Drexel Seeks a Settlement to Avoid Charge of Racketeering
Drexel Burnham Lambert Inc. held talks this week with federal prosecutors about the possibility of settling expected criminal charges, spurred on by word that the Justice Department in Washington had approved the inclusion of racketeering counts in a long-anticipated indictment.
The indictment, for insider trading and securities fraud, is now widely expected to be filed sometime next week.
Two independent sources close to the investigation said there had been talks Wednesday between lawyers for the Wall Street firm and the office of Rudolph W. Giuliani, the U.S. attorney in Manhattan. However, one Drexel official said no settlement deal was on the table “in complete form” and added that the prospects for a settlement remained highly uncertain.
The firm expects to be given 48 hours’ notice before an indictment is returned so that a last-ditch effort at an agreement could be made. One source said notice hasn’t been given yet. He said that if an accord seemed likely once final talks begin, however, “48 hours can also be two weeks if the parties are really working.”
Giuliani’s office Tuesday notified the firm and other prospective defendants in the case that the Justice Department had approved the racketeering charges, sources said. Racketeering counts could mean huge financial penalties for all of the defendants, as well as lengthy prison sentences for the individuals. The threat of racketeering charges also strengthens Giuliani’s hand in negotiating a settlement.
Expects Details Soon
The sources said any settlement would involve Drexel pleading “no contest” to one or more criminal charges. The firm likely would have to pay a large financial penalty, probably at least $100 million, and would have to agree to curtail certain aspects of its business.
One person close to Drexel said the firm still didn’t know what the specific criminal charges against it would be. He said Drexel expected to be given details of the charges when the 48 hours’ notice is given. The official said a final decision on whether to settle would hinge on the specific charges and whether the firm felt that the settlement offered wouldn’t substantially hurt its business.
Drexel officially refused to discuss this week’s contacts with the U.S. Attorney’s Office. A spokesman for the firm said: “We never have and we don’t plan to talk about settlement talks.”
As reported, a federal grand jury investigation of the firm has been conducted in New York for two years. Federal prosecutors some weeks ago sent out “target” letters to Drexel and other potential defendants in the case, notifying them that an indictment was imminent. The others include the head of Drexel’s fabulously successful “junk bond” department in Beverly Hills, Michael Milken; his brother, Lowell Milken, as well as New York-based trader Cary J. Maultasch, former Drexel trader Bruce Newberg and Drexel bond salesman James Dahl. Dahl has since been granted immunity for grand jury testimony.
The sources said the settlement talks included only the firm and not Michael Milken or any other individuals.
John Carroll, an assistant U.S. attorney handling the investigation, declined to comment when asked if talks had taken place. The prosecutors generally have refused to comment on any aspect of the case.
Lawyers for Drexel and the other defendants tried desperately in recent weeks to persuade the Justice Department not to authorize the inclusion of racketeering charges under the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO.
Approval from Washington was needed before Giuliani could include such charges in an indictment. But Carroll is said to have notified lawyers for Drexel and the other prospective defendants that Giuliani had been given a green light.
The law provides for stiff prison sentences for individuals and the “disgorgement” of profits earned through an illegal enterprise. Although the law isn’t clear, some legal experts say it could allow prosecutors to freeze at least several hundred million dollars of Drexel’s assets pending a trial.
Drexel officials are known to be worried about the impact of racketeering charges on the firm’s business, even though they maintain that they could post a bond that would prevent the freezing of assets. The firm has set aside a huge reserve fund, said to exceed $500 million, for fighting the case.
One of several difficult issues expected to be included in settlement discussions is whether Drexel would agree to sever its ties to Michael Milken. Senior Drexel officials have said recently that they aren’t willing to suspend him or ask him to step aside. Individuals close to Milken maintain that he doesn’t have any intention of stepping down, even after an indictment.
In addition to any criminal charges, Drexel must also contend with a civil lawsuit filed Sept. 7 by the Securities and Exchange Commission that charges the firm, the Milken brothers and other Drexel employees with insider trading, defrauding clients and manipulating stock prices.
