U.S. Control Over Drexel Burnham Unique on Wall St.
In its settlement of civil charges with the Securities and Exchange Commission, the Drexel Burnham Lambert investment firm has opened the door to government control of its operations that is unprecedented on Wall Street, and that has rarely been seen anywhere in U.S. business, many securities experts believe.
Indeed, some say the government’s role--as a sort of ever-vigilant probation officer--more suggests the casino industry than the rules that the regulated investment world usually faces.
“In their aggregate weight, these restrictions are much greater than those of any similar settlement,” said Sam S. Miller, a New York securities lawyer who also acts as ethics ombudsman at the Kidder, Peabody & Co. investment firm. “Is it too much? A lot of sophisticated people on Wall Street are wondering about that question right now.”
Capping the most sweeping investigation ever, the SEC and Drexel on Thursday agreed to a settlement that, among other things, puts the firm on administrative probation for three years, requires it to appoint senior officials acceptable to the agency and requires Drexel to cooperate with the government’s continuing investigation.
If approved by a federal judge, the deal settles a 7-month-old civil action in which the SEC accused the firm of a catalogue of securities violations in takeover deals between 1984 and 1986.
The SEC has worked out big civil settlements with a number of Wall Street firms in the past decade, including Jefferies & Co., Kidder Peabody, E. F. Hutton, First Boston Corp. and Bateman Eichler, Hill Richards. But asked which was closest to the Drexel deal in scope, John Sturc, the SEC’s No. 2 enforcement official, could provide no answer.
“There isn’t any comparison,” he said.
The Kidder settlement illustrates the typical features of such deals. To settle charges that it profited from trading on inside information, Kidder in 1987 hired a consultant to study how it could improve compliance with securities laws. The firm also agreed to formulate new rules to help it reach that goal.
As part of its settlement, Drexel is hiring the Philadelphia-based law firm of Morgan, Lewis & Bockius to examine the functioning of its departments and to propose ways to improve compliance with the rules. But in an unprecedented twist, it is also hiring an accounting firm that will help the SEC and prosecutors investigate the firm’s past and future trading activities.
“To have the accounting firm in an investigative role has never been done,” Sturc said.
Free Access
Also unprecedented, he said, was Drexel’s obligation under the agreement to provide free access of government investigators to all employees and documents. Usually, such information can only be obtained through subpoena, he said.
He said no previous settlements have put firms on “administrative probation,” to subject them to added scrutiny; nor have previous settlements limited the ability of some employees to invest in their own firm’s securities.
Also unusual in the SEC settlement is the appointment of an ombudsman, whose job will be to listen to employees’ concerns about possible violations and independently investigate the accusations.
Some securities experts say they have seen versions of these clauses that make Drexel’s less than totally novel. But many agree that when the features are combined with others, including the creation of an oversight committee of outside directors, the effect is unparalleled.
Some aren’t sure they like it.
Ira Lee Sorkin, a securities defense lawyer who was formerly the SEC’s regional administrator in New York, said it is not outlandish to compare such arrangements with the aggressive regulation of the casino business that goes on in New Jersey, for example.
State regulators there constantly check not only the job performance of casino managers but also a range of miscellaneous factors, such as their contacts with persons who have criminal ties.
“This sets precedent, and it may be a very dangerous one,” said Sorkin. “There’s a fine line between imposing restriction and supervision and telling a firm how to run its business.”
Without a Hearing
He asserted that Drexel employees who ran afoul of the government could be dismissed without even the hearing they would get if they worked for a casino. Securities lawyer Miller said he hadn’t made up his mind whether the rules were a good idea but wondered whether the firm’s employees would find the extra red tape they required frustratingly slow. “Will some investment bankers decide that life is just easier at the firm across the street? I don’t know,” he said.
Drexel officials have said they believe the terms will not be burdensome.
Another securities lawyer familiar with the deal said that despite the seeming complexity of the terms, the settlement “probably won’t be as draconian as it looks.” Depending on their inclinations, “these investigators and watchdogs could get in everybody’s way all the time, or they could be invisible, despite all the complicated terminology here,” he said.
