Rep. Coelho Admits S&L; Chief Bought Bond for Him

Assistant House Majority Leader Tony Coelho (D-Merced) admitted Saturday that he allowed Columbia Savings & Loan’s chief executive, Thomas Spiegel, to buy a $100,000 junk bond for him in 1986 and later repaid Spiegel with money borrowed partly from Columbia.

Coelho also acknowledged he failed to disclose the $50,000 loan he obtained from the Beverly Hills-based S&L.; House rules require disclosure of such transactions on annual reports.

Coelho’s unusual admission was likely to attract the attention of the House Ethics Committee, the Securities and Exchange Commission and the federal prosecutor in New York, who is investigating Spiegel in connection with the allegedly illegal activities of junk bond king Michael Milken at Drexel Burnham Lambert Inc.

In addition, Coelho’s lawyer admitted that his client probably owes the Internal Revenue Service at least a few hundred dollars in unreported back taxes on the transaction. Coelho made a net $6,882 on the bond, which he held for slightly more than four months.

The story of the Coelho-Spiegel deal also could bear on the current investigation of Los Angeles Mayor Tom Bradley, a Spiegel intimate whose personal portfolio over the years has included several Drexel-issued junk bonds. Earlier this year, Bradley persuaded Coelho to get California’s two senators and members of the Los Angeles delegation in Congress to intervene on behalf of Drexel in settlement negotiations with the SEC.

Coelho, 46, an ambitious and tireless congressman known for his political acumen, asserted that he is not a close friend of Spiegel and, in fact, barely knew him when he bought the junk bond. But Coelho is a personal friend of Milken, who has been accused of securities violations stemming from junk bond trading. Columbia’s assets have more than doubled since 1984 when Spiegel and the bank began investing junk bonds through Milken and Drexel.

The activities of Columbia and Spiegel are being investigated in connection with the SEC probe of Milken, according to regulatory papers filed by the thrift last month.

In a telephone interview, Coelho said he did not become a friend of Milken until more than a year later. “I did not know Milken at this time,” he said.

The details of the 1986 junk bond transaction were released by Coelho in response to persistent inquires from The Times and several other newspapers over recent weeks.

A month ago, when Coelho’s bond deal first came to light, the congressman refused to reveal how he had been able to obtain one of the bonds. Drexel underwrote the bonds to finance the takeover of Beatrice Companies, and the bonds proved so popular that many of Drexel’s best institutional customers complained that they could not get enough of them.

According to Coelho’s lawyer, Robert F. Bauer, who has spent the last month reconstructing the transaction, the congressman will give the Ethics Committee a copy of his findings in an apparent effort to head off an official inquiry into the matter. House Republicans are expected to file charges of ethical wrongdoing against Coelho after the committee has completed its current inquiry into the finances of House Speaker Jim Wright (D-Texas).

Coelho, who has been an outspoken defender of Wright, expressed confidence that the Ethics Committee would exonerate him.

Lawyer Gives Details

As Coelho’s lawyer told the story, the congressman first talked to Spiegel about the junk bond at a social function in the spring of 1986, when Coelho was looking for a way to invest his campaign funds. Coelho asked Spiegel what investment he would recommend, and Spiegel advised him to invest both personal and campaign funds in a forthcoming issue, BCI Holdings.

BCI Holdings Corp., now the parent company of Beatrice, was formed by Kohlberg Kravis Roberts & Co., a firm specializing in leveraged buyouts, as a vehicle to take over Beatrice.

At the time, according to Bauer, Spiegel was touting BCI to “many individuals.” It is not known whether this group included other politicians, but Coelho said he was not aware of any other politician who benefited from Spiegel’s advice as he did.

Neither Coelho nor Spiegel can remember where or when their conversation took place, Bauer said.

Coelho said he approached Spiegel because he knew the savings and loan official to be a successful investor, according to Bauer. In 1985, Spiegel had gained notoriety as a result of the $9-million annual compensation package he received from Columbia.

