SEC Pressing Drexel to Move Beverly Hills Division to New York

The Securities and Exchange Commission wants Drexel Burnham Lambert Inc. to move its lucrative “junk bond” division from Beverly Hills to New York as a condition for settling a massive fraud complaint against the firm, sources familiar with their negotiations said today.

The sources, speaking on condition of anonymity, confirmed an account in the Wall Street Journal that said SEC negotiators made the demand in talks late last week, toughening an earlier request that Drexel move only its supervision authority over the division to the firm’s New York headquarters.

The new condition is important because Drexel must settle with the SEC as part of a broader plea bargain deal reached Dec. 21 with the Manhattan U.S. attorney’s office. Under that deal, the firm will plead guilty to six fraud felonies and pay a record $650 million in fines and restitution.

Drexel’s high-yield “junk bond” division is considered the firm’s most profitable operation. Dismantling and moving it to New York could cripple Drexel’s renowned prowess in the $175-billion market for junk bonds, commonly used to finance takeovers and the growth of small and mid-size companies.

The new SEC demand occurred at a time when many Drexel high-yield bond traders already are upset over the firm’s decision to reach a plea bargain with the government rather than fight longstanding charges of securities fraud that grew out of the Ivan Boesky insider trading scandal more than two years ago.

Drexel spokesman Steven Anreder declined to comment on the SEC negotiations.

But he said the firm “does not believe the high-yield bond department can be successfully moved to New York, since any effort to do so would destroy the department and do irreparable damage to the high-yield market.”

SEC spokeswoman Mary McCue declined to comment on the Drexel negotiations. The agency’s policy is to refrain from commenting on any impending enforcement matter.

The high-yield department was moved from New York to California in 1978 by its architect, Michael Milken, a senior Drexel financier who is expected to be indicted on securities fraud and other charges.