Prosecutors File 6 Fraud Charges Against Drexel : Wall Street Firm Enters Preliminary Plea of ‘Not Guilty’ as Negotiations With SEC Continue
Federal prosecutors Tuesday filed the six criminal securities fraud charges to which Drexel Burnham Lambert Inc. is expected to plead guilty under a tentative agreement worked out late last year.
But the Wall Street firm entered a preliminary plea of not guilty, and it isn’t expected to change the plea until it also reaches an accord on separate civil charges filed by the Securities and Exchange Commission. Negotiations with the SEC were continuing, and it was unclear Tuesday how close the two sides were on key issues, including whether the firm will be forced to move its “junk bond” operations back to New York from Beverly Hills.
Rudolph W. Giuliani, the U.S. attorney in Manhattan, also had expected Tuesday to make public a 12-page plea agreement worked out with Drexel. The agreement is believed to contain details of how Drexel will cooperate with prosecutors in other cases, including the expected indictment of Michael Milken, the head of the junk bond department. But at the request of the firm’s lawyers, U.S. District Judge Kimba M. Wood ordered the agreement sealed, at least until another court hearing today.
First Criminal Charges
Sources close to the investigation said the indictment of Milken and certain other Drexel employees is likely before the end of this week and could come as early as today.
Defense lawyer Thomas F. Curnin told the judge that since Drexel’s agreement to plead guilty might still fall through, the firm’s accord with the U.S. attorney’s office shouldn’t be made public.
“It may be that this agreement never becomes effective,” Curnin said in court. Lawyers in the case have estimated that talks with the SEC could go on for another week or longer.
The six-count criminal “information” filed Tuesday represents the first criminal charges filed in the Drexel investigation, which has been developing for more than two years. Last Dec. 21, Drexel tentatively agreed to pay $650 million in penalties and plead guilty to six criminal counts to avoid being indicted on more serious charges of racketeering.
As background to the six charges, the document spells out two broad illegal arrangements in which Drexel allegedly agreed to “park” stock, participate in insider trading and manipulate stock prices. In stock parking, one party illegally holds shares for the benefit of another.
One of the allegedly illegal arrangements relates to Drexel’s dealings with Ivan F. Boesky, the former stock speculator who pleaded guilty to one criminal count in 1986. It was Boesky who put prosecutors on Drexel’s trail. The other focuses on Drexel’s dealings with Princeton/Newport Partners, a now-defunct securities firm that was the subject of separate criminal charges filed last summer.
The document charges that Drexel engaged in “sham and bogus securities trades which enabled the Boesky organization to violate the federal tax and securities laws and to defraud its investors.” It also spells out an arrangement under which Drexel allegedly paid Princeton/Newport to manipulate the price of securities underwritten by Drexel and to hide Drexel’s ownership of securities in violation of federal law.
But the six specific charges filed Tuesday against Drexel contained no surprises and are the same as those detailed by sources in December. The charges are narrowly focused, and five of the six closely follow civil charges contained in the pending SEC lawsuit. Drexel is said to have insisted that the charges be limited mainly to those contained in the SEC suit so that the firm’s exposure to additional lawsuits by private plaintiffs will be minimized.
In a written statement, Drexel said: “We believe that this settlement is in the best interests of our firm, its employees and clients.” The firm added that the “final agreement will be effective after the company has settled with the SEC, at which time Drexel Burnham will change today’s pleas of not guilty.” The statement also said Drexel will cooperate with the government’s continuing investigation.
The charges filed Tuesday don’t name the individuals at Drexel who are believed to have carried out the alleged wrongdoing. But the court document refers repeatedly to a “John Doe,” whom it identifies as a “senior employee” of the junk bond department. “Doe” is believed to be Milken.
Deal With Boesky
A Milken spokesman said in a prepared statement that “as we previously stated, Michael Milken is not a party to the Drexel settlement. There is no change in his position, and his attorneys are continuing to prepare to defend him against any charges that may be brought.” Milken has denied involvement in any illegal activity.
