SEC Seeks a Role in Proceedings on Drexel Bankruptcy

In an unprecedented move, the Securities and Exchange Commission attempted Thursday to intervene in Drexel Burnham Lambert Group’s bankruptcy proceedings, claiming that the federal agency is Drexel’s largest creditor.

The claim stems from Drexel’s settlement of civil and criminal charges last year, in which the firm agreed to establish a $350-million fund to be used to pay judgments in civil suits filed by private parties as a result of Drexel’s admitted illegal activities. Drexel still owed the fund $150 million when it filed for Chapter 11 bankruptcy protection Feb. 13. The SEC said Drexel also owes an unspecified amount for taxes on interest that the fund earned from the money already paid in.

In papers filed with the U.S. Bankruptcy Court in Manhattan, the SEC demanded a role on Drexel’s creditors committee. Richard A. Kirby, an SEC lawyer, said this is necessary to make sure the SEC’s interests in receiving payment are taken into account in whatever plan is eventually worked out to pay creditors.

Kirby said one SEC concern is to ensure that Drexel assets weren’t improperly dissipated in the months immediately before the bankruptcy filing. Members of Drexel’s creditors committee, formed Tuesday, have made it known that they also are concerned about reports that Drexel paid out large bonuses and may have made other payments to senior executives shortly before the filing.

“The SEC and any creditor has a concern if there has been money paid by the debtor improperly,” Kirby said. A. Robert Abboud, chairman and chief executive of First City Texas Bancorporation, was elected chairman of the creditors committee. First City has already filed papers demanding that an examiner be appointed to look into payments to executives, among other issues.

The SEC had asked for full membership on the creditors committee. But after a court hearing Thursday, Kirby said the agency may be willing to settle for non-voting, ex officio status provided that it could attend all meetings and participate fully. A court hearing on the subject is scheduled for Tuesday.

Kirby said the SEC had never before attempted to gain membership on a creditors committee in a bankruptcy case. But he said the move was made necessary by the amount of money still owed under Drexel’s settlement.

The SEC’s claim is the largest made public so far. But it is expected that claims comparable in size may yet emerge, including one by former Drexel junk bond chief Michael Milken, who is said to be owed at least $100 million by Drexel and possibly up to twice that amount.

Drexel hasn’t paid Milken for the Drexel stock he turned in, as required, when he resigned after his indictment on racketeering charges last year. The firm also didn’t pay him his bonus for 1988 and his salary for 1988 and 1989.

Milken himself made no attempt to get on the creditors committee, according to Neal Mann, the assistant U.S. trustee who selected the committee members. However, sources close to former Drexel employees said one committee member, Sylvan Schefler, a former Drexel managing director, is a close friend and confidant of Milken and may unofficially represent his interests on the committee and act as a conduit of information to Milken about steps the committee is taking.

In a telephone interview, Schefler confirmed that he speaks frequently with Milken. But he emphatically denied that he was representing Milken’s interests on the committee. Schefler said he was named to the committee because he is owed more than $5 million by Drexel, from stock he turned in that was converted into subordinated debt. He said he represents himself and a group of other former Drexel executives in a similar position, but he said the group doesn’t include Milken.

A Milken spokesman refused to comment on what steps Milken will take in the bankruptcy proceedings. But he also denied that Schefler will act on Milken’s behalf.

In Washington on Thursday, Chairman Alan Greenspan of the Federal Reserve Board told a House Judiciary subcommittee that the Fed’s decision not to step in to prevent Drexel’s bankruptcy appears to have been vindicated. The calm, post-Chapter 11 reaction by the stock and bond markets “tends to validate the judgment that the failure of Drexel, while a tragedy for the many involved, did not present undue risks to the orderly functioning of the financial system or the economy,” Greenspan said.

In response to a question from Rep. Jack Brooks (D-Tex.), Greenspan said the Fed became aware of Drexel’s crisis only about a week before the bankruptcy filing. He said the Fed and other federal agencies intervened only to the extent of monitoring the situation to see that Drexel’s problems didn’t spill over to involve other firms or the securities markets in general.

Times staff writer Oswald Johnston in Washington contributed to this story.