State Securities Regulators Mull Action Against Drexel

State securities regulators, who now have the power to kick Drexel Burnham Lambert Inc. out of their territory, are seriously considering whether they should take action against the investment banking firm.

Drexel’s agreement to settle massive securities fraud charges with the Securities and Exchange Commission and to plead guilty to six felonies allows local regulators to charge Drexel with breaking state laws.

The Drexel settlement was obviously on the administrators’ minds as most speakers mentioned it during a recent day-long session titled “The Wall Street Scandals: What Are the Public Policy Implications?”

The settlement “opens Drexel up to almost any enforcement action a state wants to take against Drexel’s license,” said John Baldwin, president of the North American Securities Administrators Assn.

“I’ve been thinking about this for a long time. I think all of us have,” Baldwin said.

States can pursue various actions, the most serious being the revocation of Drexel’s license in their jurisdictions and heavy fines, he said.

“I don’t think, based on comments I’ve heard informally here, that anyone is out for blood. There is no sense in the exercise of stabbing the dead,” Baldwin said. “On the other hand, we have to protect consumers.”

He said the state regulators have also been impressed with Drexel’s efforts to be cooperative and straightforward.

While Baldwin has been getting positive feedback from state regulators about Drexel, he is getting a very different message from investment bankers and brokerage houses.

Industry Groups Angry

“Those industry people are mad at Drexel,” Baldwin said explaining that other financial houses feel that Drexel’s alleged illegal activity reflects on them.

“There has been more anti-Drexel sentiment from industry groups than from the regulators. Then again, we haven’t been hit in the pocketbook,” Baldwin said.

Last month, Drexel made sweeping changes in its management and compliance system as part of its settlement with the SEC. It was also put on probation by the government for three years. The settlement must still be approved by a federal judge--a move that is being held up by legal complications.

Final approval of the settlement is necessary before Drexel can plead guilty to six related criminal charges and pay fines and penalties of $650 million. Part of that sum will be used to repay injured investors.

The agreement also calls for Drexel to fire its former “junk bond” chief, Michael Milken, after it pleads guilty. Milken is technically still employed by Drexel, although he will remain on leave of absence until he is fired.

Informal conversations with securities regulators from Delaware to Hawaii revealed they were well aware of the implications of Drexel’s settlement. However, some said they would wait to see if any investors in their states would claim injury before deciding what action to take.

The strongest act so far occurred last month, when the New Jersey Casino Control Commission banned the firm from doing further business with casinos there.

May Soften Actions

Also, 18 members of the New York Assembly called on the state’s attorney general to impose a fine of $150 million or more for alleged violations by Drexel of state law.

State regulators’ biggest concern is protecting consumers. But Baldwin said there are several reasons why states may take less severe actions against Drexel. Among those reasons are the heavy penalties the company agreed to pay and its decision to sell its retail brokerage unit, which deals with individual investors.

“A lot of flesh has been taken out already,” he said.

Baldwin said he does not expect a consensus by the 50 individual state administrators on which actions should be taken against Drexel.

“I think there will be a meeting of the minds about mitigating circumstances. . . . I hope we’ll all be fair,” Baldwin said.