N.J. Seeks to Ban Drexel in Casino Deals : Nevada Is Reviewing Suitability as Lender
The damage that Drexel Burnham Lambert Inc. may suffer from criminal charges began to spread Tuesday as New Jersey gaming officials asked the state’s Casino Control Commission to bar the investment firm at least temporarily from doing business with Atlantic City casinos.
Drexel estimates that it has provided 70% of the long-term financing for the New Jersey gaming industry since casino gambling started in Atlantic City in 1979. Most of the financing was provided through the sale of high-yield, high-risk “junk bonds.”
In a separate development, Nevada’s top gaming regulator said in an interview that his state’s authorities also are examining Drexel’s suitability as a lender to casinos. But he declined to predict whether Nevada will take any action.
In papers filed Tuesday with the New Jersey casino commission, Anthony J. Parrillo, director of the New Jersey Division of Gaming Enforcement, said he was seeking to ban Drexel from financing any casino deals because of the six criminal charges filed against Drexel by the U.S. Attorney’s Office in Manhattan on Jan. 24.
Parrillo asked for the ban while a review is completed of Drexel’s November, 1987, application for a casino service industry license, which is required of companies doing business with casino operators. Under New Jersey law, applicants normally may continue to conduct that business while their applications are pending. But Parrillo said the right can be revoked if the firms are accused of serious crimes.
Active in Nevada
In a written statement, Parrillo said Tuesday’s action was “designed to effect a severance of Drexel from casino business in New Jersey” until the criminal case is disposed of and the state’s license application has been fully investigated.
Drexel also is heavily involved in financing the gaming industry in Nevada. Its combined financing of purchases, construction or reorganizations of Las Vegas and Atlantic City casinos is estimated at $5 billion. William Bible, chairman of the Nevada Gaming Control Board, said in an interview that the board was collecting information on the pending criminal and Securities and Exchange Commission charges against Drexel.
Bible said the Nevada board’s review was in connection with Interface Group Inc.’s application for a license to operate the Sands hotel-casino in Las Vegas. Drexel provided much of the financing for the Massachusetts-based company’s recent purchase of the Sands for $110 million.
Bible said that if the board finds Drexel an unsuitable lender in the Sands deal, it would “send a message” that the board might not approve similar deals involving Drexel. But he said he didn’t know yet if such action was likely.
Drexel is expected to plead guilty to the six federal criminal charges in New York as soon as it completes talks with the SEC on settling separate civil charges of stock market manipulation and defrauding clients. Criminal indictments are expected to be filed against junk bond king Michael Milken and several other Drexel employees.
So far, the fallout from Drexel’s decision to plead guilty to criminal charges has been relatively mild. The New York City government and the state of Wisconsin banned the firm from participating in the sale of a small number of new issues of municipal bonds. The Federal Savings and Loan Insurance Corp. barred the firm from underwriting junk bond issues to bail out insolvent Texas savings and loan institutions.
Increased Market Share
And one prominent corporate client of Drexel’s, Stone Container Corp., reportedly has said it is unlikely to hire Drexel again to bring to market new issues of securities because of the criminal charges.
But the overall effect on Drexel’s profits is believed to be negligible. Despite the publicity surrounding the investigation of the firm, last year it increased its dominance of the hugely profitable junk bond business to a 42.8% share of the market from 40% in 1987.
It wasn’t clear whether the New Jersey action or possible action in Nevada might have a more significant effect on the firm. A Drexel spokesman declined to say how much profit the firm has earned from its investment banking services to Atlantic City casino companies. But the documents filed by New Jersey gaming officials state that the firm has earned fees “in excess of $120 million” over the past 10 years from the companies. If so, that would represent only a tiny portion of Drexel’s profits.
In a prepared statement, Drexel noted Tuesday that the firm would be granted a hearing by the New Jersey commission before it acts on Parrillo’s request within the next few weeks. The firm said that “since Drexel has provided more than $2.5 billion of capital--70% of all permanent funds raised--for the New Jersey gaming industry, we know that public confidence and trust in the regulatory process is essential.”
Drexel said that, based on new procedures it will be implementing on its own and because of the current negotiations with the SEC, “we believe that we will be able to qualify for licensure shortly.”
Reversed Position
Parrillo declined to estimate how long the full review of Drexel may take.
Drexel initially balked at New Jersey gaming authorities’ request that it apply for a license. The firm originally had maintained that it wasn’t required to do so under New Jersey law. But it reversed its position in 1987 and filed an application.
Among the big deals that Drexel has helped finance in Atlantic City were Golden Nugget Inc.’s construction of a casino in 1980. Since then, Drexel has been involved in many transactions, including marketing securities worth more than $1.3 billion to finance Holiday Inns Inc.’s casino ventures, and securities worth $325 million in 1988 to finance Griffin Resorts Inc.’s acquisition of Resorts International Inc.
