Creditors May Go After Drexel Bonuses
Creditors of Drexel Burnham Lambert Group said Wednesday that they are considering legal proceedings to try to recover as much as $350 million paid out to executives of the firm’s brokerage unit. The bonuses were paid just weeks before the parent company filed for bankruptcy protection.
One of the main options that Drexel’s creditors are contemplating is an attempt to force the brokerage unit into bankruptcy proceedings. So far, only the parent, Drexel Burnham Lambert Group, has filed. It was the brokerage unit that paid the bonuses.
By forcing the brokerage into involuntary bankruptcy proceedings, creditors open the possibility of having a judge reverse major financial transactions made by the firm as long as 90 days before a bankruptcy filing. This could include payment of the bonuses, as well as Drexel’s rapid sale of much of the firm’s portfolio of securities. Drexel said Tuesday that it had liquidated 82% of its inventory during the past week.
The swift selloff of securities has raised questions among creditors about whether Drexel has received the best possible price. But creditors said Wednesday that they were most immediately concerned about the payment of bonuses.
“We were quite surprised to hear that $350 million in bonuses were paid out within a matter of weeks of the company going bankrupt, for want of approximately the same amount of credit,” said William G. Schopf, general counsel for First City Bancorp. of Texas, Drexel’s sixth-largest creditor. Drexel’s parent firm filed for bankruptcy protection Feb. 13 after it failed to obtain bank loans to carry it through a liquidity crisis. The amount Drexel was seeking in loans was never officially disclosed but reportedly was at least $300 million. Since the filing, Drexel has said the brokerage will be closed down, and a majority of employees have already been dismissed.
In a separate development, Rep. Edward Markey (D-Mass.), chairman of the House telecommunications and finance subcommittee, said Wednesday that his panel will “look into” the payment of the bonuses. The subcommittee some time ago held hearings on Drexel and the junk bond industry.
Some of the bonuses paid to individuals within three weeks of the bankruptcy filing were said to have been as large as $10 million each. The annual payment of large bonuses is standard practice on Wall Street. At Drexel, some top-producing executives regularly received bonuses that were several times their base salary.
Steven Anreder, Drexel’s spokesman, said there was nothing unusual about the bonus payments. He said the firm was obliged to pay them under the employment arrangements Drexel had with its executives. “It was all in line with the industry norm and industry practice,” Anreder said.
Anreder said the firm strongly opposed putting the brokerage unit into bankruptcy proceedings and said the move “would cost creditors a fortune.” He said the unit isn’t insolvent and is able to pay all bills. Anreder said a bankruptcy filing might destroy the value remaining in the unit.
Sources said not all of the bonus money was paid out in cash. A small percentage--probably less than 20%--was in the form of Drexel preferred stock that some high-earning executives were required to take as part of their bonuses in lieu of cash. That stock may now be worthless.
Frederick H. Joseph, the firm’s chief executive, was said to have received his entire bonus for 1989 in preferred stock. It couldn’t be learned, however, how much stock he received.
Stuart Hirshfield, head of the bankruptcy group at Dewey, Ballantine, Bushby, Palmer & Wood, the law firm representing several large Drexel creditors, said that without the brokerage unit going into bankruptcy proceedings, creditors probably would have little chance of recovering the bonus money. He said that once a bankruptcy filing is made, however, federal bankruptcy law allows a judge to reverse transactions that may have unfairly benefited insiders of a company at the expense of the company’s outside creditors.
DeWitt Bowman, chief investment officer for the California Public Employees Retirement System, which is owed $25 million by Drexel, said some creditors are asking bankruptcy lawyers whether there is any legal grounds to try to recover money from Michael Milken, Drexel’s former junk bond chief who currently is under indictment in a federal criminal case. Bankruptcy experts interviewed Wednesday said in general the law allows action to be taken if it can be shown that an illegal act led directly to the bankruptcy of a company. But they said it wasn’t at all clear whether these provisions might apply to Milken, who has pleaded innocent to the criminal charges and denies having violated any laws.
A Milken spokesman declined to comment on any aspect of the bankruptcy. Milken himself may be owed as much as $200 million by Drexel, which didn’t pay him his salary and bonus for 1988 and 1989 when he was forced to resign from the firm last year. Sources have also said that Milken never received payment for his Drexel stock, which he was required to turn in when he left the company. The $200 million is said to represent the combined value of the compensation he was owed, plus the value of the stock at the time he turned it in.
