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Grand Jury Indicts Six On Securities-Related Racketeering Charges

August 5, 1988

NEW YORK (AP) _ A federal grand jury returned the first-ever racketeering indictment against a group of securities professionals Thursday, charging six people in a multimillion dollar fraud scheme involving a New Jersey investment partnership and the Wall Street firm Drexel Burnham Lambert Inc.

The 35-count indictment, charging racketeering, conspiracy and mail and wire fraud, named five top partners and employees of Princeton-Newport Partners, headquartered in Princeton, N.J., and Newport Beach Calif.

It also named a former trader in the high-yield bond department of Drexel in Beverly Hills, Calif.

The case, which grew out of the government’s widespread investigation of Wall Street insider trading, is the first to charge brokerage officials under the Racketeer Influenced and Corrupt Organization Act, lawyers said.

That act, originally intended to fight organized crime and drug trafficking, carries severe penalties, including up to 20 years in prison and the confiscation of property and earnings.

All those charged denied any wrongdoing in statements issued through their attorneys, who characterized the indictment as a pressure tactic to get the defendants’ cooperation in the insider trading investigation.

Named as defendants were James S. Regan, 46, a managing partner of Princeton-Newport; Jack Z. Rabinowitz, 41, general partner; Charles M. Zarzecki, 40, partner and chief trader; Paul Berkman, 41, partner and trader in Princeton-Newport Arbitrage Partners, a subsidiary of Princeton-Newport; Steven B. Smotrich, 33, comptroller of Princeton-Newport; and Bruce L. Newberg, 31, securities trader in Drexel’s high-yield bond department until early this year.

Each was charged with one count of conspiracy, one count of racketeering and one count of racketeering conspiracy. The five Princeton-Newport defendants also were charged with 32 counts of mail and wire fraud. Newberg additionally was charged with 26 counts of mail and wire fraud.

The charges arose from an alleged scheme involving the bogus sale of securities between Princeton-Newport and Drexel to create more than $13 million in phony tax losses and avoid regulatory disclosure requirements. The indictment also alleges stock manipulation from July 1, 1984 to the present.

The indictment alleged that to gain Drexel’s assistance in the bogus trades, Princeton-Newport ″parked″ securities for Drexel to help Drexel hide certain holdings. The New Jersey firm also aided Drexel in stock manipulation, the indictment charged.

″This harmless activity has been twisted into a RICO charge solely as a device to bludgeon these reputable people into testifying against others,″ said Paul Grand, an attorney for Zarzecki.

″We’re pawns in a much larger game,″ said Robert Schwartz, an attorney for Rabinowitz. ″When the elephants fight, it’s the ants that get slaughtered.″

Rudolph Giuliani, U.S. attorney for the Southern District of New York, responded to those allegations in a news conference, saying the indictment ″stands on its own.″

″This is a multimillion-dollar crime,″ said Giuliani. ″It happened not once, not twice. It was a classic pattern of criminal activity.″

But Giuliani declined to say whether any other Drexel officials or the firm itself would be indicted.

Drexel spokesman Steven Anreder said ″Obviously, today’s indictment of Bruce Newberg, a former employee of the firm, is deeply disturbing. We have only recently become acquainted with some fo the allegations in the case. We have been informed by Bruce Newberg’s lawyer that he intends to plead not guilty. It would be unfair for us to prejudge the case or to comment further at this time.″

The indictment also alleged Princeton-Newport conducted fraudulent trading activity through Merrill Lynch & Co., but Merrill cooperated fully with the investigation and was not accused of any wrongdoing.

The government’s investigation of insider trading, which snared speculator Ivan Boesky in 1986, has been thought to focus more recently on Drexel and specifically Michael Milken, the head of the firm’s high-yield bond department.

The indictment does not name Milken, but notes that Newberg reported directly to the head of the high-yield bond department.

Defense attorneys alleged the six defendants had been questioned earlier in the Drexel-related probe, and that the government had offered to drop the racketeering charges against them if the six cooperated with investigators.

Giuliani said he could not comment on that allegation but rebuked what he characterized as irresponsible statements by the defense lawyers.

″This whole silliness is designed to deflect you from what the case was all about,″ he told reporters.

If convicted on all counts, the defendants face 20 years in prison on each of the racketeering counts, five years in prison on each of the remaining counts, and $250,000 in fines on each count for a total of $18.75 million, the government said.

Also under the racketeering statute, the government could seek forfeiture of investments and interests of the defendants.

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