Drexel’s Junk Network : U.S. Says the Firm Had Some Local S&Ls; on Very Sweet Strings
Drexel Burnham Lambert’s junk bond group manipulated some Southern California thrifts in marionette-like fashion, providing financial sweeteners to executives of local thrifts who bought its bonds while pressuring them if they balked at Drexel’s wishes, documents filed this week by federal regulators show.
Drexel in effect tapped the thrifts’ huge source of federally insured deposits to fuel its junk bond machine, regardless of whether the investments were appropriate for the thrifts, regulators alleged.
Relationships between Drexel and local thrifts are described as so intertwined that former Drexel junk bond chief Michael Milken met once a month with senior executives at nearby Gibraltar Financial in Beverly Hills to review the thrift’s junk bond holdings. At one point, subsidiaries of Columbia Savings in Beverly Hills, Drexel’s biggest thrift customer, owned more than 8% of the stock in another thrift company with ties to Drexel, Imperial Corp. of America in San Diego.
These and other allegations are contained in claims made in Drexel’s federal bankruptcy case in New York by the Federal Deposit Insurance Corp., which insures thrift deposits, and the Resolution Trust Corp., which is mopping up the nation’s savings and loan mess.
In those papers, the agencies portray Drexel’s Beverly Hills-based junk bond unit as siphoning taxpayer-insured funds from thrifts to buy junk bonds, using “bribery, coercion, extortion, fraud and other illegal means.”
Drexel has criticized the government filing, saying that the investment bank has “become a convenient scapegoat” for the S&L; mess.
The government is seeking $6.8 billion from Drexel. Separately, the government is seeking another $4.5 billion from Drexel on Columbia Savings’ behalf in connection with losses on junk bonds bought through the firm.
Although the FDIC alleges Milken and Drexel used more than 40 savings and loans nationwide, nearly all of the largest and most important members of the network operated in Drexel’s own back yard.
They included Gibraltar Financial, parent of Gibraltar Savings & Loan; Imperial Corp. of America, parent of Imperial Savings & Loan; Financial Corp. of Santa Barbara, parent of Santa Barbara Savings & Loan; Lincoln Savings & Loan in Irvine, and Columbia Savings. All except Columbia were later seized by regulators, and Beverly Hills-based Columbia is expected to be taken over once it sells its junk bonds.
The government documents allege Drexel used some thrifts regularly. It underwrote $200 million in bonds for Gibraltar that the government alleges the thrift could not afford to issue. The papers further allege that Drexel, presumably as a reward for Gibraltar’s business, gave former Gibraltar Chief Executive Herbert Young a sweetener of securities that he sold less than a month later for a $100,000 profit. Young could not be reached for comment.
Drexel also helped Gibraltar executives profit by agreeing to a scheme to disguise their investment losses. That enabled the officers to justify their bonuses and dividends. Drexel also is alleged to have made Gibraltar officials privy to internal Drexel sales documents.
“Drexel exerted enormous influence over Gibraltar’s junk bond investments,” the agencies said.
Similar influence was exerted at Imperial in San Diego. In 1983, the agencies alleged, close associates of Drexel bought at least one-third of the stock in Imperial. Soon after, the company named new top officers, who launched Imperial on a $1-billion junk bond buying binge in 1986, with another $400 million bought in 1987.
In late 1986, Imperial tried to substitute Shearson Lehman Bros. for Drexel as the underwriter for $75 million in bonds. Unhappy about the decision, Drexel arranged for a group linked to one of its associates to buy additional stock in Imperial, presumably to apply pressure on the thrift, according to the papers. Imperial backed down and replaced Shearson with Drexel and another investment banker, Morgan Stanley. The size of its offering was then increased to $100 million.
Similar pressure to buy Drexel’s junk bonds was put on Santa Barbara Savings via admitted stock swindler Ivan F. Boesky. In 1983, Boesky agreed to buy a majority of the parent firm of Santa Barbara Savings. The deal ultimately fell through, but before it did an officer in Boesky’s organization successfully pressured Santa Barbara Savings executives into buying more than $250 million in junk bonds from Drexel in more than 70 transactions, the papers allege.
Drexel also helped Phoenix businessman Charles H. Keating Jr. gain control of Lincoln, and at one point Drexel owned more than 10% of the stock in Lincoln’s parent, American Continental Corp.
