SEC Pressing Drexel to Move Its ‘Junk Bond’ Department to N.Y.
The Securities and Exchange Commission is pressuring Drexel Burnham Lambert Inc. to close down its immensely profitable “junk bond” department in Beverly Hills and move it back to New York, where it could be more closely supervised by the firm’s top management.
But it wasn’t clear Wednesday whether the pressure might simply be part of a negotiating strategy by the SEC. Some sources speculated that the agency might settle for only a few sub-departments being moved back East.
It was also learned Wednesday that the SEC has asked Drexel to explain by Friday its treatment of several employees in the Beverly Hills office who are cooperating with the federal investigations. Drexel has suspended two employees, Terren S. Peizer and James Dahl, who have been granted immunity from prosecution in exchange for their testimony before a federal grand jury. A Drexel spokesman declined to comment on the SEC demand.
The firm’s high-yield department, which has about 400 employees, for years has operated as a semi-independent fiefdom under the control of Michael Milken, who is credited with developing almost single-handedly the U.S. market for junk bonds. The department is housed in offices occupying the back portion of the Gump’s department store building on Wilshire Boulevard. The building is owned by a partnership including Milken and his brother, Lowell, among others.
The junk bond department, directly or indirectly the source of up to 90% of the firm’s profits, was also the source of nearly all of Drexel’s legal problems.
Milken, who denies any wrongdoing, is expected to be indicted soon on federal criminal charges. Last month, Drexel announced plans to settle expected criminal charges against the firm by pleading guilty to six felony counts and paying a penalty of $650 million. But that settlement is contingent on Drexel also settling pending SEC civil charges of fraud, insider trading and market manipulation.
Although the six criminal charges against Drexel were to have been filed in federal court in Manhattan today, a Drexel official said it had been postponed again, until sometime next week, in part because of the dispute with the SEC.
Drexel spokesman Steven Anreder said: “Drexel does not believe that the high-yield 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.”
Sources say Drexel officials fear that key executives, already angry over the firm’s planned settlement, would be unwilling to move back to New York. Employees of the Beverly Hills office include many loyalists to Milken. They have opposed the settlement, which doesn’t cover Milken.
Individuals close to the case have said that Drexel’s settlement with the U.S. Attorney’s Office in New York is likely to require the firm to sever its ties to Milken and withhold his 1988 bonus, said to be about $200 million.
Resulted From Independence
The fact that New York-based Drexel’s high-yield department is in Beverly Hills is itself a testament to Milken’s former power and independence. In 1978, after building Drexel’s junk bond operation into a major powerhouse, he announced that he was moving the department from Drexel’s headquarters near Wall Street back to his native Los Angeles. Drexel’s management at the time felt it had little choice but to acquiesce.
SEC enforcement officials are said to believe that some of the alleged abuses at the junk bond department resulted from its independence and lack of close supervision from New York. Until recently, however, it was thought that the SEC would be satisfied with having a New York-based senior official assigned to supervise the department after a settlement and with the appointment of an audit committee of new outside directors to be named to Drexel’s board.
Last Thursday, Drexel Chief Executive Frederick H. Joseph visited the Beverly Hills office and assured employees that the junk bond operation wasn’t going to be moved to New York, sources said.
But individuals close to Drexel said the SEC on Friday began pressuring the firm to move the department. The SEC, in turn, has been under pressure from a congressional committee headed by Rep. John D. Dingell (D.-Mich.) to be tough on Drexel. It couldn’t be learned, however, what prompted the SEC demand on Friday.
An SEC spokeswoman declined to comment on any aspect of the pending settlement talks.
Drexel has indicated that it might be willing to move the convertible bond and stock trading operations now managed by the Beverly Hills office back to New York as a possible compromise with the SEC.
