Drexel Won’t Let Staff Buy ‘Junk Bonds’ It Underwrites

Drexel Burnham Lambert Inc. told Congress on Wednesday that it would stop allowing its employees to buy so-called junk bonds the firm underwrites, a practice some lawmakers had criticized as unfair and possibly illegal.

Drexel Chief Executive Frederick Joseph informed Rep. John Dingell (D-Mich.) by telephone that the firm was stopping purchases of new issues by so-called “insider accounts,” which had been the focus of congressional hearings last week, said Dennis Fitzgibbons, Dingell’s spokesman.

Drexel, which was instrumental in developing the market for high-yield, high-risk “junk bonds,” had allowed employees and partnerships formed by employees to buy bonds from hot new issues even though that sometimes denied public customers the opportunity to buy all of the bonds they wanted.

Dingell, who is chairman of the House Energy and Commerce Committee, had raised questions about the legality of the trading and its fairness to the customers.

Employees, according to the committee, were able to make substantial profits by purchasing newly issued bonds from the firm, holding them for several weeks or months and then reselling them.

Joseph, in 6 1/2 hours of hearings last Thursday, defended the practice as proper and said bond prices were not as subject to manipulation as were stock prices. But he had acknowledged that he was troubled by the appearance of a conflict.

Steven Anreder, a Drexel spokesman in New York, said the firm was barring employees and employee partnerships from buying new public issues of debt securities “to avoid any appearance of possible unfairness.”

Dingell praised the decision as “a very good step,” adding in a statement: “It should lay to rest questions associated with the fairness and legality of that particular practice. . . . Drexel’s decision is both good from the standpoint of the public interest and wise.”

But Fitzgibbons said Dingell has made no decision regarding his committee’s ongoing investigation of Drexel.

Dingell has been criticized by Rep. Thomas Bliley (R-Va.) for subpoenaing Michael Milken, chief of Drexel’s Beverly Hills junk bond unit, to appear before the committee even though Milken indicated in advance that he would refuse to testify based on his constitutional protection from self-incrimination.