it already controlled more than 5% of the Chicago area company’s stock and that it didn’t intend to file government documents required of such large shareholders.
Such filings are “bad for business,” the suit quotes an unnamed Drexel officer as saying.
