Drexel Case Seen as a Bonanza for Lawyers : 36 Law Firms Involved, $130 Million Spent and More Suits Expected

Securities lawyers seem to be vying these days for the best way to describe the lengthy litigation that is expected to come out of accusations against the investment firm Drexel Burnham Lambert Inc.

Jeffrey Rosen, a Washington securities lawyer, compares the coming confrontation to the 8-year-old war of attrition between Iran and Iraq: “This is mega-litigation, with all that implies.” Others evoke the memory of the 15-year government antitrust suit against International Business Machines Corp.

At least 36 law firms are believed to have been retained so far to work on the case, ranging from the smaller firms that are defending secondary witnesses to blue chip defense firms such as Williams & Connolly and Paul, Weiss, Rifkind, Wharton & Garrison, which are representing Michael Milken, head of Drexel’s “junk bond” operations. One New York white-collar defense lawyer said he had received separate requests for representation from five persons involved in the case, while another, Don R. Buchwald, said “every (white-collar defense) firm in the city has at least a tiny piece of this.”

The Securities and Exchange Commission won’t say how many of its troops will be assigned to the task, but SEC Chairman David S. Ruder told a congressional panel last week that the agency would have to forgo other enforcement initiatives because so much of its staff would be devoted to this suit.

Expenses related to the case have so far reached $130 million for Drexel, including legal fees and the costs of paying an accounting firm to organize documents for the government’s two-year investigation.

Securities law experts expect the litigation to be particularly long and complex not only because of the lengthy SEC complaint but also because of expected criminal charges, novel issues involved in those criminal charges and shareholder suits seeking damages from the principals.

The criminal complaints are expected sometime in October and are believed to include charges of wire fraud, mail fraud and criminal racketeering, say sources close to the case. Use of the federal anti-racketeering statute would complicate the case because the law has been used largely against accused mobsters and never, until recently, against a securities firm.

Drexel is expected to resist vigorously if the government aggressively tries to construe the law’s provisions that the government can seize proceeds of the “criminal enterprise” used in racketeering. Under this provision, the Justice Department could claim that a wide range of Drexel operations are part of a “racketeering enterprise,” securities lawyers say.

“You’ve got a lot of fancy lawyers, and they will make a lot of fancy motions about this,” predicted one securities lawyer.

Lawyers in the case are closely watching a federal appeals court’s deliberations over a prosecutor’s move in the racketeering case filed last month against Princeton/Newport Partners, a small securities firm based in Princeton, N.J., and Newport Beach. The government has sought to freeze at least $30 million in assets of the firm, saying they can’t be disposed of since they may be seized as the proceeds of a racketeering enterprise.

Princeton/Newport has disputed the claim.

If a criminal case is brought in the Drexel case, the Justice Department and the SEC might seek to arrange the order of the cases several ways. But many experts believe that the criminal case will be tried first, with the SEC’s case put on hold for the duration.

If prosecutors win convictions on the criminal charges, there would be no reason for the SEC to litigate similar civil charges. But experts say prosecutors are likely to bring fewer charges, and they predict that the SEC will press the remaining civil charges even if the prosecutors make their expected criminal case stick.

Prosecutors typically try to focus a criminal case to make sure they do not overwhelm a jury with too long a trial or one that laymen cannot grasp. In this case, knowledgeable observers expect the prosecutors to bring criminal charges based on only a handful of the 18 transactions cited in the SEC complaint, probably those that are the most fully corroborated and the easiest to explain.

Also to be litigated are shareholder suits by investors who allege that they lost money because of the Drexel employees’ allegedly illegal insider trading and other violations. Two lawyers in Haverford, Pa., last week filed a class-action suit claiming that the violations make Drexel subject to fines under the civil provisions of the anti-racketeering statute.

The suit, and perhaps similar ones, are likely to be heard at the same time as the SEC complaint, said Bruce McNew, one of the lawyers.

Securities lawyers say the Drexel case will be a bonanza for the defense bar partly due to the number of third parties involved in the case, most of whom will probably also want to be well represented. The 18 transactions cited in the SEC complaint involved a long list of companies and investors who were tangentially involved but accused of no violations. Among them are such Wall Street luminaries as Carl C. Icahn and such companies as Wickes Cos., Maxxam Group and the Kohlberg Kravis Roberts & Co. leveraged buyout firm.

During the past two years, the Drexel investigation has already provided work for many lawyers, since many of the hundreds of securities-industry employees who were questioned by prosecutors retained lawyers.