U.S. Investigating Columbia S&L;’s Drexel Dealings
Beverly Hills-based Columbia Savings & Loan Assn. said federal investigators are looking into whether it engaged in an illegal trading scheme with Drexel Burnham Lambert’s “junk bond” department.
Kenneth R. Heitz, Columbia’s executive vice president and general counsel, confirmed that the thrift has provided “cartons of documents” to both the U.S. Attorney’s Office in Manhattan and the Securities and Exchange Commission. He also said some employees of Columbia had been subpoenaed to appear before the grand jury in New York that has been looking into alleged criminal violations at Drexel.
But in an official statement, the firm said it was confident that no wrongdoing had occurred.
Said to Be a Close Friend
Columbia, which has 22 branches, all in Southern California, has long been one of Drexel’s biggest buyers of junk bonds. Thomas Spiegel, Columbia’s chief executive, is credited with helping the thrift to grow rapidly and earn big profits by using deposits to invest heavily in high-risk, high-yield junk bonds. Savings and loans traditionally earned nearly all their income from issuing mortgages. Spiegel was said to have become a close business associate and friend of Michael Milken, until last week the head of Drexel’s junk bond department.
Milken, his brother, Lowell Milken, and a former Drexel trader, Bruce L. Newberg, were named in a 98-count federal criminal indictment last week in New York. It accuses them of racketeering, insider trading and illegal “parking” of securities.
Both the SEC and the U.S. Attorney’s Office in Manhattan are believed to be looking into an alleged “parking” arrangement between Drexel and Columbia. Parking generally involves sham trades, in which securities are sold back to their original owner, usually at a prearranged price. Such arrangements are considered illegal when they are done to hide the true ownership of the securities to avoid paying taxes or to evade SEC disclosure regulations.
Heitz said Spiegel wasn’t among those subpoenaed by the grand jury. However, he declined to name those who were or say specifically what the grand jury was looking for. Some of the individuals are believed to have appeared simply to present documents that the grand jury had requested.
Columbia said it believed that the inquiry was part of a broad-ranging look by investigators at a number of Drexel clients. In its written statement, the firm said:
“Columbia Savings & Loan Assn. has been one of the largest customers of the Drexel Burnham Lambert high-yield bond department, and we continue to have an important business relationship with that group. Like virtually every important customer of Drexel’s high-yield bond group, Columbia has produced to the SEC and the U.S. Attorney its entire trading records with Drexel for the past five- to seven-year period.”
‘Normal Business’
Columbia said, however, that it had conducted its own internal investigation of all trading with Drexel and added: “We have found nothing which indicates that any of the trading activity between the two companies is anything other than normal arm’s-length business transactions.”
One source close to the inquiry said that federal investigators had been actively looking into Columbia last fall but that in recent months little appeared to be happening. It is also believed that at least one Drexel employee some months ago gave testimony to the grand jury about Drexel’s dealings with Columbia.
A spokesman for Drexel and a personal spokesman for Michael Milken both declined to comment when asked about the Columbia inquiry. John Carroll, an assistant U.S. attorney on the Drexel case, said he wouldn’t comment on whether an investigation of Columbia is under way.
Federal prosecutors Monday continued to negotiate by telephone with lawyers for the Milken brothers and Newberg over the amount of bond that the three would be required to post to avoid having the government freeze their assets pending a trial on the criminal charges brought last week. Prosecutors claim that, if convicted, the three should be required to forfeit a total of $1.85 billion, the amount the government estimates was the proceeds of the allegedly illegal activities at Drexel. If prosecutors and defense lawyers fail to reach agreement, the matter may be decided by a federal judge.
