THE DREXEL CASE : Down the Line : Flood of Private Litigation May Soon Swamp Beleaguered Firm
Despite Drexel Burnham Lambert’s efforts to limit private lawsuits against the firm by carefully picking the six criminal cases to which it will plead guilty, some securities lawyers foresee a surge of suits against the beleaguered investment banker.
Further, Drexel Burnham has no guarantee that potential damages will be covered by the $350 million that it is putting into a settlement pot under the plea bargain with the Justice Department, legal experts said Friday.
Five of the guilty pleas reportedly involve stock transactions with convicted speculator Ivan F. Boesky. The sixth apparently involves Princeton/Newport Partners, which has offices in Princeton, N.J., and Newport Beach and is going out of business.
Several of the felony cases figure in the massive Securities and Exchange Commission suit against Drexel Burnham and its “junk bond” chief, Michael Milken, which was filed Sept. 7.
The criminal counts reportedly involve Drexel Burnham’s manipulation of the price of securities and concealing its activities in deals between 1984 and 1986. The companies whose stocks were involved in Drexel’s activities are MCA Inc., Stone Container Corp., Fischbach Corp., Harris Stephen A. Wynn Graphics, COMB Co. and Phillips Petroleum.
In the case of Los Angeles-based MCA, the SEC suit previously alleged that Drexel Burnham orchestrated purchases of MCA stock to keep the price up. In addition, the suit said, Drexel indemnified Boesky against losses on those purchases. The government indicated that the deal helped Stephen A. Wynn, chairman of Golden Nugget Inc., in 1984 when he was disposing of the gambling firm’s 4.95% MCA stake, which he obtained through Drexel.
Along with the criminal counts, a “pervasive” number of insider trading and other charges encompassed by the SEC civil suit provide “fertile ground” for plaintiffs’ attorneys to explore, said Gerald Boltz, who headed the SEC’s Los Angeles regional office in the 1970s.
Drexel Burnham’s efforts to limit private suits is not viewed by another securities lawyer, Richard M. Phillips, as likely to be effective. His prediction: a “multitude of different suits” against the company and others.
The company appears to have selected cases that have involved limited damages to possible plaintiffs, who could use the guilty plea as the basis of their own claims. None of the six seem likely to go into the kinds of insider trading allegations by the SEC that could balloon the potential cost of private lawsuits.
Expects New Filings
Further, Phillips believes that the prospective new litigation will provide fodder for follow-up actions from investors who claim losses due to Drexel’s illegal activities even beyond that contained in the criminal case and the SEC suit.
For instance, Phillips, a partner in the Washington office of Kirkpatrick & Lockhart, said his firm expects to file new actions on behalf of institutional investors that do business with Drexel Burnham.
He expects other law firms to bring more class-action suits for individual investors and, to a lesser extent, actions on behalf of corporations that did business with the investment banker or whose stock was involved in Drexel deals.
And Richard Greenfield, who already represents individuals in several class-action suits against Drexel Burnham, said his firm also represents stockholders looking into potential cases against some firms whose managements dealt with Milken.
He identified one such firm as First Executive Corp., Los Angeles, headed by Fred Carr. Greenfield also said he represents several stockholders of Wickes Cos. in a pending class action suit against the management of former Chairman Sanford C. Sigoloff and has been contacted by some shareholders of Pacific Lumber Co., which was acquired in 1985 by Maxxam Group, headed by financier Charles Hurwitz.
Some companies with potential grounds to sue Drexel have not done so, Greenfield said, “in part because basically people who live in glass houses don’t like to throw stones,” and they might thereby “invite claims against themselves.”
Greenfield’s firm brought a class action in Los Angeles County Superior Court last month on behalf of Drexel Burnham employees who own stock in the company. The suit alleges that Drexel failed to disclose allegedly illegal activities and potential legal liabilities to employees and hurt the value of their stock.
Phillips said that a fresh area of Drexel Burnham exposure, one not covered by either the criminal case against the company or the SEC suit, lies in congressional testimony that partnerships in which Drexel was involved bought significant parts of securities offerings handled by the investment banking firm.
In some cases, customer orders were only partly filled and, as a result, the institutions will claim damages from losing the opportunity to buy at lower prices, Phillips said.
He said Drexel Burnham has a “formidable” task of handling present and future litigation seeking enormous amounts of money in a fashion that “it doesn’t break the company.” He said that is difficult, but it can be done.
Civil litigation against the company, securities lawyers say, likely will rely heavily on the broad grounds of fraud.
Los Angeles lawyer Michael Bertz notes that the criminal cases involve fraud by use of manipulative or deceptive devices that cause financial damage to investors.
Phillips said a large number of expected suits may be based on the numerous instances of insider fraud alleged in the SEC suit, on which Drexel Burnham is negotiating a settlement.
Boltz noted that the criminal and civil actions bring up the question of breach of fiduciary duty as causes for bringing new civil actions.
“The case,” he said, “illustrates the need for companies and individuals dealing with investment bankers to look beyond mere financial benefits being offered and really ask questions about the integrity of the organization.
“I’m afraid that has too often been neglected in the past.”
