Drexel Rejects Terms Offered for Settlement : Move Boosts Likelihood U.S. Prosecutors Will Seek Racketeering Indictments
Employees of Drexel Burnham Lambert Inc. were told Monday that the firm rejected the terms it had been offered for settling expected criminal charges, increasing the probability that Drexel and several key employees will be indicted on racketeering charges, sources said.
Frederick H. Joseph, Drexel’s chief executive, told employees via intercom Monday that the firm couldn’t accept a settlement offered by Rudolph W. Giuliani, the U.S. attorney in Manhattan. The sources said Joseph denied that Drexel had done anything wrong. And he said Drexel could be indicted as early as today.
The sources said Joseph didn’t specify which terms were unacceptable, but he reportedly said the firm didn’t have adequate reserves to cover the financial penalty demanded by the prosecutors.
In a statement, the firm declined to comment on Joseph’s remarks. “We have consistently refused to comment publicly about the settlement negotiations,” the written statement said. “Obviously, the firm would like to resolve these issues if it can do so on a basis that makes business sense and is fair to our employees.”
Negotiating for Weeks
It wasn’t clear whether Joseph’s announcement to employees meant a definitive end to negotiations or whether the firm was posturing in hopes of extracting better terms from Giuliani.
Bruce Baird, head of the U.S. attorney’s securities fraud unit, declined to comment Monday on any aspect of the case.
When asked if there was still a possibility of further talks, Peter Fleming Jr., one of Drexel’s lead attorneys, said: “I have no idea.” He refused to make any further comment.
As reported, Drexel has been in negotiations for weeks to avoid an indictment. The firm was considering a settlement that would involve a financial penalty of up to $750 million and a guilty plea to at least five felony counts for securities law violations but not racketeering.
Drexel officials had said the firm was anxious to settle because it feared the effect that an indictment on racketeering charges would have on its business. Such a charge could allow the government to freeze a big portion of the firm’s assets and protracted legal proceedings could drive away clients.
But last week, reports surfaced that some key employees in Drexel’s “junk bond” department in Beverly Hills, as well as in the firm’s New York headquarters, were opposing the settlement terms. They were supported by some members of Drexel’s board.
The opposition came mainly from employees who felt strong loyalty to Michael Milken, the head of the junk bond department, who is also expected to be indicted. They feared that the settlement terms, which wouldn’t cover Milken, might harm his own legal defense. Sources close to the firm also had claimed that some key customers were threatening to withdraw their business if there was a settlement unfavorable to Milken.
Drexel executives reportedly were concerned that the settlement terms would be so strict that the firm’s ability to remain profitable would be in doubt.
Milken is credited with developing the national market for junk bonds, which are high-risk, high yield debt securities, and he was a key force in transforming Drexel from a second-tier investment house into the fifth largest on Wall Street.
Up to Giuliani
One source close to the Milken loyalists said that “over the weekend, when people had time to sit by themselves and think, it was clear that if they made the decision to settle, they wouldn’t have had a firm left.”
This person said all hopes of a settlement hadn’t evaporated, but “now it’s back in Giuliani’s court to indict or come back with another offer.”
The source asserted that Joseph’s announcement followed a polling of Drexel’s 22 board members Monday in which they unanimously rejected the current settlement terms. But this wasn’t confirmed by Drexel’s spokesman or other sources.
The board members who represent the Belgium-based Groupe Bruxelles Lambert, which owns 25% of Drexel, earlier had been said to be in favor of a settlement. Those board members didn’t return calls to their offices Monday.
In his short address to employees, Joseph also denied published reports that some high-level employees had threatened to resign if the settlement terms were too unfavorable to Milken.
$400-Million Reserve
A spokesman for Milken declined to make any comment on Joseph’s announcement.
Sources said the firm had only about $400 million set aside in reserves to cover financial penalties. But analysts of securities firms have said that Drexel, which has been hugely profitable, could afford to pay a larger amount without harming its business.
Over the weekend, sources said another sticking point in the negotiations was Giuliani’s insistence that the firm agree to cooperate in the government’s investigation of Milken.
Giuliani’s office is believed to have drafted an indictment to be returned if settlement talks broke down.
