Firm Says Reaction to SEC Charges Was ‘Non-Event’ : Competitors Trying to Hire Top Drexel Brokers

As competitors began trying to hire away some of its best stockbrokers, Drexel Burnham Lambert Inc. went on the offensive Thursday, declaring that it had weathered the first shock of the wide-ranging charges filed against the firm by the Securities and Exchange Commission.

Reaction to Wednesday’s civil charges of insider trading, stock manipulation and other violations was “a non-event,” said Frederick H. Joseph, Drexel’s chief executive, after a day of meeting with employees and outsiders. “As far as I could tell, we didn’t miss a beat anywhere in the organization.”

Yet despite signs that the market for Drexel’s high-risk, high-yield “junk bonds” had also shrugged off news of the suit, others on Wall Street contended that it won’t be clear for several weeks whether Drexel still has the full confidence of customers and employees in the face of the most massive enforcement action in SEC history.

By early Thursday morning, employment recruiters and officials of other brokerage firms were already on the telephone trying to hire away some of Drexel’s most productive brokers, said an executive of one recruiting firm. “Every headhunter in the world is after them today,” the recruiter said.

Some managers in the firm’s brokerage arm were also reported to be discussing the possibility of giving fat bonuses to some top-producing stockbrokers to keep them, although Joseph denied the report.

After a two-year investigation, the SEC charged Drexel, the firm’s junk bond chief Michael Milken, investor Victor Posner and others with a panoply of securities law violations. The agency alleged that in 16 transactions between 1984 and 1986, the firm concealed its ownership of big blocks of stock, manipulated stock prices and rigged corporate takeovers, in some cases cheating its clients.

Lawyers Prepare Documents

Drexel’s lawyers began preparing documents that they will submit to U.S. District Judge Milton Pollack in New York to obtain the evidence that the SEC is using as the basis of its case. But attorneys knowledgeable about the case said they do not expect it to move forward until Rudolph W. Giuliani, U.S. attorney in Manhattan, brings criminal charges in the weeks ahead.

Chief Executive Joseph said he had been on the two-way telephone hookup used by the firm Wednesday afternoon and again on Thursday morning to discuss the case and answer questions from the staff about the expected schedule for the case. Employees asked, for example, “When do we get a shot at Ivan Boesky?” Joseph said.

Ivan F. Boesky, the convicted insider trader, is a key witness in the government’s case and allegedly concealed Drexel’s ownership of huge blocks of stock to help Drexel make money in takeovers and other transactions. The defense is expected to try to undermine the government’s case by attacking Boesky, who paid $100 million to settle his case in November, 1986.

Joseph said the firm made a coordinated effort to test the reaction of the company’s banks, institutional brokerage clients and the corporate clients who turn to the firm to underwrite new issues of stocks and bonds.

Others on Wall Street said they expect little reaction from Drexel’s inner circle of clients, including the savings and loans, insurance firms and wealthy individuals who have made a huge success of the firm’s junk bond operation. But they predicted that the company will have a harder time lining up new customers and may lose brokerage and other employees who fear that the legal problems may harm their careers.

One of the firm’s longtime clients, who asked not to be named, declared that the SEC charges provoked little reaction from the financial world because they have been discussed in news leaks over the last two years.

“We’ve been getting the three-minute version of this for years; this is just the 60-minute version of the same story,” he said. “It was a yawn.”

May Seek a Hedge

This client predicted that more of Drexel’s underwriting clients will choose to use two underwriters rather than just Drexel as a hedge against the possibility that the case will harm Drexel’s ability to market junk bonds. Such decisions cut Drexel’s hefty underwriting fees in half, he noted.

Another major client, Ray Martin, chief executive of Coast Saving & Loan in Los Angeles, said that, although he was not fully knowledgeable about the case, “I’ve been more than satisfied with Drexel, and this won’t change any of that.”

Some have speculated that the case might preoccupy some Drexel employees and keep them from their best performance. But “their people have always been there when I needed them,” said Martin, whose S&L; has some $12 billion in assets.

When Drexel sold its investment management unit to a group of its employees and outside investors last July, both sides in the transaction said Drexel’s possible legal problems played no role in the move. But others in the industry asserted that the managers of the firm, now called 1838 Investment Advisers, felt Drexel’s legal problems were making their job more difficult.

“I think it was a factor,” said Terry Bilkey of Butcher Consulting, an investment consulting firm in Pittsburgh. “They were competing with other well-qualified firms to win investment clients, and they had a handicap.”

Wall Street competitors say the SEC charges may cost Drexel the underwriting business of some municipalities, since their officials are bound to be sensitive to such problems. E. F. Hutton lost some business from the city and state of New York after some employees were implicated in a wide-ranging check kiting scheme.

Joseph acknowledged that municipal bond underwritings--featured in some of Drexel’s recent advertisements--”have political or PR implications that are different” from those of corporate underwriting clients. But he pointed out that such business represents only a small portion of Drexel’s revenues.

Competitors and analysts predicted that some of Drexel’s competitors will try to exploit the firm’s difficulties by reminding prospective clients of the litigation.

“They’ll just whisper, ‘Isn’t it too bad about Drexel’s problems?’ But they will succeed in getting the idea across,” said Perrin Long, an analyst with Lipper Analytical Securities in New York.

One investment banker said the case may also present problems for employees in certain Drexel operations who want to move to a different firm. “Now that people have actually seen the case, I think they’re going to want to know a lot about people from, say, mergers and acquisitions, before they hire them,” said the banker, who asked to remain unidentified. “They want to make sure they’re not inheriting any problems.”

Keep Eye on Junk Bonds

Many in the financial community had kept a close eye on the junk bond market Thursday for signs of nervousness. But though the market opened down only slightly, it regained its losses and closed the day with most prices unchanged on average volume, traders said.

Meanwhile, in Washington, the SEC charges brought predictions of a new impetus for legislation to stiffen penalties for insider trading and related securities abuses. Rep. Edward J. Markey (D-Mass.) said the charges “ensure” that Congress will send President Reagan a new insider trading bill before it adjourns next month.

Markey is chairman of the House subcommittee on telecommunications and finance and is principal author of an insider trading bill that would boost the maximum fine to $1 million from $100,000 for individuals and to $2.5 million from $500,000 for corporations.

Criminal charges in the Drexel case are expected to be filed soon. Details in Business.

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