Drexel Official Invokes 5th at House Inquiry

Michael R. Milken, who pioneered the use of high-risk, high-yield junk bonds, invoked his constitutional right against self-incrimination three times today and was excused from testifying before the House committee that had subpoenaed him.

Milken, junk bond chief for Drexel Burnham Lambert Inc., had been expected to use his Fifth Amendment right to refuse to testify before the investigations subcommittee of the House Energy and Commerce Committee, which is looking into irregularities in financial markets.

Frederick H. Joseph, chief executive of Drexel, is scheduled to appear Thursday.

Some Republican members of the subcommittee, led by Rep. Thomas J. Bliley Jr. of Virginia, had argued that House rules required that the hearing be closed and said such a move would be more effective in eliciting information.

Possible Manipulation

But the panel’s chairman, Rep. John D. Dingell (D-Mich.) wanted the hearing to be open.

According to published reports, the subcommittee is investigating several instances of possible manipulation of bond issues underwritten by the firm.

The Washington Post and the Wall Street Journal, in Tuesday’s editions, quoted anonymous sources who said the subcommittee is examining reports that parts of some bond issues were withheld and placed with affiliates of Drexel and with partnerships that included Drexel employees.

That practice, if it occurred, could allow withheld parts of a hot bond issue to be sold at a higher profit than the bonds initially offered to the public.

Independent Inquiry

Drexel and Milken have also been at the center of the Securities and Exchange Commission’s continuing investigation of insider trading. However, a subcommittee staff member said the congressional inquiry is independent of investigations by the SEC and by the U.S. attorney’s office in Manhattan.

Drexel disclosed in February that it had been told that the staff of the SEC would recommend that civil charges for securities law violations be brought against the firm and some of its employees.

Milken’s innovations allowed companies to get bond financing based on whether they had sufficient cash flow to pay off their debts. More traditional ratings look at debt-to-equity ratios, stability, earnings and other criteria.