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FDIC Lawyers Deny Conflict in Suing Milken Over S&L Failures

September 4, 1991

NEW YORK (AP) _ A law firm representing federal thrift regulators denied Tuesday it had any conflict of interest in suing Michael Milken and others for allegedly fraudulent junk-bond sales.

Attorneys for Milken, the jailed Drexel Burnham Lambert Inc. executive, are seeking to disqualify Cravath, Swaine & Moore from the case on the grounds that the law firm handled numerous junk-bond deals, including ones for Drexel.

But in court papers, the New York law firm said the disqualification motion was groundless because none of the parties who filed it ever was represented by Cravath. It also said Drexel last year decided not to claim a conflict of interest against the law firm.

Cravath was hired by the Federal Deposit Insurance Corp. and the Resolution Trust Corp. to recover money from individuals and firms the regulators claim were responsible for the failure of dozens of thrifts.

The squabble over the law firm involves a $6 billion federal lawsuit filed by the FDIC and RTC in November 1990 on behalf of the Columbia Savings & Loan Association.

Columbia purchased millions of dollars in high-yielding junk bonds from Drexel in the 1980s. It alleged in its lawsuit that Milken and others at the collapsed Wall Street firm rigged the junk-bond market, causing huge losses for the thrift.

The motion on behalf of Milken, nine other ex-Drexel workers and hundreds of Drexel partnerships claimed Cravath represented the underwriters or issuers of about $15 billion in high-yielding junk bonds in over 100 deals.

It also claimed the law firm was Drexel’s lawyer in six junk-bond deals, and in 19 deals in which Columbia bought hundreds of millions of dollars of the debt securities.

Milken’s lawyers argued that Cravath therefore played a major role in the junk bond market, and its reversal amounted to a conflict of interest.

Cravath’s response said the law firm never received any confidential material about Drexel’s junk-bond activities. Cravath also said that before it was hired by the regulators, Alfred J.T. Byrne, general counsel for the FDIC and RTC, said the agencies found no conflict.

Additionally, Cravath said Drexel decided not claim any conflict, and in fact Cravath is pursuing claims against Milken and others on behalf of Drexel as part of the firm’s bankruptcy case reorganization.

Drexel filed for Chapter 11 bankruptcy protection in February 1990 after failing to recover from its guilty plea to criminal securities violations. Drexel in May reached a settlement with the FDIC, RTC and other securities litigants.

The Columbia lawsuit alleges the thrift lost more than $2 billion on investments in junk bonds and seeks three times that amount under federal racketeering and antitrust laws. The defendants have denied the charges.

Columbia once was a major Drexel customer. It was seized by federal regulators earlier this year.

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