Drexel Loses Plea to Disqualify Judge in SEC Insider Case : Appeals Court Says Facts Don’t Support Bias Claims

In a sharp legal setback for Drexel Burnham Lambert Inc., a federal court of appeals Tuesday rejected a request that it order a lower court judge to disqualify himself from the Securities and Exchange Commission’s insider trading lawsuit against the firm.

A three-judge panel of the U.S. 2nd Circuit Court of Appeals in New York ruled 2-1 that the facts didn’t back up Drexel’s claim that U.S. District Judge Milton Pollack is biased and has a conflict of interest.

Pollack, 81, has a reputation among defense lawyers for favoring the government in securities cases. In their request to the appeals court, Drexel claimed that Pollack should disqualify himself because his wife, Moselle Pollack, stands to gain $30 million from the sale of her interest in a chain of Texas retail stores.

Drexel is helping the buyer arrange financing. Drexel had argued that this would create a public perception that the judge couldn’t handle the case impartially.

Drexel’s lawyers also claimed that Judge Pollack showed bias by questioning their integrity and making verbal attacks against them during court proceedings.

The appeals court ruled, however, that there was no direct link between Drexel and Moselle Pollack, and that to grant Drexel’s request would allow the company to go “judge shopping.”

The decision noted that Drexel hasn’t signed a contract to provide financing for the transaction. It also noted the opinion of an expert witness, a consultant on leveraged buyouts, who asserted that other investment banks besides Drexel could easily be found to provide the financing.

“We believe that, in light of the facts and circumstances that are known, a reasonable person would not conclude that the judge’s impartiality could reasonably be questioned,” the court ruled.

The appeals court acknowledged that the judge had rebuked lawyers for Drexel and for Michael Milken, the head of the firm’s “junk bond” department, and had even asked for disciplinary proceedings against them.

May Seek Rehearing

But the appeals court said behavior by the lawyers, including a phone call to the judge’s home without first notifying the other side, could justify such scoldings.

It wasn’t immediately clear whether the ruling would end Drexel’s two-month attempt to get Pollack off the case. Martin Flumenbaum, one of the lawyers representing Milken, said that although a decision hadn’t been made, it was likely that Drexel and other defendants in the case would ask either for a reargument or for a rehearing by the entire federal court of appeals in New York.

In a statement, Drexel said: “We naturally are disappointed with today’s decision.” A spokesman said the firm’s lawyers hadn’t had an opportunity to review the ruling. He said they would decide later whether to continue appealing.

The SEC filed suit Sept. 7, accusing Drexel of insider trading, stock market manipulation and defrauding clients. Most of the allegations related to the activities of the firm’s high-yield bonds department in Beverly Hills.

Dissenting Opinion

Proceedings in the case had been stayed pending the appeals court’s ruling. Barry Goldsmith, one of the SEC lawyers handling the case, said Tuesday: “We’re pleased they ruled, and we’re ready to get on with the case.”

The appeals court’s ruling was signed by appellate judges Richard J. Cardamone and Lawrence W. Pierce. In a dissenting opinion, Judge Edward J. Lumbard reviewed the pending business transaction involving Moselle Pollack and concluded that the fact that Drexel was attempting to raise the financing and that she stood to gain a large sum of money was enough to justify removal of the judge.

Lumbard also said Pollack’s “castigation” of the defense lawyers confirmed that “he cannot act impartially in these cases.”

The Drexel case has been consolidated with a series of private lawsuits against former stock speculator Ivan F. Boesky.

Criminal charges are still expected to be filed against Drexel, Milken and several other employees by the U.S. Attorney’s Office in Manhattan.

Drexel’s lawyers last week attempted to persuade the Justice Department in Washington not to authorize the filing of charges against the firm under the federal racketeering statute, known as RICO. Lawyers said Tuesday that they still haven’t received a firm indication how U.S. Atty. Gen. Richard Thornburgh will rule.