Drexel Creditors May Try to Force SEC to Return Fines
Creditors of Drexel Burnham Lambert Group may try to force the Securities and Exchange Commission to give back the $500 million that Drexel paid last year in fines and civil penalties.
An SEC lawyer said Thursday that he had been notified that the creditors committee in the Drexel bankruptcy proceedings may try to get the money back for the firm so that Drexel could use it to help pay off its debts.
First City Bancorp of Texas, whose chairman, A. Robert Abboud, is chairman of the creditors committee, has made it known that it favors such a move. A lawyer for another creditor said the idea already had been discussed informally among creditors and most of them probably favor it, although he said the proposal hasn’t been examined closely yet. He said it may be taken up formally at a creditors committee meeting Tuesday.
Bankruptcy law in some circumstances allows a judge to reverse transactions made up to a year before a bankruptcy filing. Lawyers for First City could not immediately be reached to comment on the legal theory they would use to try to recover the money turned over to the SEC.
Richard A. Kirby, senior litigation counsel at the SEC, said he believed that any effort to recover the money would fail. “I don’t know of any legal basis on which they can try to do that.”
The SEC claims that it, too, is a major creditor of Drexel because the firm still owes $150 million of the $650 million that it agreed to pay when it pleaded guilty to criminal charges and settled SEC civil charges. Of the total, $350 million was to have been set aside as a fund to pay claimants in civil lawsuits who proved that they were harmed by Drexel’s illegal activities.
The SEC, in an unprecedented move, has demanded a seat on the creditors committee. But so far, the U.S. Trustee, who handles administrative details of bankruptcy proceedings, and other creditors have not accepted the idea. The SEC’s efforts to get on the creditors committee may have to be decided by a bankruptcy judge.
Drexel Burnham Lambert Group, the parent company of the investment banking firm Drexel Burnham Lambert Inc., filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code on Feb. 13, as it was about to default on $100 million in loans. The company has since been winding down its operations and has laid off most of its employees. In a preliminary filing with the bankruptcy court, the company said it had assets of $3.7 billion and liabilities of $2.88 billion.
Although on paper the company’s assets exceed its liabilities, Drexel officials and others say it probably will be months before a clear picture emerges of how much money is actually available to pay creditors.
