Bradley, Coelho Targets of U.S. Criminal Probe

Preliminary criminal investigations of both Mayor Tom Bradley and House Majority Whip Tony Coelho (D-Merced) have been opened by the Justice Department in Washington in connection with their financial dealings with Drexel Burnham Lambert Inc., The Times has learned.

Although details of the investigations are not known, a central question being examined is whether Bradley and Coelho, who have acknowledged that they made investments through Drexel, illegally received preferential treatment, according to two sources close to the investigation. The inquiry also is expected to examine whether Drexel offered investment opportunities to the two Democratic officeholders with the hope or expectation of receiving favored treatment in return.

Meanwhile, newly obtained records show that Bradley--in a deal that was not available to ordinary investors--purchased $100,000 in “junk bonds” through Drexel’s high-yield department in Beverly Hills. The March, 1986, transaction suggests that the mayor had an unusual relationship with the junk bond department headed by Michael Milken.

Bradley apparently lost most of his investment, a previously undisclosed purchase of Gibraltar Financial Corp. bonds, according to two independent sources familiar with the transaction. But his access to a private placement of the Gibraltar bonds by Milken’s department appears to be inconsistent with the mayor’s recent statement that he was “not aware” of receiving any investment opportunity not available to the general public.

The mayor has refused to elaborate on his ties to Drexel, although he has acknowledged that he has an account with the firm. Asked to comment on the Justice Department inquiry, Bradley spokesman Bill Chandler said Wednesday that “the mayor has no knowledge of any such investigation.”

Coelho, who earlier had declined to comment on the matter, late Wednesday night said: “I am confident that the report of a preliminary investigation is inaccurate. In Washington’s current atmosphere, such stories based on rumor or leaks are perhaps inevitable but no less regrettable.”

The investigations of Bradley and Coelho are being conducted by the Justice Department’s Public Integrity Section, a unit responsible for looking into allegations of corruption against judges and other political figures. The decision to open the probes came after an unusual disagreement between U.S. attorney’s offices in Los Angeles and New York over whether facts in the case warrant such serious action, sources said.

Sensitive Treatment

Because of the sensitivity of even preliminary investigations of political figures, they normally are authorized only after a thorough study of the available facts and after the attorney general gives his approval. The Justice Department declined Wednesday to comment on the matter.

The decision to open a preliminary investigation of Bradley represents a significant step beyond the decision last week by the U.S. attorney’s office in Manhattan to subpoena records of the mayor’s transactions with Drexel.

That subpoena was issued in connection with a “broad-based” inquiry into the investment firm’s dealings with politicians. Launching a preliminary investigation, by contrast, is the first official step in the Justice Department’s formal procedure for deciding whether the facts warrant no further action or instead justify launching a full-scale grand jury investigation leading to possible criminal prosecution.

Bradley and Milken are acquaintances who have appeared together at Drexel’s annual junk bond conference--informally known as the “Predators’ Ball”--and at a variety of programs benefiting charity and nonprofit organizations. Since 1983, Bradley has received at least $125,000 in campaign contributions from Drexel and its network of employees and associates.

Earlier this year, at Bradley’s instigation, Coelho persuaded California’s two senators and the Los Angeles congressional delegation to intervene on behalf of Drexel in settlement negotiations with the Securities and Exchange Commission. The agency was seeking to force Drexel to move its junk bond department from Beverly Hills to New York.

As previously reported, Coelho bought a $100,000 Drexel-issued junk bond with the help of a $50,000 loan from Columbia Savings & Loan Assn. that he failed to disclose as required by law. Columbia Chairman Thomas Spiegel, a close associate of Milken, also has acknowledged assisting Coelho by recommending--and then helping finance--the highly unusual junk bond purchase.

Milken stepped down as head of the hugely profitable junk bond department in March, after he was indicted on federal racketeering and securities fraud charges. He has pleaded innocent.

Bradley’s investment in the Gibraltar bonds--technically referred to as senior subordinated debentures--was revealed in records turned over to The Times by the mayor’s office in response to a state Public Records Act request. Two sources familiar with the mayor’s finances said Bradley invested in at least two other previously undisclosed junk bonds issued by Drexel, though it is not known whether the transactions were handled by Milken’s unit.

Milken’s junk bond department normally dealt only with institutional investors, such as insurance companies, mutual funds and banks. Former Drexel employees said in interviews that the department maintained accounts for only a very select, limited number of individuals, primarily top executives at companies that did business with Drexel and friends and relatives of Milken and employees of the department.

‘Real Good Advice’

For the junk bond unit’s preferred customers, “the most important thing you get is product (securities) that generally the average retail client does not see,” said one former Drexel executive, who asked not to be named. “The other thing you get in the high-yield department is real good advice. These are the people who have put together the deal. . . . They are aware of the shortcomings or the advantages. That’s the type of advantage you don’t always get from a retail broker.”

The records obtained by The Times consist of a log of correspondence to the mayor from various Drexel officials. The letters and packages described in the log range from one official in the municipal finance department raising the possibility of new public financing methods to others sending paperweights to the mayor. Several of the 28 entries to Bradley from Drexel are marked “personal and confidential.”

The records show direct communications between the mayor and Milken’s junk bond department, including a letter from an administrative employee in the department, Jillian H. Mendorff. The letter enclosed a form that the mayor needed to sign to authorize the sale of the Gibraltar bonds in January, 1989.

Gibraltar Financial officials confirmed that its bonds were sold in March, 1986, by Drexel under a private placement, which meant that they were not offered to the public. The bonds were available only to clients of the junk bond department and were not registered with the SEC for public trading until more than eight months later.

Such private placements were not available to Drexel’s regular retail customers, said one former Drexel retail broker.

“The only way you could get those private placement bonds was to deal directly with the high-yield bond department,” the broker said.

Steven Anreder, Drexel’s spokesman, refused to discuss the Gibraltar offering. Wall Street traders, however, said the Gibraltar bonds were not considered a “hot issue,” meaning that there was not an exceptionally high level of investor interest and that the bonds did not shoot up significantly in value after they began trading publicly.

Bradley sold the bonds in January after the ailing thrift’s bond ratings had declined for months, said two independent sources familiar with the transaction. The mayor sold his bonds only days before the company disclosed that federal regulators considered the company’s main subsidiary, Gibraltar Savings, “a troubled institution” operating in an “unsafe and unsound condition.”

A securities analyst familiar with the Gibraltar bonds said that, if the mayor sold them in January, he would have received only between 20 and 30 cents on the dollar for his original investment. The mayor, therefore, would have lost between $70,000 and $80,000.

Based on what is now known about the transaction, Bradley’s purchase of the bonds does not appear to violate any rules or laws, although one SEC source said there may be a question about whether Drexel violated rules concerning private placements in selling to the mayor. The rules, in most cases, limit private placements to “sophisticated investors” who have substantial assets and a high degree of investment savvy.

This story was reported and written by Times staff writers Jack Nelson and Ronald J. Ostrow in Washington, Glenn F. Bunting and Rich Connell in Los Angeles and Scot J. Paltrow in New York.

Related Story: Part II, Page 1.