Drexel May Give Secret Milken Files to FDIC

Drexel Burnham Lambert has tentatively agreed to waive attorney-client privilege and hand over formerly secret files to the Federal Deposit Insurance Corp., sources close to Drexel’s bankruptcy case confirmed Monday.

The information relates to the private partnerships created by former Drexel junk bond chief Michael Milken. In exchange, the sources said, the FDIC has agreed to share with Drexel a portion of funds it recovers in its lawsuits against the Milken partnerships for allegedly defrauding numerous savings and loans.

The Drexel-FDIC accord is part of an overall agreement in principle reached last week between Drexel and its creditors to resolve the firm’s year-old Chapter 11 bankruptcy case. The sources said the arrangement with the FDIC, first reported in the National Law Journal, will go into effect only if the overall settlement is approved. The tentative settlement plan hasn’t been made public.

While he ran Drexel’s junk bond department in Beverly Hills, Milken and his brother, Lowell, created scores of private partnerships to benefit themselves, family members and fellow Drexel employees. The FDIC is seeking $6 billion from Milken and the partnerships.

Drexel has long said that most of the partnerships were officially sanctioned and were part of the firm’s generous compensation package to employees. But Drexel said some of the partnerships were created secretly, possibly to profit at the firm’s expense. The firm considers itself to have a claim against these partnerships, sources said, which would justify receiving a portion of whatever the FDIC recovers from them.

Among them are MacPherson Partners, which allegedly ended up owning a hugely profitable stake in the 1985 leveraged buyout of Storer Communications.

Milken’s personal spokesman declined to comment on the reported accord. The spokesman also declined to say whether lawyers for the Milkens or the partnerships might try to prevent Drexel from waiving the attorney-client privilege.

Allan Whitney, an FDIC spokesman, declined to confirm that an information-sharing agreement had been reached with Drexel. Whitney noted that lawyers have been put under a gag order, preventing them from disclosing the contents of the overall agreement while final details are worked out.

Precisely which information is covered in the accord isn’t clear, and the sources said the FDIC has agreed to the arrangement without knowing exactly what it will get. The arrangement may create some interesting problems, because former Drexel Chief Executive Frederick H. Joseph, still a senior executive at the firm, is also a defendant in the FDIC suits. One source close to Drexel contended that the shared information would relate mainly to partnerships that had been created without Joseph’s knowledge.

It also wasn’t clear whether the FDIC might share the information with other government investigators--such as the staff of the House subcommittee on oversight and investigations--which have been looking into the extremely lucrative partnerships.

Under the tentative settlement, Drexel probably will emerge from bankruptcy as a reorganized firm owned mainly by its “fixed” creditors--institutions such as banks that had extended more than $2 billion in credit to the firm before the bankruptcy filing. However, current and former Drexel employees who owned stock in the pre-bankruptcy company would also have an interest in the reorganized firm, sources said.