Although Coelho decided against investing his campaign funds outside of his home district, Spiegel placed an order with Drexel for Coelho to buy a $100,000 BCI Holdings Corp. 12.5% senior subordinated debenture, known as a “junk bond” in the trade because of its high interest rate and high risk.

Spiegel Bought Bond

The bond became available on April 10, but Coelho was unable to arrange financing to buy it. So Spiegel purchased the bond for Coelho with a unwritten understanding between the two that the congressman would reimburse him with interest at a later date.

But Coelho did not amass the necessary $100,000 to complete the deal until June 3, by borrowing $25,000 each from Wells Fargo Bank and Security Pacific National Bank and $50,000 from Columbia. On that date, the bond was finally transferred from Spiegel’s account to Coelho’s account at Drexel.

At the time Coelho took possession of the bond, it had increased substantially in value from the initial price that Spiegel paid, as popular junk bonds usually do. But the congressman did not pay Spiegel the higher price. Instead, he paid him the initial offering price plus $1,667 in interest that had accrued during the period that Spiegel held the bond.

It was a lucrative investment for Coelho, even after he paid off the loans to the three banks and Spiegel, with interest. When he sold the bond in October, 1986, after holding it for little more than four months, he reaped a net profit of $6,882.

Coelho listed his loans from Wells Fargo and Security Pacific on his financial disclosure report filed the following May. But the Columbia loan was not disclosed. Moreover, he inaccurately reported that he purchased BCI on May 1, 1986--masking Spiegel’s role.

Blames Accountant

Coelho contended that these discrepancies resulted from inadvertent errors by his accountant, Donald Ozenbaugh, of Merced. He said he had no intention of covering up the involvement of Columbia and Spiegel in his investment. He said he relied entirely on Ozenbaugh to file an accurate report and did not check the facts before signing it.

Ozenbaugh was not available for comment, but Bauer said the accountant told him that while he was aware of the Columbia loan, he simply overlooked it. He said Ozenbaugh did not have the records at the time.

Bauer said the congressman will file an amended report with the House clerk to correct the errors and pay whatever he owes in back taxes to the IRS as a result of similar errors on his 1986 tax return. But the lawyer strongly denied that Coelho violated any House rule or securities law by allowing Spiegel to make the investment for him.

House rules prohibit members from accepting gifts valued in excess of $100 from people with a direct interest in legislation, as Spiegel did as an S&L; executive. Bauer contended that the service that Spiegel provided to Coelho did not constitute an illegal gift, even though he could not have obtained the junk bond elsewhere, nor could he have obtained it at the initial asking price plus interest on the date his financing was complete.

Columbia officials declined comment Friday and Saturday when questioned by The Times about the Coelho development. A bank spokeswoman reportedly told the Washington Post on Saturday that “it is not Mr. Spiegel’s practice” to recommend stock and bond purchases to politicians.

A ‘Hot Issue’

According to institutional buyers of junk bonds, BCI was widely regarded as a “hot issue” and was heavily oversubscribed when Coelho obtained it. These buyers said Coelho took a negligible risk in buying a bond that had created such investor interest, and they complained bitterly that the congressman may have received favored treatment.

“If they (Drexel) are turning around and letting politicians or other people get all the bonds they want, effectively ensuring a short-term profit on them, I guess one should question that,” said a life insurance company official who invests in junk bonds and who declined to be identified. “It would appear to me that institutional accounts shouldn’t be cut back to the benefit of politicians and people of special interest just for a quick profit.”

As evidence that Coelho received no special favor, Bauer cited a statistic he said he had obtained from industry sources that 243 of the 443 BCI 12.5% bonds sold on April 10 were for amounts of $100,000 or less and many of those went to individuals.

Bauer also dismissed as a “red herring” allegations that Coelho used campaign funds to invest in the junk bond. Although Coelho’s account at Drexel was listed under the name of “Coelho for Congress,” Bauer said it was a clerical error that apparently occurred because Spiegel thought the money being invested was from Coelho’s campaign.

Coelho and his staff members claim to have written repeatedly to Drexel asking that the account be listed in the name of the congressmen, not his campaign.

Times staff writer Scot Paltrow contributed to this story.