Judge Approves Milken-Drexel Settlement Plan : Junk bonds: Federal regulators drop their objections, but they retain the power to reject the agreement.
A judge on Monday approved the settlement of more than 150 lawsuits involving Drexel Burnham Lambert Inc., but government agencies won the right to opt out of the pact after they examine new financial information to be supplied by jailed financier Michael Milken and other defendants.
The accord satisfies objections raised last week by the Federal Deposit Insurance Corp., which had rejected the $1.3-billion settlement on the grounds that it lacked “adequate or sufficient information upon which (to) base an informed judgment.”
But the settlement, approved by U.S. District Senior Judge Milton Pollack, did not mollify critics, who said the pact did not exact a heavy enough penalty from Milken and other financial miscreants.
Under the settlement, Milken will be left with at least $125 million in his own name and a family fortune of perhaps half a billion dollars.
Milken and many of his former associates at Drexel were sued by the FDIC and the Resolution Trust Corp., which is charged with cleaning up the savings and loan mess, because many of the S&Ls; that have been taken over by government regulators had invested heavily in high-yield junk bonds peddled by Milken, who was head of Drexel’s Beverly Hills-based junk bond department.
Milken, through a spokesman, said it is “very difficult to pay this sum of money when the claims have no merit.” He insisted that no jury would have found him responsible for losses incurred by S&Ls.;
RTC Chairman Albert R. Casey attended the standing-room-only hearing and hailed the proceedings as “a final, glorious moment.” The RTC and the FDIC will split about $500 million in settlement proceeds. The balance will go to investors who contend that they were defrauded by Drexel, to Drexel’s creditors and to lawyers.
Policyholders of two failed Los Angeles-based insurance firms that invested in junk bonds sold by Drexel, Executive Life Insurance Co. and First Capital Insurance Co. will share about $100 million of the settlement, officials said. The settlement removes Milken and other key Drexel figures from a state Department of Insurance suit filed last month in California, California Insurance Commissioner John Garamendi said Monday.
“This is an extraordinary settlement that will get for people something they would not have ordinarily gotten for the rest of this century,” added Pollack, the 85-year-old jurist who cajoled the parties into settling.
In resolving the dispute over disclosure of financial information that threatened to derail the settlement, lawyers agreed to invest the respected jurist with considerable power. Pollack, for example, will have the unilateral right to determine the precise nature of the financial disclosures and whether they will be made available to the public.
Milken, as reported, has agreed to pay $500 million, or 80% of his current stated net worth of $625 million, into the $1.3-billion settlement pool. Milken has already paid $400 million into a Securities and Exchange Commission-administered settlement fund, bringing his total contribution to the settlement to $900 million.
Of the balance of the settlement, $100 million will come from various insurance companies and $300 million from about 200 former Milken associates at Drexel. The former Milken associates will not have to put up cash; instead, they will be required to contribute interests in partnerships that own junk bonds.
Milken, who popularized the use of the high-yield, high-risk bonds, pleaded guilty to six felonies in 1990 and was sentenced to 10 years in prison, though he is only expected to serve 40 months at a minimum security facility in Pleasanton, Calif.
Drexel, which made a fortune issuing and trading junk bonds, filed for bankruptcy protection in February, 1990, leaving in its wake a trail of financial wreckage that includes ruined savings and loans, insurance companies and debt-laden companies.
Rep. Joseph P. Kennedy (D--Mass.), who had criticized the initial settlement, said Monday: “I am pleased that the FDIC will now get more detailed information about the true financial wealth of Michael Milken and his cronies.
“However,” Kennedy added, “it is difficult to understand why the parties were so quickly pushed into making a settlement without all the facts. It appears that the judge has pressed the parties to put the cart before the horse.”
But Melvin Weiss, an attorney whose clients stand to reap $400 million in the settlement, said the settlement wasn’t only reached “through head-banging by the judge. It was the independent judgment of a lot of experienced lawyers.”
Weiss noted that if Milken has hidden any assets, they must be forfeited if they are uncovered. “If someone (credible) calls us up and says, ‘Look, he’s got a bank account in Spain,’ or somewhere else, we’ll look into it,” Weiss said.
Separately, Federal Bankruptcy Judge Anthony Conrad confirmed the reorganization plan under which Drexel is expected to emerge from bankruptcy proceedings as New Street Capital Corp.
New Street will have 40 employees--compared to more than 10,000 during Drexel’s heyday--and, capitalizing on Drexel’s former expertise in junk bonds, will specialize in managing troubled assets.
Times staff writer Robert A. Rosenblatt in Washington contributed to this story.
