Legal Roadblock in Drexel Case May Force Long Delay

Drexel Burnham Lambert Inc.’s landmark settlement of securities fraud charges hit a major roadblock Wednesday in the form of a legal technicality.

Legal experts said a ruling by a federal appeals court could delay final settlement of the case for months, dragging out a chapter that the beleaguered investment banking group had hoped was now behind it.

The hitch arose when a U.S. Court of Appeals in New York denied a motion by Drexel and the Securities and Exchange Commission to allow U.S. District Judge Milton Pollack to rule on the settlement. His approval is necessary for the agreement to be completed.

Previously, Drexel, its former “junk bond” chief Michael Milken and his brother, Lowell, asked that Pollack be removed from the case, charging that he had a conflict of interest.

The appeals court had denied the motion, but issued an order that prevents Pollack from making any rulings in the case until the removal question is taken to the U.S. Supreme Court.

The appeals court ruling could seriously delay the civil settlement with the SEC. It could also delay Drexel’s separate agreement to plead guilty to six criminal charges and pay $650 million in fines, which is contingent on the civil settlement.

On April 5, the Milkens asked the Supreme Court to hear the Pollack matter. The court has not yet responded.

The terms of Drexel’s agreement with the SEC require the Wall Street group to fire Michael Milken and withhold his 1988 bonuses.

The appeals court said it could not lift the stay because the matter is pending before the Supreme Court.

“The stay . . . will remain in effect until the Supreme Court disposes of the case,” wrote the three-member panel of the appeals court.

“The proposed settlement agreement between the SEC and Drexel clearly may affect the interests of Michael and Lowell Milken,” it added.

Barry Goldsmith, a lawyer in the SEC’s enforcement division, said one interpretation of the ruling is that it does not allow another judge to rule on the settlement. He said the SEC was considering its options.

“We’re very eager to get this settlement in place and running,” he said.

Lawyers involved in the case said that if the Supreme Court decides to hear the matter, it could take months before arguments are scheduled.

Steven Anreder, a Drexel spokesman, said the company has already undertaken some of the changes called for in the settlement and will continue to implement other requirements it feels are appropriate.

A spokeswoman for the Supreme Court said she could not predict when the court might decide whether it will hear the case.

Last year, Drexel and the Milkens sought to have Pollack removed from the civil case on grounds that Pollack’s wife held a stake in a Texas department store chain being purchased by a Drexel-financed suitor.

But legal experts said Drexel’s charges may have been motivated by Pollack’s reputation of being sympathetic toward the government and harsh toward white-collar crime.

Pollack and defense lawyers exchanged heated words last fall during a hearing where lawyers asked Pollack to step down.