Drexel Says Probe Cost $1.5 Billion in Lost Revenue

Drexel Burnham Lambert Inc. has told its employees that the continuing federal investigation of the investment firm has cost it $1.5 billion in lost revenue and $175 million in direct expenses to defend itself in the case.

Sources said an internal memo--signed by Drexel Chief Executive Frederick H. Joseph and distributed to employees Thursday--also said federal prosecutors are holding out for stringent punishment of the firm in negotiations over settling expected criminal charges.

The memo confirmed that settlement talks were under way. But it said Rudolph W. Giuliani, the U.S. attorney in Manhattan, was insisting that Drexel plead guilty to criminal charges and accept punishment more severe than that meted out to former Wall Street speculator Ivan F. Boesky. The memo wasn’t specific, however, about exactly what punishment Giuliani is seeking.

Boesky, implicated in the nation’s largest insider trading scandal in 1986, agreed to cooperate with prosecutors. He was allowed to plead guilty to a single felony count, required to pay $100 million in penalties and given a three-year prison sentence. Joseph’s memo didn’t specify whether Giuliani would insist on prison sentences for any Drexel officials covered by a settlement.

In a separate development, it was learned Friday that prosecutors are close to reaching an agreement on granting immunity to a key Drexel employee in exchange for his testimony about the firm and the head of its hugely successful “junk bond” operation, Michael Milken. A source said the employee, Cary Maultasch, formerly a trader under Milken in Beverly Hills, had indicated that he was prepared to cooperate with prosecutors and probably would be granted full immunity from criminal prosecution next week.

The source said Maultasch’s lawyers held a lengthy meeting with prosecutors in New York on Wednesday, after which both sides felt they were close to an agreement. Maultasch is said to have been directly involved in many of the trades under investigation. Lawyers in the case said it is generally believed that Maultasch’s testimony could be devastating to Drexel and Milken. They said an agreement to testify could significantly add pressure on the firm to settle.

The Joseph memo circulated to Drexel employees Thursday didn’t state whether the firm was leaning toward a settlement. But one Drexel official said late Friday that the talks were still going on, with contact nearly every day between Drexel’s lawyers and assistant U.S. attorneys. He said it still wasn’t clear whether they could negotiate an agreement.

The settlement talks are believed to involve only the firm and none of the individuals who have been named as potential targets of an indictment, including Milken and his brother, Lowell Milken.

Racketeering Charges

A Drexel spokesman confirmed the broad outlines of the memo. Giuliani’s office refused to comment on it.

The memo said that if Drexel didn’t reach a settlement, the firm could expect to be indicted and that the charges would include counts under the federal racketeering statute, the Racketeer Influenced and Corrupt Organizations Act. The so-called RICO law carries stiff penalties and theoretically would enable prosecutors to freeze several hundred million dollars of Drexel’s assets.

However, Joseph said in the memo that in the event of an indictment, the firm had set aside enough funds that it could post a bond and continue business as usual. And despite Drexel’s lost revenue and huge defense expenses, Wall Street experts say the firm is still earning substantial profits.

Joseph stated that charges are expected to relate to alleged securities law violations in Drexel’s dealings with Boesky and with a small investment firm, Princeton/Newport Partners. Five partners in that firm already have been indicted on racketeering counts in an alleged scheme to create phony tax losses for Princeton/Newport.

The memo said the indictment also probably would include charges of obstruction of justice.

It is expected that any settlement would also include resolution of the civil charges pending against the firm, Milken and several other employees in an insider trading case filed by the Securities and Exchange Commission in September.

Joseph told employees that the costs of a settlement had to be weighed against the potential advantage of putting an end to the constant negative attention that the firm has received from the government and the press because of the investigations.

Staff Divided on Action

But a Drexel official said Friday: “It seems we’re not going to settle unless there is a settlement we can live with.” He said a key condition is that Giuliani agree not to bring new cases against the firm or its employees for their past activities. He said it would be “stupid” for the firm to settle “and not have it over and done with.” He also said Drexel wouldn’t agree to a settlement so large that it would bankrupt the firm.

Drexel’s staff is said to be deeply divided over which course to take. Some, maintaining that the investigations are unfair and that Drexel has done no wrong, are arguing for the firm to stand fast and fight an indictment in court. Others are said to argue that the firm’s best hopes of survival and prosperity lie in quickly settling criminal charges and moving on.

According to some accounts, a settlement would clear the way for Howard H. Baker Jr., the former senator and White House chief of staff, to step in as Drexel’s new chairman.

It was widely predicted that an indictment was to have come out this week. But sources said the date has been pushed back because of the continuing settlement talks.