Despite Felonies and Chapter 11, Drexel May Get Back in Business : Securities: Michael Milken’s old firm is considering a renaissance, but not as a brokerage. Will customers let bygones be bygones?
Might Drexel Burnham Lambert rise like a phoenix from the ashes of its bankruptcy?
The odds are heavily against it. But Drexel’s management and lawyers for the first time have raised the possibility that the firm might emerge from Chapter 11 proceedings and go back into business in some form.
“It’s one of several things we’re considering,” Drexel spokesman Steven Anreder said. “We haven’t made a decision yet.”
Until now, Drexel has said the entire company would be liquidated. When the parent company, Drexel Burnham Lambert Group, was forced to file for bankruptcy protection on Feb. 13 due to a cash crisis, the firm and all of its subsidiaries abruptly stopped normal operations. They began winding down their positions in stocks, bonds and commodities.
To date, the firm has fired all but about 500 of the more than 5,000 employees it had just before the bankruptcy. And in early June, an auctioneer in New York is due to sell off the bulk of Drexel’s office furniture, computer equipment and cafeteria furnishings.
Sources said, however, that Drexel Chief Executive Frederick H. Joseph is considering taking the firm back into business in some limited form as a way of increasing the possibility that the company’s shareholders eventually will receive something substantial for their stock. Much of Drexel’s stock is held by former or current employees, many of whom have a considerable part of their net worth tied up in it. They stand to get nothing unless Drexel’s other creditors are paid in full first and the many lawsuits against the firm are resolved.
The sources said there is virtually no possibility that Drexel would attempt to resume operations as a securities broker-dealer. Instead, a reorganized firm might simply manage Drexel’s remaining portfolio of junk bonds and other assets. Executives also are considering offering limited investment banking services to customers, although the sources said it is too early to speculate on what the services might be.
Such an option might be attractive because Drexel has accumulated a huge net operating loss, in part from writedowns on the securities it has sold since the bankruptcy filing. Although the tax implications apparently haven’t been worked out fully, the operating loss conceivably could be used to shelter any profits that the reorganized firm might earn.
Anreder cautioned that complete liquidation of the firm is still one of the main options under consideration. However, others noted that there would be obvious advantages to avoiding selling off Drexel’s remaining holdings right away. Much of Drexel’s remaining assets are in junk bonds, bridge loans and partnership interests that may not be readily salable. With the junk bond market still severely depressed, sources say it might be more logical for Drexel to hold on to what remains and manage the assets rather than selling them off now at fire-sale prices.
A big question, however, is whether a post-bankruptcy firm that attempted to attract clients would find public acceptance. The bankruptcy followed a severe decline in Drexel’s business that stemmed partially from the firm’s legal problems. Drexel pleaded guilty last year to six felony counts and agreed to pay $650 million in penalties for securities fraud related to the firm’s junk bond operations. Many civil lawsuits related to that are still pending.
A. Michael Lipper, president of Lipper Analytical Securities Corp., which provides institutional investors with analysis of the securities industry, said that if a new company emerged and kept the Drexel name, it might have trouble. But Lipper noted: “There are individuals there who have talent who I think would find acceptance with their clients.”
A source close to Drexel asserted that public hostility to the firm has abated since the bankruptcy filing and since former Drexel junk bond chief Michael Milken pleaded guilty last month to six felony counts. He said Milken thus personally shouldered some of the blame that previously had fallen on Drexel’s top management. The source claimed that since these developments, “you don’t see that much negativism around about Drexel per se.”
Drexel and its bankruptcy lawyers are believed to have begun working on a reorganization plan to file with the U.S. Bankruptcy Court. The plan could call for resuming some operations or liquidating or other possibilities, such as placing remaining assets in a trust. Under Chapter 11 of the U.S. Bankruptcy Code, the firm’s management has the exclusive right until mid-June to formulate a reorganization plan. Drexel may seek an extension. If a deadline expires before the firm comes up with a plan, creditors would be free to propose their own.
Drexel’s creditors’ committee, meanwhile, is continuing to weigh several options to ensure that creditors get paid in full. Among these, as reported, is the possibility of an attempt to recover $260 million paid out in bonuses to Drexel executives shortly before the bankruptcy. Thought also is being given to attempting to recover huge sums paid to Milken in the late 1980s, on the theory that the amount paid was so large that it couldn’t have been for actual services rendered. Milken, for example, received $550 million in salary and bonus from Drexel in 1987.
A lawyer for one Drexel creditor said that New York’s “fraudulent conveyances” statute might allow creditors to seek to recover money paid to Milken as long as six years ago. New York law would apply since the company is based in New York and the bankruptcy was filed there, the lawyer said. A spokesman for Milken declined to comment.
Creditors also are still considering whether to attempt to get back the $500 million paid last year by Drexel in fines and penalties as part of the $650 million that it had agreed to pay under the settlement of criminal and Securities and Exchange Commission charges. Creditors’ lawyers have said bankruptcy law may allow them to reclaim the money.
Marc S. Kirshner, the lead attorney for the creditors committee, confirmed that these options are being considered. But he refused to say when any action may be taken. Other sources close to the creditors’ committee said members first want to get an accurate picture of Drexel’s financial position.
The most recent financial statement filed with the Bankruptcy Court, which includes Drexel’s balance sheet as of March 30, appears to show that the company isn’t insolvent. Assets exceed liabilities, leaving the company with a positive net worth of $444 million. This indicates that at least theoretically there is enough to pay creditors in full.
But creditors say they aren’t at all confident that the figures are reliable. Creditors say many of the assets are practically impossible to value accurately, since there is little or no current market for them. And they note that major new lawsuits keep popping up, such as a suit filed earlier this week by the central bank of Yugoslavia, which claims that it suffered a $70-million loss due to improper action by a Drexel subsidiary. The New York Stock Exchange also reportedly is considering fining Drexel as much as $25 million.
One sign of the increasing restiveness of creditors is that two of Drexel’s subsidiaries also have been forced into bankruptcy proceedings in the past few days. Until then, only the parent company was officially in bankruptcy. The units are Drexel Burnham Lambert Trading Corp. and Drexel Burnham Lambert Trade Finance Inc.
The parent company’s creditors committee is now embarking on an extensive program of “discovery” through the bankruptcy court. This involves subpoenaing records and taking sworn depositions of top Drexel officials. The aim is to get a more detailed understanding of the firm’s financial position. One source said a main focus of the inquiry also will be to see if there were any improprieties in transactions between Drexel and its employees in the months preceding the bankruptcy filing.
