Insider Probe of Drexel Widens, Heightening Its Desire to Settle
Information from newly cooperating witnesses has caused federal prosecutors to broaden substantially their probe of Drexel Burnham Lambert Inc. and its “junk bond” chief, Michael Milken, even as the investment firm’s talks on settling expected criminal charges appeared to be nearing an accord.
Sources close to the investigation said the witnesses, both employees of Drexel’s junk bond department in Beverly Hills, had given the U.S. attorney’s office in Manhattan information about insider trading and improper dealings between Drexel and some of its clients.
The information is said to broaden the investigation because it isn’t related to Drexel’s dealings with former stock speculator Ivan F. Boesky or with the investment firm Princeton/Newport Partners. Those two areas until now had been the core of U.S. Atty. Rudolph W. Giuliani’s investigation.
The sources said the new information isn’t expected to derail the settlement talks. Instead, it is said to be one reason why Giuliani has held out for stiff terms from Drexel, including guilty pleas to multiple felony counts and a financial penalty of up to $750 million. And it has added to Drexel’s eagerness to reach a settlement that would end the criminal investigations of the firm.
A Drexel official confirmed Wednesday that the firm’s chief executive, Frederick H. Joseph, had met “within the last couple of weeks” with Giuliani. However, the face-to-face meeting yielded no definitive results. It is believed that one of the key elements of a settlement would be a requirement that Drexel sever its ties with Milken.
The new information could substantially strengthen the government’s case against Milken personally. He isn’t expected to settle with prosecutors and probably will be indicted soon. Spokesmen for Drexel and for Milken declined to comment on Giuliani’s new areas of inquiry.
Bruce Baird, the head of Giuliani’s securities fraud unit, also refused to discuss the investigation.
Settlement talks were said to be continuing Wednesday, although the Drexel spokesman said a final accord hadn’t been reached.
The two witnesses who provided new information, both granted immunity from prosecution, are James Dahl and Terren Peizer. As reported, Dahl, one of the top junk bond salesmen under Milken, was given immunity and appeared briefly before a grand jury in early October.
Led to Subpoenas
Lawyers for Dahl have claimed that he cooperated involuntarily, only because prosecutors obtained a court order forcing him to testify. But sources now say that Dahl provided prosecutors with a range of useful information that took them beyond their focus on transactions with Boesky and Princeton/Newport.
His talk with prosecutors led to subpoenas of other Drexel employees, including Peizer. As reported, Peizer last week also agreed to cooperate in exchange for immunity. He is said to have been interviewed by prosecutors but hasn’t yet appeared before the grand jury.
Sources said the broadening inquiry is one reason why Giuliani has asked a House subcommittee investigating Drexel to delay giving immunity to Drexel employee Lorraine Spurge. The committee has been looking into allegations that Milken may have improperly manipulated the sale of high-risk, high-yield junk bonds, including by allocating big portions of hot new issues to partnerships controlled by him and other Drexel employees. Spurge, 37, a key aide to Milken, had been subpoenaed to testify before the House investigations subcommittee, chaired by Rep. John Dingell (D-Mich.).
Avoiding RICO Charges
Sources said the new information falls into two broad areas. One is new allegations of insider trading unrelated to the firm’s dealings with Boesky. The other is the possible existence of an illegal profit-sharing arrangement with some of Drexel’s best junk bond customers.
Despite the likelihood of an unprecedented financial penalty and guilty pleas to felony counts, Drexel is anxious to settle with Giuliani’s office to avoid being charged under the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO.
The law provides for lengthy prison terms for individuals. RICO counts against the company also could allow prosecutors to freeze and control a substantial portion of Drexel’s assets as soon as an indictment is issued.
