SEC Move on Drexel Goes Beyond Wall St. : Analysts Fear Serious Damage to the Market
After Black Monday, the last thing Wall Street needs is another crisis of confidence.
But the government’s massive fraud accusations against investment giant Drexel Burnham Lambert Inc. threaten to rock the public’s already shaky trust in the fairness of the stock market.
By refocusing the 2-year-old insider trading investigation on a major securities firm, the charges leveled by the Securities and Exchange Commission elevated the scandal well beyond the simple greed of individuals like Ivan Boesky and Dennis Levine.
In so doing, the government heightened public doubts about the venerable institutions that control the securities business and shape the market’s role in the American economy.
Although many investment professionals think the move against Drexel by the SEC reflects an aggressive government effort to make the markets fairer, others say that at least for now, the charges are likely to further erode ordinary Americans’ confidence in stocks and other securities.
That could mean less business for brokers, less long-term investing, more difficulty for companies trying to raise money to grow, rising unemployment, mounting debt and a fall in America’s economic might, some strategists argue.
Array of Charges
“There’s no question this comes at a bad time,” said Perrin Long, a securities industry expert at Lipper Analytical Securities Corp. in New York. “It probably lowers confidence as far as the average investor is concerned, below what their already-low confidence may be.”
Although Long and others said they believe the securities industry in general and Drexel in particular will ultimately survive, “the sad thing is, if Wall Street doesn’t prosper, it’s highly unlikely the country will prosper. . . . There’s a close tie-in all the way around, and it benefits both not to have our image tarnished. It’s a sad situation.”
The staggering civil suit filed by the SEC last Wednesday against Drexel and key employees--notably its high-yield, high-risk “junk bond” unit chief Michael Milken--accused them of a vast array of frauds ranging from insider trading to stock manipulation to client-cheating. The defendants denied the charges, vowed to vigorously fight them in court and predicted vindication.
As outlined by the SEC, Drexel engaged in systematic, arrogant abuse of its position as a leading investment firm, calling into question why it is in business in the first place.
“I would say this particular news story or incident isn’t helpful in terms of bringing the small investor back,” said William Gross, managing director of Pacific Investment Management Co. of Newport Beach, which manages a $17-billion portfolio for large institutional clients such as pension funds.
“The more headlines you see on trials about insider trading--I’m not commenting on the veracity of this suit--the more the individual investor subscribes to the theory that you can’t win,” Gross said.
Investor Suits Predicted
The SEC action had been expected for months and both the stock and bond markets showed little outward reaction. But it raised the likelihood that the Manhattan U.S. attorney’s office will soon bring criminal charges, which would be far more serious and could possibly cripple Drexel’s ability to do business. The firm’s difficult position also recalls the demise of E. F. Hutton Group Inc., the once-mighty retail brokerage devastated by fraud charges that arose from a check-kiting scandal three years ago. A debilitated Hutton was sold to Shearson Lehman Brothers Inc. last year.
This analogy hasn’t been lost on Drexel, which has undertaken an unprecedented TV campaign for support, stressing what it calls the firm’s role in raising money for projects ranging from day-care centers to middle-income housing. But the SEC move and possible criminal charges may nullify the effect of that campaign. They also are bound to incite a spree of suits from investors who claim that they lost money on stocks allegedly manipulated by Drexel and other defendants.
“There are two levels of awareness in the marketplace--you have the professionals close to the industry who were aware this was there, and when it happens, it’s a non-event,” said John W. Bachmann, chairman of the Securities Industry Assn. “Then there are the people who heard it along the way and weren’t aware, and in that group, it’s not a plus.”