The government also alleged that Drexel provided equity “kickers” to Keating as kickbacks to reward him for having Lincoln buy large amounts of Drexel-underwritten junk bonds. In addition, Lincoln improperly used Drexel to buy junk bonds issued by other thrifts, including Columbia Savings, the parent of Imperial Savings and the parent of San Jacinto Savings & Loan in Texas.
Keating has consistently denied any wrongdoing.
KEY FIGURES IN THE GOVERNMENT’S CLAIMS AGAINST DREXEL
MICHAEL MILKEN: As former head of the junk bond department at Drexel Burnham Lambert, Milken developed the market for the high-risk bonds.
HERBERT YOUNG former chief executive, Gibraltar Savings : Drexel allegedly provided financial benefits to certain Gibraltar officers and directors, including Young, as a reward for their thrift’s junk bond investments. For a period of time through 1986, Milken visited Gibraltar’s offices for monthly meetings with Young and other officials to review Gibraltar’s investment portfolio.
DAVID PAUL former chief executive, CenTrust Bank : Drexel allegedly provided incentives for Paul to have Miami-based CenTrust purchase Drexel-underwritten junk bonds, which the thrift lost money on.
CHARLES H. KEATING JR. former owner, Lincoln Savings : Drexel allegedly enabled Keating to obtain control of Lincoln, providing him with kickbacks and assisting him with his illegal schemes. In exchange, Keating had Lincoln invest heavily in junk bonds underwritten by Drexel and take part in other schemes orchestrated by Drexel and others.
IVAN F. BOESKY former Wall Street speculator : An officer in Boesky’s organization is alleged to have successfully pressured Santa Barbara Savings executives into buying more than $250 million in junk bonds from Drexel in more than 70 transactions.
Here are the failed thrifts that government regulators allege were defrauded by Drexel Burnham Lambert Inc.:
ABQ Bank, Albuquerque, N.M.
American Pioneer, Daytona Beach, Fla.
Baltimore Fncl. Fed. Savings, Baltimore
Benjamin Franklin Savings, Houston
Bright Banc Savings Assn., Dallas
CenTrust Savings Bank, Miami
Certified Savings, Georgetown, Tex.
City Federal Savings, Bedminster, N.J.
Columbia Savings, Englewood, Colo.
Commonwealth S&L;, Ft. Lauderdale, Fla.
Ensign Bank FSB, New York
Franklin Savings Assn., Ottawa, Kan.
Germania Bank FSB, Alton, Ill.
Gibraltar Savings Assn., Houston
Guaranty Federal S&L;, Dallas
Home Owners Federal S&L;, Boston
Mississippi Savings, Batesville, Miss.
MountainWest S&L;, Ogden, Utah
Nowlin Savings Assn., Ft. Worth
People’s Heritage S&L;, Salina, Kan.
Pima Savings & Loan Assn., Tuscon
Security S&L;, Scottsdale, Ariz.
Sooner Federal S&L;, Tulsa, Okla.
Southwest S&L;, Dallas
Statesman FSB, Des Moines, Iowa
Sunbelt Savings Assn. of Texas, Dallas
Sun State S&L;, Phoenix
Texas Western Federal S&L;, Houston
United Federal Savings, Windom, Minn.
United Savings Assn. of Texas, Houston
Williamsburg Savings Bank, Salt Lake City
Of the 41 failed thrifts that government regulators allege were defrauded by Drexel Burnham Lambert Inc., nine were headquartered in California.
Current junk bond Institution Realized loss holdings (at cost) Beverly Hills S&L;, Laguna Hills $15.84 million $22.86 million Central S&L;, San Diego not available not available Charter Savings Bank, Newport Beach $27,500 $7 million Gibraltar Savings, Beverly Hills $44.5 million $18.7 million Imperial Savings, San Diego $56.2 million $426.8 million Lincoln S&L;, Irvine $32.06 million $300.63 million Santa Barbara S&L;, Santa Barbara not available not available Western Empire S&L;, Yorba Linda $6.74 million $5.44 million Westwood S&L;, Los Angeles $2.44 million none Columbia S&L;, Los Angeles* $197.99 million $2.53 billion
* A separate claim was filed on behalf of Columbia Savings & Loan, which has not been taken over by the government.