The “background” section of the court document filed Tuesday refers to a $5.3-million payment that Drexel allegedly received from Boesky to make good Drexel’s losses on illegal trades carried out on his behalf. Evidence of the payment had been the initial focus of the criminal investigation, but the actual charges don’t include any counts related to the payment.
The six charges include:
- Making deliberately false filings with the SEC in 1980 in connection with the purchase of shares of Fischbach Corp. Drexel allegedly worked with Boesky to help investor Victor Posner take control of Fischbach by evading a previous agreement by Posner not to increase his stake in the company.
- Manipulating the price of MCA Inc. common stock in 1984 to help Golden Nugget Inc. get a good price when it sold off a big block of MCA shares.
- Helping Boesky hide his ownership of $200 million worth of Phillips Petroleum Co. stock in 1985 to mask the fact that Boesky’s firm was in violation of SEC rules about how much capital securities firms keep on hand to protect investors and trading partners.
- Arranging with Boesky to buy shares in Harris Graphics Corp. in 1983 and 1984 in a secret scheme to arrange an acquisition of Harris Graphics.
- Arranging with Boesky to manipulate upward the price of Stone Container Corp. stock to make possible an offering by Drexel of Stone Container convertible securities. The offering was dependent on the price of Stone Container’s common stock reaching a certain level.
- Arranging with Princeton/Newport to sell short 40,000 shares of COMB Co. to make it easier and more profitable for Drexel to sell an issue of COMB convertible securities.
‘THE BOESKY ARRANGEMENT’
‘The Boesky organization agreed to participate in various illegal securities transactions in which it bought and sold securities at the direction, and for the benefit, of the defendant Drexel without disclosing the true ownership of the securities, as required by law.’
--Criminal information filed by the U.S. Attorney’s Office in Manhattan
THE CASE AGAINST DREXEL Transaction: Stone Container 1986 Charge: Securities fraud Government Allegation: Drexel was underwriter and manager of Stone Container securities that were to be offered only if its common stock was trading in a certain range. Ivan F. Boesky’s organization purchased substantial Stone stock the day before the offering to create the appearance of active trading, manipulating the stock price to induce Stone to proceed with the offering.
Transaction: COMB 1985
Charge: Mail fraud
Government Allegation: Drexel persuaded investment firm Princeton/Newport to sell short 40,000 shares of Drexel client COMB Co. in an effort to artificially depress the discount retailer’s stock price. COMB had hired Drexel to underwrite a convertible bond offering, the price of which would be based on the closing price of its stock the day before the offering. COMB would have preferred a high price; a low price would make the bond easier for Drexel to sell. Drexel agreed to reimburse Princeton/Newport for any losses resulting from its short sale.
Transaction: Phillips Petroleum 1985
Charge: Securities fraud
Government Allegation: Drexel gave the appearance of purchasing Phillips stock from Seemala Corp., which was controlled by Boesky, to hide stock losses that left Seemala in violation of SEC net capital regulations.
Transaction: Harris Graphics 1985-86
Charge: Securities fraud
Government Allegation: Drexel arranged with Boesky to buy shares in Harris in a secret scheme to arrange its acquisition. In May, 1986, AM International bought the company for $22 a share. A month later, Drexel raised $100 million for AM to complete the deal--a move that earned it $4 million. Drexel and Boesky also earned $5.6 million in trading profits on their joint Harris holding. A top Drexel employee earned $6.5 million more on his personal Harris stake.
Transaction: MCA 1984
Charge: Mail fraud
Government Allegation: Drexel manipulated the price of MCA common stock to help Golden Nugget sell a big stake without losing money. Drexel encouraged Boesky’s company to buy from Drexel a block of 1.1 million MCA shares, secretly guaranteeing it against losses. The government says Drexel intended to deceive the public into believing Golden Nugget was holding MCA stock rather than selling it--creating the appearance of high interest in the stock and thereby supporting its price.
Transaction: Fischbach 1980
Charge: Securities fraud
Government Allegation: Drexel made false filings with the SEC in connection with the purchase of shares of Fischbach Corp., a construction firm. Drexel allegedly worked with Boesky to help investor Victor Posner take control of Fischbach by evading a previous agreement by Posner not to increase his stake in the company.
Source: U.S. Attorney’s Office filing
