Delays Imperil Drexel Deal, Prosecutor Says
A criminal plea bargain by Drexel Burnham Lambert Inc. could be jeopardized if it fails to resolve separate civil charges with the Securities and Exchange Commission by Monday, a prosecutor said Thursday.
Assistant U.S. Atty. Bruce Baird said the government does not plan a lengthy extension of the deadline, which already has been extended several times.
Failure to reach a pact would nullify the Manhattan U.S. Attorney’s Office’s landmark plea agreement with the Wall Street investment firm and raise the possibility of a far more serious indictment on fraud and racketeering charges.
Settling civil charges including insider trading brought by the SEC last September was a precondition for Drexel’s criminal plea bargain three months later, under which it agreed to plead guilty to six felonies and pay a record $650 million in fines and restitution.
If the deadline is not met or extended, the government could bring a criminal indictment and force a trial of Drexel, which has been under federal investigation for more than two years.
Drexel agreed to the plea deal partly so it could avoid a crippling indictment under the Racketeer Influenced and Corrupt Organizations Act, which carries enormous fines and allows prosecutors to seize assets before trial.
Officials familiar with the SEC talks said a pact could be approved by Monday or shortly thereafter.
Baird, who heads the U.S. attorney’s securities and commodities fraud unit in Manhattan, said Drexel and the SEC initially agreed to complete their negotiations Jan. 30, just six days after laying out terms for negotiations. That deadline was extended several times by mutual consent of prosecutors and Drexel as talks snagged.
Baird said no discussions were planned to try to extend the Monday deadline. If there is an extension, he said, “it will be a brief one.”
Thomas Newkirk, SEC chief litigation counsel, declined to comment on whether the deal could be reached by Monday.
Arraignment Today
“I think we’re still hoping to have an agreement and we’ll see how it goes,” Drexel spokesman Steven Anreder said.
One of the major obstacles in the agreement, designed to force Drexel to crack down on internal policing, reportedly has been an SEC demand that Drexel fire Michael Milken, architect of its Beverly Hills “junk bond” department that transformed the firm into a Wall Street power.
Milken took a leave of absence after he and two others were charged March 29 with 98 counts of racketeering and securities fraud, and his departure may satisfy the SEC. Drexel has a policy that all indicted employees must be placed on leave.
But Milken, who is scheduled to be arraigned today in U.S. District Court in Manhattan, has undertaken a legal challenge to provisions of the criminal settlement that require Drexel to fire him and withhold his 1988 pay, said to be more than $200 million. Milken claims it violates his rights.
Meanwhile, sources on Thursday confirmed that David Solomon, chief investment officer of Solomon Asset Management, is negotiating with prosecutors to cooperate in the government’s case against Milken.
Solomon, whose firm manages about $1.5 billion in junk bond investments, would be the first Drexel client to testify against Milken should he become a witness. Several former Drexel employees have testified against the firm in exchange for immunity during the government’s probe.
Earnings Disclosed
Talks between Solomon and the government began more than 10 days ago, before Milken was indicted, said the sources, who spoke on condition of anonymity. Milken declined to comment through the New York public relations firm he’s hired to speak for him, Robinson, Lake, Lerer & Montgomery.
The investigation is believed to focus on allegations of “parking” of junk bonds and stocks by Solomon’s company.
Parking involves the purchase of securities with an agreement that they will be sold back to the original owner, usually at a prearranged time and price. The process is intended to hide the shares’ true ownership to avoid tax or disclosure obligations.
The indictment of Milken, his brother, Lowell, and former Drexel trader Bruce L. Newberg includes allegations of stock parking.
In another development, Drexel said in a filing with the Securities and Exchange Commission that it earned $178.06 million on sales of $2.99 billion in the nine months ended Sept. 30, Reuters reported.
The disclosures, which were filed Thursday as part of a court agreement regarding the tender offer by MAI Basic Four Inc. for Prime Computer Inc., gave no direct comparisons but noted that the firm earned $130.2 million on sales of $3.19 billion in 1987.
