A former mutual fund manager testified Thursday that Drexel Burnham Lambert’s junk bond department arranged very profitable personal investments for him at the same time it pressured him to buy risky securities for his funds.
The testimony was the first public evidence in support of prosecutors’ contentions that the department headed by Michael Milken’s department attempted to bribe mutual fund and pension fund managers so they would have their funds buy risky securities that Drexel had difficulty selling.
The witness, Benalder Bayes Jr., who managed high-yield bond funds for the First Investors family of mutual funds, also said the Drexel department headed by Milken had arranged for him to get his job with First Investors.
Bayes said that while he was still being considered for the job, a Milken subordinate at first demanded assurances that Drexel would be able to control his purchases of high-yield securities for the funds. Bayes said the salesman, Roy Johnson, told him that First Investors was a big account for Drexel and that the Beverly Hills-based junk bond department wouldn’t be able to “endorse” him for the job unless he made such a promise.
“He told me he wanted total control over the account,” Bayes said. He also said Johnson later referred by name to managers of other mutual funds that did business with Drexel:
“He said they had made a lot of money (personally). They had done extremely well. And there was no reason why I couldn’t follow in their footsteps.”
The testimony came in the fourth day of hearings in U.S. District Court in New York. The pre-sentencing hearings are being held to determine if Milken, 44, committed additional crimes beyond the six felonies he pleaded guilty to in April.
As in earlier testimony in the hearings, prosecutors Thursday didn’t link Milken directly to the alleged securities law violations. But since the hearings began a week ago, a picture has steadily emerged of a department in which Milken’s own staff frequently broke the law.
Bayes strongly denied that he viewed the investment opportunities as bribes. He said they never influenced his decisions on which securities to buy for the funds. He also said he rebuffed Johnson’s demand that Drexel be allowed to control his decisions over the three funds he managed, and that Johnson then “back-pedaled” on the request.
Nevertheless, Bayes said he made over $70,000 from five investments either arranged for him by Johnson or based on a tip from the Drexel salesman. One transaction was a purchase of Storer Communications warrants that weren’t publicly available to investors but turned out to be enormously profitable.
The government claims that the Storer warrants were one of the main securities used to improperly influence fund managers. Bayes said Drexel offered him the warrants, through a private partnership called MacPherson Partners, after he had bought about $10 million of preferred stock in Storer for his funds. A former Drexel employee testified Thursday that Drexel had had difficulty finding buyers for the preferred stock. Drexel was the principal investment banker for Storer’s leveraged buyout in 1985.
Bayes said he lost his job with First Investors for failing to disclose his personal investments to the company. He said he agreed to turn over all his profits from them to the mutual fund company. Bayes also said that he was given immunity from prosecution for the transactions in exchange for his testimony and that his lawyers are negotiating a settlement with the Securities and Exchange Commission. The negotiations are believed to relate to violation of laws and regulations governing mutual fund managers.
Prosecutors on Thursday didn’t make clear what influence Drexel had over First Investors’ hiring decisions. A security guard at First Investors’ headquarters said early Thursday evening that no one was reachable for comment. But Bayes testified that just after he was offered the job at First Investors, Johnson suggested that he talk with Milken. He said Johnson “told me I should talk to Milken about the job, and he told me that (Milken) could help me negotiate an appropriate compensation package.”
Bayes said he did meet with Milken, but said the former junk bond wizard’s only suggestion was that he seek a commitment from First Investors’ management to redecorate the firm’s offices.
Separately, Richard Grassgreen, chairman of Enstar Group Inc., reportedly resigned from that post Thursday after it was disclosed that he is under investigation for buying some of the Storer warrants from Drexel for his personal account. Another witness testified Thursday that Grassgreen was allowed to buy the warrants after he had arranged for Kinder-Care Inc., Enstar’s predecessor company, to buy Storer preferred securities.