Drexel Posts Loss Due to Legal, Settlement Costs

Drexel Burnham Lambert, hit by massive legal and settlement costs related to securities law violations, posted a loss of $166.7 million in 1988.

The loss, disclosed in a Securities and Exchange Commission filing, compared to a profit of $130.2 million in 1987 and is believed to be the first publicly reported annual loss ever for the privately held investment firm.

But excluding legal and settlement costs, the firm reported a $587-million pretax operating profit from continuing operations last year. That figure, up from $448 million in 1987, provided evidence that Drexel and its “junk bond” operations continued to be highly profitable last year despite continuing investigations that led it to agree to plead guilty to six felony counts of mail and securities fraud and pay $650 million in fines and restitution.

“You can see how profitable they were even in a year when they were confronted with considerable adverse publicity,” said Perrin Long, an analyst at Lipper Analytical Services.

As much as half of Drexel’s profits may have come from the controversial junk bond operations. Drexel’s share of that market has slipped somewhat but the firm remains a major player, Long said.

Drexel said its 1988 loss included $623.5 million in settlement and investigation-related costs. That included the $650 million in fines and restitution, which was valued at a lower amount on the 1988 books because it will be paid over several years.

The loss also included about $150 million in after-tax losses related to its operations in retail brokerage, municipal finance, municipal bond trading, and over-the-counter and international stock trading. Drexel announced last month that it would discontinue these operations.

The loss reduced Drexel’s capital to $1.966 billion at the end of 1988, from $2.185 billion a year earlier. That places Drexel at about fourth or fifth among securities firms.

“That’s still a very strong firm even after provisions for settlement,” Long said.

Revenue at Drexel rose to $4.44 billion in 1988 from $3.96 billion in 1987. The 1987 results had been depressed in part by the October, 1987, stock market crash.

Drexel’s figures were disclosed by a client, Tustin-based MAI Basic Four, in connection with its attempted takeover of Prime Computer. Drexel was ordered by regulators to include its figures in the MAI filing because it is seen as a co-partner with MAI in the takeover bid.

Interestingly, Drexel’s 1987 profit of $130.2 million compared to $550 million in earnings that year for junk bond chief Michael Milken, who almost single handedly put Drexel on the map as a Wall Street giant but was recently indicted on 98 counts of securities violations.