Drexel’s Joseph and House Panelists Spar at Hearing
Drexel Burnham Lambert’s chief executive on Thursday defended the investment banking firm’s controversial practice of allowing its professionals to purchase large amounts of securities in Drexel-arranged deals.
But members of a House panel investigating the firm’s trading activities said the practice may have posed conflicts of interest for Drexel salesmen who stood to benefit from the bond deals.
Rep. Dennis E. Eckart (D-Ohio) said Drexel, in effect, “elbowed aside” its own customers and “cut to the head of the line.”
Frederick H. Joseph, Drexel’s chairman, testified before the House Energy and Commerce investigations subcommittee during the second day of hearings on trading activity at Drexel. The subcommittee has focused on the practice of allowing the “employee accounts.”
It is quite common that investors will want to buy more bonds than are available, he said, and Drexel used the same criteria for deciding how many bonds employees could purchase as it did for its other customers.
Dominates the Game
He said purchases by Drexel employees are closely monitored for propriety by the firm’s compliance division.
Drexel is the dominant player in the corporate “junk bond” market. Junk bonds are speculative, high-yield debt securities that have been crucial in financing takeovers but which also have been used for a wide variety of corporate purposes. The panel has been investigating several cases of Drexel’s involvement in the junk bond market.
The lawmakers repeated earlier charges that the employee account transactions may have violated federal securities laws by driving up the securities’ prices and limiting supplies.
“There have been significant questions raised this morning with regard to whether . . . these accounts are trading . . . under circumstances most advantageous to them, and possibly more advantageous to them than other investors and traders, in possible violation of (the federal securities laws),” said Rep. John D. Dingell. The Michigan Democrat chairs the House Energy and Commerce Committee’s oversight and investigations subcommittee, which has been looking at Drexel for the past six months.
The panel was focusing on a 1986 Drexel offering of $50 million of Texstyrene Corp. bonds and a 1985 sale of $2.5 billion of bonds issued to finance a buyout of Beatrice Foods.
In the Texstyrene bond sale, documents prepared by the subcommittee staff showed that Drexel sold about 25% of the total offering to its insiders’ accounts. These sales were made even as an order for $5 million of the bonds by Vanguard Mutual Fund was cut back to $750,000 and a $2 million order by Lutheran Life Insurance Co. was cut back to only $500,000.
Stock Sold Back
Within 17 days, the employee accounts had sold their holdings back to Drexel at what appeared to be above-market prices, for a handsome profit of $6.75 to $8.25 per $100 invested.
“You had the Drexel sales representative . . . telling buyers that they couldn’t buy what they wanted to buy because (he) wanted to buy for his own account,” charged Rep. Jim Slattery, a Kansas Democrat.
Joseph could not immediately explain the above-market prices at which the insider accounts had sold their bonds back to Drexel. But he defended the sales as legal and fair to all investors.
“I think we served all our institutional accounts as well as the employee accounts,” he told the panel. “We tried not to differentiate.”
However, Rep. Norman F. Lent (R-N.Y.), ranking Republican on the Energy and Commerce Committee, said the purchases for “insider accounts” appear to violate the rules of the Securities and Exchange Commission and the National Assn. of Securities Dealers.
“In my view such a practice brims with opportunities for conflict of interest,” said Rep. Ron Wyden, (D-Ore.). “I’m particularly interested to know where the SEC was.”
