Drexel Sues Milkens to Try to Regain Assets : Brokerage: The bankrupt firm accuses Michael and his brother Lowell of misleading the company about the legality of their activities.

Drexel Burnham Lambert Inc. filed suit on Wednesday against Michael Milken, charging the imprisoned former junk bond king who brought the firm to prominence--and disgrace--with racketeering, breaching responsibility to investors and misappropriating corporate assets. The lawsuit, which also named Milken’s brother, Lowell, is an outgrowth of the recently unveiled settlement plan under which Drexel hopes to emerge from bankruptcy proceedings. Under that plan, Drexel is obliged to go after the assets of former employees suspected of illegal activity. Much of any money recovered would be turned over to the once-high-flying brokerage firm’s creditors.

Drexel alleges that the Milken brothers, who between them earned more than $1.1 billion in direct compensation from the firm between 1985 and 1989, repeatedly misled the firm about the legality of their activities.

The lawsuit, filed in U.S. District Court in New York, drew a sharp response--and the promise of a countersuit--from Alan Dershowitz, the well-known Harvard law professor and criminal appeals lawyer who Michael Milken hired recently.

“This lawsuit is absurd,” said Dershowitz in a statement. “It stands truth on its head by conjuring up legal theories to sue people on behalf of a company for activities that the company approved, encouraged and profited from enormously.”

Drexel’s suit also alleges that while government officials were bearing down, Michael Milken orchestrated a cover-up at the junk bond division’s Beverly Hills headquarters, signaling to subordinates to “remove or destroy” incriminating documents that had been subpoenaed. After sentencing hearings in Milken’s criminal case last year, a federal judge said she found some of the allegations of a cover-up “credible.”

In one instance, according to the suit, Milken told Terren Peizer, a member of the Beverly Hills-based junk bond department: “If you don’t have (the documents), you can’t provide them,” emphasizing the comment by flinging open a file drawer that had already been emptied.

He also allegedly called subordinate James Dahl into his office, steered him into the men’s room and, while running the water, falsely told Dahl: “There haven’t been any subpoenas issued, and whatever you need to do, do it.”

The suit charges that the Milken brothers repeatedly misled the firm. “The defendants repeatedly represented to Drexel that they . . . were following Drexel’s policies--including Drexel policies not to engage in insider trading, not to engage in fraudulent or manipulative transactions and not to violate the securities laws,” the suit states.

“Those representations continued throughout their employment at Drexel and almost to the day (Michael) Milken agreed to plead guilty to six felony violations of the securities laws” and both Milkens were barred for life from the securities industry, the suit alleges.

Drexel claimed that it had been forced to pay $300 million in civil and criminal penalties and more than $350 million for the compensation of civil claimants as a result of the brothers’ wrongdoing.

In addition, the suit charges, the pair “misappropriated for their own use and benefit valuable corporate assets,” “trained and induced other Drexel employees to violate Drexel policies” and “deliberately misled and deceived their superiors.”

The Drexel assets allegedly were funneled out through hundreds of interlocking partnerships the Milkens set up to benefit themselves, family members and certain Drexel employees.

Dershowitz, on the other hand, insisted that “the existence of the partnerships was well known to the firm” and that other key Drexel officials “encouraged and even invested in the partnerships.”

Dershowitz said Milken will “countersue those responsible for the losses for which he is being blamed.”

He added that Drexel, like many individuals and companies that have sued Milken, has decided to “use Milken as a scapegoat rather than properly admit responsibility for their own failures.”