U.S. Prosecutors in Drexel Probe Target Steinberg : Issue Centers on Whether He ‘Parked’ Large Stake in Wickes With Milken
The government’s investigation of alleged criminal securities fraud at Drexel Burnham Lambert Inc. has widened to include one of the firm’s prominent “junk bond” clients, corporate raider Saul P. Steinberg, according to sources familiar with the probe.
Federal prosecutors are investigating whether Steinberg tried to evade state insurance laws by participating in an illegal “stock parking” scheme with Drexel junk bond chief Michael Milken when Steinberg accumulated a big stake in Wickes Cos. four years ago, the sources said.
In a stock parking scheme, an investor tries to hide his ownership of stock by placing the shares with someone else and secretly agreeing to buy them back later. In this case, the government is investigating whether an insurance company controlled by Steinberg parked shares of Wickes--at the time operating under federal bankruptcy law--in order to evade state laws that prohibit insurance companies from owning stock in firms that are in bankruptcy proceedings.
Many Clients Subpoenaed
Steinberg is one of a host of corporate raiders who acquired prominence and wealth in close association with Drexel and Milken during the 1980s. Through Reliance Group Holdings Inc., Steinberg has bought stakes in and threatened takeovers of several companies in recent years, including Walt Disney Co., Penn Central Corp. and Quaker State Corp. Earlier this month, Steinberg said he was considering a proposal to buy Tiger International Inc., which operates the Flying Tiger air cargo concern and in which he already had a substantial stake. Tiger International has since been sold to Federal Express Corp.
The investigation of Steinberg’s trading in Wickes stock reflects an expansion of the long-running Wall Street corruption probe to include some of Drexel’s prominent junk bond clients. A number of Drexel clients have received subpoenas in recent weeks as government investigators have worked to develop information provided by new witnesses, according to sources.
Drexel announced last week that it had agreed in principle with Manhattan U.S. Attorney Rudolph W. Giuliani to plead guilty to six felony counts and pay penalties of $650 million, a deal that would end federal investigations of securities fraud at the firm. However, several Drexel employees, including Milken, still face a probable indictment on fraud and racketeering charges.
An attorney for Milken declined comment on the investigation of Steinberg’s trading, as did a Reliance spokesman.
The government’s investigation of trading by Steinberg concerns purchases of Wickes stock by Reliance Financial Services Corp. in late 1984 and early 1985, sources said, a time when Wickes was attempting to emerge from federal bankruptcy proceedings.
Wickes, a diversified automotive, industrial and home furnishings company, ended its bankruptcy proceedings in mid-January, 1985. As part of its reorganization, the company issued new shares of common stock. In March, Reliance Financial disclosed in a Securities and Exchange Commission filing that it had accumulated a 10.4% stake in Wickes, and that it had bought 8 million of its 10 million shares during a two-week period beginning March 12.
Among other things, federal prosecutors are said by sources to be investigating possible irregularities in Reliance’s SEC filing. Sources said Reliance actually arranged to purchase a large block of Wickes shares through Drexel in November, 1984, before Wickes completed its emergence from bankruptcy. Reliance has told the government that its November purchase didn’t have to be disclosed because the shares weren’t officially issued until after Wickes emerged from bankruptcy in January, the sources added.
The government, however, is examining evidence that Steinberg secretly arranged with Milken to hide his November purchase of Wickes stock, sources said. Among other reasons allegedly behind the stock parking arrangement, prosecutors are investigating whether Steinberg wanted to evade certain state laws that prohibit an insurance company from owning shares of companies involved in bankruptcy proceedings, as Wickes was in November, sources said.
As part of their probe of Milken’s dealings with Steinberg, federal prosecutors have informed a salesman in Drexel’s Beverly Hills junk bond department, Carl Deremer, that he is likely to be indicted on criminal fraud charges, according to sources. Deremer has been the salesman at Drexel responsible for Steinberg’s accounts at the firm.
A Drexel spokesman declined comment on the matter, citing firm policy against commenting on matters that may be before a federal grand jury. Deremer’s attorney, Andrew Lawler, did not return a phone call seeking comment.
Transactions in Wickes stock in early 1985 involving Steinberg, Milken and jailed stock speculator Ivan F. Boesky were cited in a sweeping lawsuit filed against Drexel and some of its employees by the SEC last September.
Wickes officials could not be reached for comment Thursday, but the company issued a statement that was highly supportive of Drexel and Milken after the SEC’s lawsuit was filed in September.
As part of its agreement with Giuliani’s office, Drexel has been negotiating this week to extricate the firm from that lawsuit.
