U.S. Acts to Recover Lost Millions From Drexel and Milken

Federal regulators today said they will seek to recover millions of dollars lost by failed thrifts in investments with the bankrupt Drexel Burnham Group Inc. and Drexel’s junk bond king Michael The Federal Deposit Insurance Corp. said it will create a special task force of lawyers with the Resolution Trust Corp. as part of intensified efforts to recover millions of dollars that otherwise would have to be footed by taxpayers.

The task force will also consider possible referrals to the Justice Department.

The FDIC is the government agency that insures bank and thrift deposits and manages the RTC, which was created by Congress last year to sell or merge hundreds of failed thrifts at a cost of billions of dollars to taxpayers.

“The FDIC always investigates failed institutions for signs of wrongdoing that may have contributed to the failure,” said FDIC general counsel Alfred Byrne.

Drexel filed for Chapter 11 relief with the U.S. Bankruptcy Court in New York in February, which set a Nov. 15 deadline for asserting claims against Drexel and its subsidiaries.

Byrne said the federal regulators intend “to recover the maximum amount possible for our insurance funds and, ultimately, for the American taxpayer.

“In fact, we believe that the FDIC and the RTC may be among the largest creditors in the Drexel bankruptcies,” the counsel said.

Milken, who led Drexel’s junk bond activities in Beverly Hills, Calif., and is credited with creating almost single-handedly the market for the high-yield, high-risk paper, pleaded guilty to six felonies in April and agreed to pay $400 million in restitution, which would be available to injured parties, the FDIC said.

Savings and loan institutions were major investors in junk bonds.

“We have preliminary information that links Drexel and Milken to millions of dollars lost by a number of failed thrifts in junk bonds,” Byrne said.

After a series of insider trading scandals involving Drexel officials, the Securities and Exchange Commission filed a civil complaint Sept. 7, 1988, charging Drexel, Milken and others with fraud, insider trading, stock manipulation and other securities law violations.

On Dec. 21, 1988, Drexel agreed to plead guilty to six felony counts and pay $650 million in penalties and fines.

The FDIC noted that the SEC is holding pools of $350 million for claimants of Drexel and $400 million for claimants of Milken.

Drexel owes about $2 billion to its creditors.

“Although we have been investigating the link between Drexel and failed thrifts for some time now, the Nov. 15 date set by the bankruptcy court is prompting us to step up our effort to nail down these claims,” Byrne said.