FALLOUT FROM THE DREXEL CASE : Leadership : Accord Puts Baker Closer to Chairman Post at Drexel
Drexel Burnham Lambert Inc.’s tentative settlement with federal prosecutors greatly increases chances that Howard H. Baker Jr., the former White House chief of staff and senator, will agree to take over as chairman of the powerful but legally troubled investment firm.
Sources confirmed Thursday that more discussions with Drexel are expected soon.
Thomas C. Griscom, a longtime aide and Baker spokesman, said: “I expect that they will continue talking, and then they will sit down and look at where Drexel goes in the future and what its plans are and whether he fits in in a different role from the one he’s been playing.”
Baker, 63, and his Knoxville, Tenn., law firm officially have been serving as advisers to Drexel on “internal corporate governance” while Baker considers a standing offer to become chairman. He would succeed Robert E. Linton, who is expected to retire soon.
Although Baker has little experience in the securities field, Drexel Chief Executive Frederick H. Joseph is known to believe that his record as a prominent senator and White House official will help the firm overcome its tarnished image. It wasn’t clear, however, whether Baker would command the respect of veteran Drexel Howard H. Baker Jr.investment bankers and “junk bond” traders, some of whom may quit in coming months over dissatisfaction with the terms of the settlement.
As reported, Drexel on Wednesday agreed in principle with federal prosecutors to plead guilty to six felony counts and pay a record $650 million in penalties. But the accord was conditioned on the firm settling a Securities and Exchange Commission lawsuit filed in September that accuses Drexel of insider trading, defrauding clients and stock market manipulation.
Drexel’s lawyers and federal prosecutors spent much of Thursday finalizing details of the six felony charges to be included in a criminal “information” to be filed today or next week in U.S. District Court. A Drexel official said the firm will waive its right to a formal indictment by a grand jury and will then enter a temporary plea of not guilty to the six charges. Once a final settlement is worked out with the SEC, Drexel will then plead guilty, the official said.
The charges are to include mail, wire and securities fraud. People familiar with the discussions said the charges aren’t likely to cover what originally was considered one of the central examples of wrongdoing under investigation: a $5.3-million payment to Drexel from former stock speculator Ivan F. Boesky. The payment was believed to have bee1847615776securities trading, according to the SEC’s civil lawsuit.
Prosecutors couldn’t be reached for comment Thursday.
But one source said Drexel had insisted that the charges not cover that incident, in part because it could directly implicate Michael Milken, head of the firm’s junk bond department, in criminal activity. Milken and several other Drexel employees are expected to be indicted soon on securities fraud and racketeering charges.
Key Conditions
Drexel Chief Executive Joseph told employees on Wednesday that the six charges had been selected because they would expose the company to the least amount of liability in civil lawsuits.
Specific charges reportedly were still being negotiated Thursday. As of late Wednesday, however, they involved Drexel’s role in an attempt to destabilize and gain control of Fischbach Corp. in 1980; manipulation of the price of Stone Container stock in 1986; fraudulent trading of Phillips Petroleum Co. stock in 1985; improper trading in a bid for Harris Graphics in 1983 and 1984; illegal transactions in 1984 involving the shares of MCA, and manipulating the price of shares of C.O.M.B., one of its own clients, with the aid of Princeton/Newport Partners, a small securities firm in which some Drexel employees were invested.
Five of the six charges to be filed against the firm closely follow some of the alleged wrongdoing spelled out in the SEC lawsuit.
The charges in which Los Angeles-based MCA is mentioned would allege that Drexel illegally helped Golden Nugget several years ago break even on the sale of its shares in the firm. Golden Nugget had bought nearly 5% of MCA but backed off any takeover attempt. Drexel allegedly had stock speculator Boesky buy MCA shares to help boost their price, thus permitting Golden Nugget to sell without incurring a loss.
Drexel’s agreement to settle the criminal charges is contingent on settling civil charges brought by the SEC. It was understood that Baker would accept the chairman’s job at Drexel only after the firm reaches a final agreement with the SEC and U.S. attorney’s office. Griscom said Baker’s advisory role doesn’t include giving advice on dealings with the prosecutors, the SEC or any other government agency.
Baker also wouldn’t take the job if Drexel’s top management, including Joseph, were unexpectedly forced out in the aftermath of the settlement, one source said.
Other sources close to the investigation said the SEC was involved in the settlement talks between Drexel and the office of Manhattan U.S. Atty. Rudolph W. Giuliani. They said some key issues that would be included in an SEC settlement already have been resolved, although they didn’t give details. Nevertheless, some sources said, there is still some possibility that the accord could unravel over the remaining points to be worked out with the SEC.
The SEC, for example, could impose limits on Drexel’s business, as it did when it banned the brokerage firm Kidder, Peabody & Co. from running a stock arbitrage operation after the firm settled insider trading charges.
In another development Thursday, the New York Stock Exchange said it was reviewing Drexel’s tentative settlement, but a spokeswoman for the exchange declined to comment on whether it was considering disciplinary action against the investment firm.
