Drexel an Isolated Case in Securities Field, SEC Chief Testifies

From Staff and Wire Reports

The chairman of the Securities and Exchange Commission said Friday that his agency’s sweeping stock fraud suit against Drexel Burnham Lambert Inc. is not an attack on the securities industry overall.

“It is my opinion that the securities industry in the United States is essentially an honest, well-run industry,” SEC Chairman David S. Ruder told a House subcommittee. In the Drexel case, he said, the SEC is “attempting to find those people in the industry who do not fit the mold of the industry itself.”

Ruder defended Wall Street when asked by Rep. Edward J. Markey (D-Mass.), chairman of the House Commerce subcommittee on finance, whether the Drexel allegations reflect widespread abuse or whether the problem is confined to a few companies.

“These allegations, if true, represent a blistering, scalding commentary on the culture of Wall Street in the 1980s,” Markey said.


In a suit filed Wednesday in U.S. District Court in New York, the SEC accused Drexel; Michael Milken, head of the firm’s “junk bond” operations in Beverly Hills; three other Drexel employees, and two other individuals and one firm of violating securities laws, including prohibitions against insider trading, stock manipulation and defrauding clients.

Drexel and its employees have denied the civil allegations, which could lead to stiff fines and even to loss of the company’s brokerage license.

Federal prosecutors have not disclosed publicly whether they will file criminal charges. Ruder said SEC investigators have maintained a continuing relationship with U.S. Atty. Rudolph W. Giuliani in New York, but he would not elaborate.

However, sources close to the case confirmed Friday that Giuliani has sent “target letters” to at least five individuals associated with Drexel, including Milken, notifying them that they may be indicted within a month.


Ruder and the SEC’s enforcement chief, Gary Lynch, said the Drexel litigation and similar cases have stretched the agency’s resources to the limit. Because of staff limitations, they said, the Drexel case may force the SEC to forgo other initiatives.

There is a growing tendency in the securities industry to challenge SEC complaints rather than settle out of court, Ruder said. Two years ago, 18 SEC cases were being litigated; today there are 60, he said.

Ruder said the $160-million SEC budget that the Reagan Administration sought for the fiscal year starting Oct. 1 is “the minimum for the commission to fulfill its responsibilities. The commission has reached the limits of its resources in efficiency and now needs additional resources,” he said.

Ruder and Lynch discounted suggestions that the Drexel case, if successful, could doom the junk bond industry, in which Drexel is the leader. Junk bonds are high-risk, high-yield debt securities that often have been used to finance corporate takeovers and leveraged buyouts.


“One can characterize the complaint as not involving junk bonds, and therefore there is not any connection,” Ruder said.

“There is nothing inherent in the trading of junk bonds that requires one be involved in fraud or manipulation,” Lynch said.

Ruder said the SEC is “absolutely confident we are going to prevail” in the Drexel case and defended the fact that the agency spent two years and documented 18 allegations before filing the complaint.

Rep. Howard C. Nielson (R-Utah) complained that “you could have shaken (Congress) nicely with only three or four” allegations several months earlier, “when there was still time for this session of Congress to act.”


“We have a potent array of weapons” against fraud already, Ruder replied, indicating no new legislation would have helped in the pursuit of the Drexel case.

Nevertheless, he said he supports a bill sponsored by Markey and others, due for a House vote next week, that would toughen laws against insider trading--the profiting from access to non-public information.

“An increase in sanctions in the insider trading area will be helpful,” Ruder said.