Milken May Aid in Probes of Lincoln, Other Thrifts
Federal investigators looking into fraud at several of the largest failed savings and loans are hoping for a boost once Michael Milken begins sharing information with the government, sources say.
The Securities and Exchange Commission in particular is conducting an intensive investigation of whether Lincoln Savings & Loan Assn. of Irvine and CenTrust Savings Bank of Miami, among others, may have participated in a “daisy chain” of securities trades among themselves that created phony capital for the thrifts and funneled profits to Drexel Burnham Lambert. Investigators also are interested in hearing from Milken about his close relationship with Beverly Hills-based Columbia Savings & Loan, once one of Drexel’s biggest junk bond customers and now in deep financial trouble, according to individuals familiar with the investigation.
In pleading guilty to six felony counts Tuesday, Milken agreed to cooperate fully with federal investigators. Richard C. Breeden, the Securities and Exchange Commission chairman, has made it known that he is especially eager for Milken to cooperate in the ongoing savings and loan probe. Such cooperation, however, is still months away, since a provision in his plea agreement specifies that Milken won’t begin giving information to prosecutors until he is sentenced Oct. 1.
In testimony before a House subcommittee Wednesday, Breeden said he finds it “inconceivable” that Milken won’t live up to his promise to cooperate. An SEC spokeswoman said: “What we expect out of Milken is total cooperation.”
Investigating securities fraud at savings and loans is such a high priority at the SEC that the agency has established a special task force to look into it. When fully staffed, it will employ 25 lawyers and investigators full time. Several grand jury investigations also are looking into the possibility of criminal violations by thrifts that invested heavily in junk bonds, and more are expected.
The SEC already has received information from other former Drexel employees about the firm’s relations with savings and loans. James Dahl, a former top junk bond salesman at Drexel, is expected to spend much of next week talking to SEC investigators on that subject. Dahl, granted immunity from prosecution, has been cooperating with federal investigators for some time.
Joe Goldstein, the head of the task force, declined to comment.
One source with knowledge of the SEC investigation said the agency’s enforcement lawyers will be “wanting to know (from Milken) whether there was, in fact, a daisy chain among savings and loans where they sold bonds back and forth for the benefit of Drexel or Michael (Milken) or for themselves.”
In general, investigators are looking into whether there was a scheme to make Lincoln’s financial position look better than it actually was through a series of transactions with Drexel and other Drexel customers.
For example, investigators for some time have been looking into a strange pattern of trading in restricted stock of two companies, Playtex and Memorex. Such stock wasn’t registered for trading on the open market, and Drexel essentially made the only market for the restricted securities. Some of the Playtex stock was purchased from Drexel by Lincoln, then sold to Lincoln’s parent company, American Continental Corp., and then resold to CenTrust. CenTrust, in turn, later sold the stock back to American Continental. At each sale along the way, the price of the stock shot up significantly, enabling the seller to book a hefty profit.
Similar transactions took place involving Memorex stock.
But since there was no real public market for the stock, investigators want to know if the price was deliberately inflated so the sellers could use the paper profits to bolster their sagging balance sheets. A congressional investigator said federal officials want to know “how Drexel set the price for these off-market securities.”
Charles H. Keating, head of American Continental, couldn’t immediately be reached for comment Wednesday. But Keating and officials who were at CenTrust at the time of the transactions have strongly denied any wrongdoing.
Sources said SEC investigators and prosecutors also want to know whether Milken and Drexel provided any improper inducements personally to officers or directors of savings institutions to get them to buy certain issues of junk bonds. And investigators are said to be interested in details of any personal business dealings that Milken may have had with the principals of Columbia Savings.
Columbia officials declined to comment on what Milken might tell investigators. Charles Yamarone, the thrift’s associate general counsel, said: “In light of the fact that there are ongoing investigations, Columbia doesn’t feel it’s appropriate to comment.” Thomas Spiegel, until recently Columbia’s chief executive, didn’t return a call seeking comment.
A spokesman for Milken declined to comment on what Milken might tell investigators about dealings with thrifts.
