Wickes Cos. Transactions Said to Be Typical : The Anatomy of 3 Alleged Insider Deals

Times Staff Writer

Drexel Burnham Lambert Inc.'s dealings in the stock of one of its big clients--Wickes Cos. of Santa Monica--figure prominently in the sweeping insider trading lawsuit filed Wednesday against Drexel by the Securities and Exchange Commission.

The suit, the most massive securities fraud case ever brought by the SEC, involves many prominent Drexel clients. In its 184 pages, the SEC complaint outlines one tortuous, covert transaction after another in which the giant Wall Street firm allegedly engaged in insider trading, defrauded clients, falsified records and manipulated stock prices.

A look at the three allegations involving Drexel’s dealings with Wickes, however, provides good examples of how several types of allegedly illegal schemes worked.

Wickes has been an investment banking client of Drexel since Wickes, a diversified lumber and building products concern, emerged from Chapter 11 bankruptcy reorganization in 1985 under the aggressive leadership of its chairman and chief executive, Sanford C. Sigoloff. Since then, with the help of Drexel, the firm has raised capital, sold off operating units and made acquisitions. Drexel currently is representing Wickes’ management in its planned leveraged buyout of the company.


The allegations involving Wickes make up three of 18 series of transactions spelled out in the SEC lawsuit. Wickes’ name figures more often than any of the other clients listed in the suit, which include such well-known companies as Lorimar, Occidental Petroleum and MGM/UA Entertainment. But, as with the other clients, Wickes isn’t accused of any wrongdoing. Instead, the SEC charges that Wickes and other clients were victims of Drexel’s covert stock dealings.

The Wickes examples also highlight one of the lawsuit’s main themes: The SEC claims that Drexel repeatedly used Wall Street stock speculator Ivan F. Boesky and companies or partnerships he controlled as a front for its own illegal stock transactions.

Drexel and its employees named in the lawsuit deny any wrongdoing, although they and their lawyers decline to discuss the specifics of the suit. They say the suit is based mainly on unsubstantiated allegations by Boesky, now a federal prisoner cooperating with investigators. Wickes, like many other Drexel customers, has remained loyal to Drexel throughout the long investigation. Wickes apparently intends to continue as a client despite the SEC lawsuit and an ongoing criminal investigation of Drexel. It couldn’t be learned Thursday whether Wickes had ordered any type of internal investigation of its dealings with Drexel.

“Obviously, if the charges are ultimately proved, this would be distressing,” said Wickes’ spokesman Michael Sitrick, adding that Wickes officials hadn’t seen the suit. He said Drexel “has done a good job for us in everything we’ve employed them to do.”


Sigoloff remained out of the country on a personal trip Thursday and couldn’t be reached for comment.

On April 10, 1986, Wickes launched a hostile tender offer to acquire National Gypsum Co., a maker of building products. Gypsum’s stock at that time was traded on the New York Stock Exchange. According to the SEC lawsuit, Wickes had retained Drexel to recommend possible acquisitions, and the idea of buying Gypsum was suggested by Drexel.

Under federal securities law, investment banking firms such as Drexel aren’t permitted to use their advance knowledge of possible takeover attempts to buy or sell stock for its own account or that of anyone else besides its client. To do so ordinarily would constitute illegal insider trading. Yet the SEC charges that two days before the $54-a-share tender offer began, and before the offer was public, Cary J. Maultasch, a Drexel trader working under the direct supervision of Michael Milken, the head of Drexel’s high-yield bond department, ordered the purchase of 333,500 Gypsum shares for Drexel and for Milken personally at prices ranging between $49.875 and $54.50 per share.

The shares were allegedly bought under Drexel’s secret arrangement with Boesky. The transaction was disguised so that it appeared that Boesky, a leading speculator in takeover stocks, was buying the shares himself through a trading account at Drexel.


According to the suit, Drexel’s big purchase helped drive the price of Gypsum’s stock up, making it more difficult for Wickes to acquire the company at $54 per share. Wickes subsequently lost out in its effort to acquire Gypsum. Gypsum’s own management made a successful offer to take the company private, offering a combination of cash and debt securities worth substantially more than Wickes’ offer. Through the Boesky account, Drexel tendered its Gypsum shares to Gypsum’s management, and received a total of $68.22 per share in cash and securities.

Drexel’s profits on the transactions allegedly totaled more than $6.6 million, in addition to a $1-million investment banking fee earned from Wickes. The SEC complaint states that Milken and Maultasch had known that the Wickes tender offer, before it was announced, was material, non-public information.

