FDIC Seeks $6.8-Billion Damages From Drexel : Bankruptcy: The investment banking firm is accused of ‘plundering’ at least 40 thrifts that have since failed.
The Federal Deposit Insurance Corp. disclosed Wednesday that it is seeking $6.8 billion in damages from Drexel Burnham Lambert, which the agency claims “plundered” more than 40 savings and loan institutions that have since failed.
The claims are being filed in U.S. Bankruptcy Court in New York and allege violations of the Racketeer Influenced and Corrupt Organizations Act, known as RICO. Drexel, which dominated the junk bond market in the 1980s through the firm’s junk bond headquarters in Beverly Hills, filed for protection from creditors last February after the brokerage and investment banking firm collapsed because of a cash crisis.
The FDIC had indicated months ago that it was planning to file a major claim against Drexel, which it charges played a significant role in the nation’s savings and loan disaster.
In a statement released Wednesday, the agency said Drexel used “bribery, coercion, extortion, fraud and other illegal means” to loot the assets of the thrifts. It charged thatDrexel monopolized the junk bond market, made misrepresentations about the high-yield, high-risk bonds that it sold and made illegal payoffs to managers of several thrifts.
The specific allegations were not made public Wednesday, however, because lawyers for the FDIC were not able to finish filing the voluminous papers with the court before the clerk’s office closed for the day. The rest are expected to be filed today, the deadline for filing claims against Drexel’s assets.
The law firm of Cravath, Swaine & Moore began filing the claims on behalf of the FDIC, which insures thrift deposits, and the Resolution Trust Corp., set up by Congress to administer failed savings and loans. Thomas D. Barr, a lawyer at Cravath, said copies would be released today.
L. William Seidman, chairman of the FDIC and RTC, said the investigation is continuing. “We still have much more to do to ensure that we identify and recover all the losses caused by Drexel,” he said. “The American taxpayers, who are paying the bill for the S&L; bailout, expect no less from us.”
Drexel reacted sharply to the FDIC’s announcement. In a statement, the firm said:
“The FDIC/RTC claims announced (Wednesday) underscore that Drexel has become a convenient scapegoat for the savings and loan crisis as various agencies and branches of the government attempt to deflect their own responsibility at the expense of parties to the firm’s bankruptcy proceedings.”
The firm also said: “Regardless of the number of zeroes in the claims of the government, which has a contingency fee arrangement with its lawyers, Drexel intends to vigorously defend against them.”
The FDIC said its lawyers arrived at the $6.8-billion figure in large part by using the racketeering law’s provisions for triple damages. The agency estimates that the actual losses the thrifts suffered from junk bond transactions with Drexel amounted to about $2 billion. The FDIC total also includes more than $800 million in additional specific claims on behalf of 15 thrifts.
The agency did not immediately name the thrifts allegedly harmed by Drexel except for Guaranty Federal Savings & Loan of Dallas, on whose behalf the RTC has already filed public allegations of fraud involving government securities sales. However, the documents are expected to include charges involving several of the nation’s largest failed savings institutions, including Lincoln Savings & Loan in Irvine and CenTrust Bank. Lincoln was headed by Charles H. Keating Jr., who faces criminal charges in Los Angeles.
Lawyers said the FDIC charges are related to Drexel’s key role in the 1980s as the leading underwriter and market maker for junk bonds. The FDIC claims that a number of thrifts got into severe financial trouble because of heavy investments in high-yield, high-risk bonds, which have since declined drastically in value.
Drexel’s collapse came less than a year after the firm pleaded guilty to six felony counts and agreed to pay $650 million in penalties. The firm faces hundreds of civil suits.
Michael Milken, Drexel’s former junk bond chief who is awaiting sentencing on six felony counts, is believed to have developed relationships with the heads of certain savings and loans whereby they agreed to have their institutions buy securities that Milken was anxious to sell.
Milken sold Lincoln Savings nearly all of the more than $600 million worth of junk bonds that the S&L; held just before it was seized in April, 1989. Lincoln’s junk bond activities were one of the risky ventures that regulators allege caused the institution to crash.
Drexel also held about 10% of the stock in Lincoln’s parent firm, American Continental Corp. in Phoenix, and collected $12.2 million in the sale of that stock to the corporation’s employee stock ownership plan.
Lincoln and American Continental, now in bankruptcy, also booked millions of dollars in gains from the sales of stocks and bonds through Drexel or with Drexel’s help.
The FDIC also said it will pursue recoveries from two restitution funds, set up by Drexel and Milken, which total $750 million. The agency said it is considering filing civil claims directly against Milken “and other participants in the frauds against S&Ls.;”
A Milken spokesman declined to comment on the FDIC charges.
A hearing is to be held today on an FDIC request for more time to investigate and file additional documents in support of its claims.
The large number of claims being filed against Drexel in bankruptcy court are expected to vastly exceed the firm’s remaining assets. Successful claimants probably will be paid only a fraction of what they seek.
Staff writer James S. Granelli in Orange County contributed to this story.
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