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Prosecutors Turn Heat Up on Drexel

December 16, 1988

NEW YORK (AP) _ Federal prosecutors have stepped up pressure on Drexel Burnham Lambert Inc. to settle as-yet unfiled securities fraud charges, expanding the scope of their original inquiry and exacting cooperation from at least three employees of the beleaguered Wall Street firm, sources said Friday.

″There’s no question the investigation has shifted into other areas,″ said one of the sources, who were familiar with the Drexel probe but spoke on condition they not be identified. ″They’ve probably come to the realization they don’t have enough.″

The investigation, once limited to allegations of a conspiracy between Drexel and now-imprisoned speculator Ivan Boesky, has been frustrated by a lack of substantive evidence and is spreading into possibly questionable dealings between the firm and other individuals, these sources said.

Evidence for the broadened probe is coming from three Drexel high-yield bond traders, James Dahl, Cary Maultasch and Terren Peizer, who are known to be cooperating with the government in exchange for lenient treatment.

These developments suggested the negotiations between Drexel and the Manhattan U.S. attorney, which have been going on for the past several weeks, remain substantially unresolved, despite predictions that a break in one of the biggest securities fraud cases in history could come before Christmas.

Bruce Baird, the assistant Manhattan U.S. attorney for securities fraud, declined to comment on the Drexel case. Drexel spokesman Steven Anreder also declined to comment.

The nation’s fifth-largest securities firm has been negotiating intensely with the Manhattan U.S. attorney’s office to avoid a potentially ruinous indictment on fraud and racketeering charges, the result of the investigation rooted in the Boesky insider trading scandal.

As the negotiations have dragged on, unconfirmed reports, conflicting speculation and leaks of imminent settlements and sudden snags have persisted.

Earlier in the week rumors flew that the firm’s high-yield bond executive Michael Milken, another key target in the probe, had resigned abruptly. The rumor was officially denied.

Some sources disputed another report Friday that suggested a rift was growing in Drexel’s senior management over terms of a settlement, which could include hundreds of millions of dollars in fines, multiple guilty pleas and restraints on some of the firm’s most profitable operations.

A settlement also would almost certainly include the ouster of Milken, who regardless of what happens to Drexel is expected to be indicted.

The Wall Street Journal said key Drexel executives Leon Black and Peter Ackerman were threatening to resign if a proposed agreement required the firm to cooperate with the government in prosecuting Milken, the driving force behind the firm’s prowess in the $175 billion high-yield ″junk bond″ market.

″They didn’t threaten to quit,″ said one source in response to the Journal account. ″No such threat was made. They’re still aboard.″

Others with knowledge of the situation said some Drexel executives were growing exasperated with the government’s tough negotiating position and were increasingly opposed to a settlement, preferring to scrap it out in court.

″Some people are saying, what the government’s asking is unconscionable,″ said one source. ″If the government has its way, it’s selling Milken out. It’s not fair and it’s not right.″

Drexel and Milken have repeatedly denied any wrongdoing in the protracted legal ordeal, which began after Boesky turned state’s evidence and paid the Securities and Exchange Commission a record $100 million fine for insider trading two years ago.

On the basis of Boesky’s disclosures, the SEC filed a civil suit Sept. 7 accusing Drexel, Milken and three other employees of scheming with him to profit on inside information, dupe clients, manipulate stock and falsify books.

The civil suit has been stalled indefinitely by Drexel’s legal challenges to the impartiality of the federal judge presiding in the case.

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