By jeopardizing Wickes’ takeover attempt and misappropriating confidential information, Drexel defrauded Wickes, the SEC claims. Wickes, however, said at the time that it made a $3-million profit when it disposed of its Gypsum shares.

Under federal securities law, it is illegal to buy or sell stock for the purpose of artificially manipulating a stock’s market price. However, Drexel in 1986 allegedly manipulated the price of Wickes common stock, which is listed on the American Stock Exchange. The alleged purpose was to help Wickes redeem an issue of convertible preferred stock, which paid a high dividend. It also enabled Drexel to earn a fee for redeeming the stock.


As Wickes’ investment banker, Drexel in 1985 had helped Wickes’ raise money by underwriting an offering of 8 million shares of preferred stock. The stock paid an annual dividend of $2.50 a share. Under the terms of the offer, Wickes had the right to redeem the preferred stock and exchange it for ordinary common stock if the market price of Wickes’ common reached and remained at or above $6.08 per share for 20 out of 30 consecutive trading days. Such a redemption would save Wickes money; it wouldn’t have to pay the preferred stock’s dividend.

The suit states that by April 22, 1986, Wickes’ common stock had reached $6.08 per share on 19 out of 27 consecutive trading days, nearly enough to trigger the redemption. But the next day, April 23, the stock’s price sank. Milken and Maultasch allegedly swung into action that afternoon. They arranged, in the name of Boesky’s company, to purchase 1.9 million Wickes common shares, enough to cause the stock’s price to close for the day at above the $6.08 trigger price.

As a result, the stock was redeemed, and Drexel earned a $2.3-million fee for carrying out the redemption, the suit charges.

Like all licensed securities broker-dealers, Drexel is required by federal law to keep keep accurate records of securities trades, including the true identity of individuals or companies for whom trades were made.


But, in early 1985, Drexel allegedly disguised that it was “selling short” Wickes stock and making a profit through a complicated transaction that involved converting some Wickes bonds that it held into Wickes common to cover the short position. (In selling short a stock, a trader borrows a stock and sells it in the hope that the price will decline. Later, he “covers” the short sale by repurchasing the stock, preferably at a lower price, and returning it to the lender.)

The Wickes short selling allegedly was listed in Drexel’s records as being carried out by Boesky’s firm, when it was really on behalf of Drexel, the suit charges.

THE CASE AGAINST DREXEL The massive SEC lawsuit charging insider trading by Drexel Burnham Lambert Inc., Michael Milken and others details a series of allegedly illegal transactions involving well-known companies. One company name that pops up frequently is Wickes Cos., which had enlisted Drexel as investment banker when Wickes emerged from bankruptcy proceedings in 1985. The following examples show how Wickes’ stock allegedly was manipulated in various transactions using corporate entities of Ivan F. Boesky as a cover. Drexel and the employees named in the lawsuit have denied any wrongdoing. Source: SEC vs. Drexel Burnham et al., Sept. 7, 1988



1Drexel recommends National Gypsum as a possible takeover target for Wickes.

2Two days before the tender offer is launched, Cary J. Maultasch, a trader working under Milken, orders the purchase of 333,500 Gypsum shares for Drexel and Milken. Through a secret arrangement, the transaction is made to appear as though Boesky is buying the stock.

3The big purchase helps drive up Gypsum’s stock price, jeopardizing Wickes’ tender offer. Gypsum management eventually takes the company private.

4Drexel’s profits on the transactions allegedly total more than $6.6 million, in addition to its $1-million investment banking fee.



1Drexel underwrites an offering of preferred stock for Wickes. Wickes has the right to redeem the preferred shares and exchange them for common stock if the price of Wickes common reaches or surpasses $6.08 a share for a specified period.

2Wickes common stock nears the “trigger” but suddenly the price sinks. Milken and Maultasch, under the auspices of Boesky’s company, purchase 1.9 million shares, enough to cause the price to close above $6.08 for the day.

3Wickes redeems the stock, and Drexel pockets a $2.3-million fee for executing the redemption.



1Drexel sells short Wickes stock, disguising the transaction through Boesky companies.

2Again using Boesky entities, Drexel converts old Wickes bonds into new common stock.

3Drexel uses shares from the bond conversion to cover its short position and make a profit.


4Drexel records fail to state that transactions were really done for Drexel’s own profit.

MORE INSIDER COVERAGE * Drexel sought to reassure its employees, lenders and key clients as Wall Street reacted to the shock waves of the SEC’s massive lawsuit. Part I, Page 1 * The SEC charges against Victor Posner and his son Steven came as a surprise. Page 3 * It all started with Dennis B. Levine, the young Drexel investment banker who led investigators to Ivan F. Boesky. Page 3