Billions in Claims Against Drexel May Be Prelude to Other Charges
Nov. 19, 1990
NEW YORK (AP) _ When the lawyers and accountants complete their tally, total fraud claims against Drexel Burnham Lambert Inc. are expected to approach the ridiculous sum of $30 billion.
The firm has only about a tenth of that amount in assets. No one has yet proved the allegations of systematic fraud, deception and other forms of cheating by Drexel and its junk bond empire have any validity.
But in bankruptcy court, as in budget proposals and Turkish bazaars, the idea is to exaggerate, negotiate and hope the middle ground is a little higher than expected.
''Everyone is inflating their initial claims,'' said John C. Coffee Jr., a securities law professor at Columbia University. ''People see this on the outside as a fight between Drexel and these claimants. It's not. It's a fight among Drexel's creditors committees.''
The battle involves entities that claim they were stiffed when Drexel, the Wall Street prima donna whose comeuppance was a 1989 criminal securities fraud guilty plea, filed for Chapter 11 bankruptcy court protection in February.
Legal experts said no group of creditors is likely to receive even half its claims. But inflated requests can improve leverage during negotiations among creditors, who ultimately must approve any reorganization plan.
While Drexel's resources are limited and the filing deadline for claims passed last week, claimants plan to bring separate cases against other entities who actually have money.
The government's efforts are expected to focus on a Drexel-led network of individuals and savings and loan institutions that regulators charge manipulated the nation's junk bond market in the 1980s.
In their claim against Drexel, two federal thrift agencies are seeking $11.3 billion for allegations that rigged junk bond dealings helped topple 48 S&Ls. The Federal Deposit Insurance Corp. and Resolution Trust Corp. described a conspiracy among major thrift institutions that did business through Drexel. If the court supports the theory, dozens of individuals and institutions named in the claim could face lawsuits from the government.
Legal experts said likely targets are former Drexel executives such as CEO Frederick Joseph and convicted junk bond financier Michael Milken; Drexel's insurance companies; still-functioning savings and loans; indicted and unindicted thrift executives; and companies swept up in Drexel's dealmaking.
''Those people are solvent,'' Coffee said. ''They have deeper pockets. Michael Milken has a few million or so sitting around.''
''Claims can be brought against a lot of people in this alleged conspiracy,'' he said.
The FDIC said it is continuing an investigation of failed thrifts with ties to Drexel, which controlled about two-thirds of the risky high-yield debt securities that S&Ls bought with federally insured deposits.
Entities outside the thrift industry someday also could be exposed. S&L holdings were only a small percentage of the entire junk bond market - about $15 billion of $200 billion in securities issued.
For now, the government and other claimants want to recover money from Drexel. Attorneys are negotiating to try to reach a settlement figure of all the litigation that would be passed onto a federal judge for approval.
The FDIC and RTC are seeking $6.8 billion from 47 failed thrifts in connection with junk bond losses, securities fraud and other alleged lawbreaking by Drexel. A separate claim for $4.5 billion was filed on behalf of Columbia Savings and Loan Association of Beverly Hills, Calif., which has not been seized by the government but has huge junk bond losses.
Another $9.3 billion is sought by investors, shareholders and companies who allege they were defrauded in the deals to which Drexel pleaded guilty. Add on at least $8 billion more from Drexel- and Milken-related cases consolidated before a federal judge in New York. Other actions scattered nationwide seek $2 billion, lawyers said. All the claims reflect tripled damages under organized crime laws.
In a bankruptcy reorganization, the legal claims would fall somewhere below those of secured creditors such as banks or financial firms who lent Drexel money. But the threat of such massive claims is that they will dilute the pie for everyone. A reorganization plan will allot a percentage of Drexel's assets to creditors.
Plaintiffs lawyers admit the claims are inflated - but that is part of the bankruptcy game.
'To get our proper percentage of Drexel's assets we have to assert our full claims against it,'' said Melvyn I. Weiss, a New York lawyer whose firm filed the $9.3 billion claim alleging 18 separate securities frauds and listing scores of defendants - each of whom is individually liable.
''That's what bankruptcy is all about,'' added David Berger, a Philadelphia plaintiffs lawyer who also is suing Drexel.
Before any money is apportioned, claimants have to persuade Drexel's lawyers and a bankruptcy court judge their allegations are substantial enough to merit a large settlement.
Legal experts said the FDIC and RTC will have to prove that thrifts bought junk bonds from Drexel despite knowing they were a bad investment with the intent of manipulatively propping up prices and deceiving outside investors.
If no settlement is reached, the judge may call a trial to resolve the claims. To prevent a trial from delaying the bankruptcy reorganization, the judge could set aside a portion of Drexel's estate as potential compensation, depending on a verdict.
End advance for Monday Nov. 19