Home Shopping Network Sues Milken, Drexel : TV Retailer Says Its Stock Was Manipulated to Boost Value of Bonds
Home Shopping Network filed a lawsuit Monday accusing Beverly Hills “junk bond” impresario Michael M. Milken and the investment bank of Drexel Burnham Lambert of fraudulently manipulating the price of the television retail channel’s stock.
The civil lawsuit claimed that Milken and two other Drexel officials conspired with unnamed investors in a sophisticated scheme to drive down the price of Home Shopping’s stock in order to generate windfall profits for the investors.
According to the suit, Drexel and Milken diverted bonds issued by Home Shopping from long-term investors to professional speculators and Drexel clients, a so-called junk bond network. The speculators and Drexel then sought to increase the value of the bonds by driving down the price of the company’s stock, the suit says.
Home Shopping, battered by a plummeting stock price in recent months, said the scheme damaged its financial stability and drove away long-term investors. The suit did not specify the amount of damages sought by the company, which is based in St. Petersburg, Fla.
Milken did not return a reporter’s telephone call, and Drexel issued only a brief statement from its New York headquarters, which said: “While we have not yet seen the lawsuit, it sounds as if Home Shopping Network is unhappy with the market performance of its security, over which we have no control. We and our counsel will, of course, review the matter.”
The suit was filed in U.S. District Court in Tampa, Fla. In addition to Milken and Drexel, the suit named as defendants two other Drexel officials, Allen Rosenthal and Joel L. Gold. The suit also said up to 50 unnamed investors, part of Drexel’s junk bond network, were involved in the scheme.
Roy M. Speer, Home Shopping’s chairman and chief executive, said the company also filed a complaint with the Securities and Exchange Commission making similar allegations.
Stock Hit $47 High
Drexel and Milken have been the focus of a broad government investigation reportedly centering on the firm’s junk bond operation, which is run by Milken out of Beverly Hills. Junk bonds are high-risk, high-yield securities. The firm and Milken have denied any wrongdoing.
In 1985, Home Shopping Network pioneered the concept of buying merchandise by telephone from television offerings. Its stock was highly touted when the company went public in 1986.
After reaching a high of $47 a share early last year, the stock began to drop as growth failed to meet expectations and other problems arose, including increased competition. The stock dipped as low as $3.50 earlier this year and closed at $5.625 on the American Stock Exchange on Monday. The suit claims the lows this year are a result of Drexel’s manipulations.
When the stock was riding high in 1987, the company said it sought the investment bank’s assistance in raising new capital by issuing up to $500 million in bonds that would be convertible to stock. The amount was eventually scaled back to $100 million, partly because of volatility in the stock price, and the decision was made to issue the bonds only in Europe.
The lawsuit said Home Shopping executives wanted the bonds sold to long-term European investors who would eventually convert them to stock and help stabilize its stock price. The bonds carried a conversion value of $25.80 a share, which meant they could be swapped for stock at that value.
According to the suit, as the deal was closing, Drexel began to pressure Home Shopping to change the terms in a series of “frantic” telephone calls. Milken and others said the European investors were unhappy with declines in the stock price and they urged Home Shopping to add a “reset” clause to the deal, the suit said.
The reset clause, which was ultimately added, specified that the conversion price would be based on either the established $25.80 or 120% of the average closing price of the stock between March 10 and April 21, 1988, whichever was lower.
The clause meant that, if the average stock price during the March-April period was substantially below $25.80, the bonds would be worth more if the stock rose again.
Instead of marketing the bonds to long-term European investors, the suit said Drexel “secretly planned to funnel” them back into its junk bond network in the United States. The suit did not identify which investors bought the stock, but it listed a roster of Drexel’s known junk bond clients.
Home Shopping executives said they learned for the first time in January, 1988, that the bonds were in the hands of Drexel’s junk bond clients and not long-term European investors.
The suit said Drexel and the investors conspired to drive down Home Shopping’s stock to artificially low prices in advance of and during the 30-day period, which ends Thursday, in an attempt to dramatically enhance the value of the bonds to the holders.
The suit said the price has been dragged down by aggressive short selling, a technique in which investors bet that a stock will decline in the future.
Nando DiFilippo, Home Shopping’s executive vice president and general counsel, said the new conversion price apparently will be about $6.50. He said once the stock rebounds, as the company believes it will, the bonds will be worth substantially more than their offering price.
