Drexel Admits Guilt; to Pay $650 Million : Brokerage Settles Securities Fraud Case; Fine Believed Biggest Ever for a U.S. Firm

Drexel Burnham Lambert Inc., the fifth-largest firm on Wall Street, agreed in principle Wednesday to plead guilty to six felony counts and pay $650 million in financial penalties to end a two-year investigation of the firm by federal prosecutors.

The financial penalty dwarfs all previous civil or criminal fines in securities fraud cases and is believed to be the largest penalty ever paid by a U.S. company in a criminal case.

Rudolph W. Giuliani, the U.S. attorney in Manhattan, said the firm would plead guilty to mail, wire and securities fraud.

The decision to settle marked an abrupt reversal by Drexel’s board of directors, which on Monday had unanimously rejected settlement terms offered by Giuliani. Sources said the board Wednesday voted, 16 to 6, to settle after the prosecutors offered slightly better terms, including lowering the financial penalty from $700 million.

Deadline Reportedly Given

One source said Giuliani had given the firm a final deadline of 4 p.m. Wednesday to settle, after which the firm would have been indicted.

The accord followed an agonizing debate within the highly profitable firm about whether to settle or attempt to fight expected racketeering charges in court. Sources said many details of the settlement terms actually haven’t been worked out yet. The accord reportedly leaves some Drexel executives disgruntled and the firm divided. “A lot of people are not happy with the decision,” one Drexel executive said.

The settlement eliminates the threat of racketeering charges, which carry harsh penalties. In a written statement, Drexel said the settlement would allow it to avoid years of damaging legal proceedings. “The settlement will allow us to concentrate all our energies, once again, on serving our clients and building our business,” Drexel said.

Giuliani said final adoption of the settlement depended on approval by the Justice Department in Washington and on Drexel reaching an agreement with the Securities and Exchange Commission to settle an insider trading and fraud lawsuit filed against the firm in September. Negotiations with the SEC are expected to take at least two weeks.

Many details of the accord remained secret. However, sources confirmed that it won’t prevent the expected indictment of Michael Milken, the head of Drexel’s “junk bond” department in Beverly Hills, and several other individuals who have received target letters from prosecutors. Milken is widely credited with the firm’s success in the 1980s. His department’s activities, however, were the main source of Drexel’s legal problems.

The agreement apparently requires the firm to cooperate with the government’s continuing investigation of Milken and the others, although Giuliani declined to confirm this. A spokesman for Milken declined to comment on details of the settlement. But he read a written statement that said Milken’s position hasn’t changed and that his lawyers were continuing to prepare a defense for any charges that may be brought.

The indictment now isn’t expected before January. Settlement by the firm is believed to worsen Milken’s chances for a successful legal defense. His lawyers have maintained that no illegal activity took place at the firm. Milken is expected to remain officially at the firm until he is indicted, after which he would resign or take a leave of absence.

Officials Still Vulnerable?

One Drexel source said the accord seems to leave open the possibility that Giuliani could eventually bring charges against other officials who haven’t been officially designated yet as the targets of investigation. But the accord would end his investigation of the firm itself.

The Drexel investigation was a direct outgrowth of the government’s prosecution of former stock speculator Ivan F. Boesky in 1986. Boesky was implicated in illegal insider trading on a mammoth scale, but he agreed to cooperate with prosecutors and was allowed to plead guilty to only one felony count. He was required to pay what until now was the largest penalty ever imposed in a securities case, $100 million.

Giuliani said the $650 million that Drexel will be required to pay includes amounts designated for criminal fines, civil penalties, “disgorgement” of illegal profits earned from insider trading and an amount to establish a fund to pay victims of Drexel’s wrongdoing who may sue the firm. One source said $300 million would go to fines and penalties, while the rest would go to the fund to pay civil judgments. Any amount left over in the fund after all judgments were paid would be turned over to the government, Giuliani said.

The total amount would be paid out over three years, one source said. It would reduce the value of a share of Drexel’s stock by $10 to $15, the source said, adding that Drexel’s stock is currently valued at about $112 a share. Most of the stock is owned by employees of the closely held firm, although the Belgian concern Groupe Bruxelles Lambert owns about 25%.

‘No Point’ in Delay

At a press conference Wednesday, Giuliani said the government decided to settle with Drexel, in part, because prosecutors negotiated probably as big a financial penalty as they could have gotten if they had prevailed in a trial. “There was no point in protracting this and getting involved in a tremendous amount of litigation . . . to get a result that might be no better than this,” he said.

Giuliani confirmed that his investigation of events at Drexel is continuing.

Details couldn’t be learned about all of the six criminal counts to which Drexel will plead guilty. But one Drexel official said one count is related to illegally hiding the ownership of securities for Princeton/Newport Partners, a small securities firm whose senior officials were indicted on racketeering charges in August.

Another is said to relate to Drexel’s dealings in Occidental Petroleum’s preferred stock. It wasn’t clear whether any of the counts concerned evidence that prosecutors had obtained of $5.3 million paid by Boesky to Drexel to settle an amount owed for illegal securities trading.

The decision to settle followed a long series of bad developments for Drexel over the last month. Several employees believed to have crucial evidence agreed to cooperate with the government in exchange for immunity from prosecution. They, in turn, were said to have turned over information that enabled Giuliani to broaden substantially his investigation. Previously, much of the case had focused on Drexel’s dealings with Boesky.

And Drexel’s officials were clearly alarmed by the fate of Princeton/Newport after top officials were indicted on charges under the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO. A trial has not been held yet in that case, but the impact of the charges caused Princeton/Newport to announce earlier this month that it was going out of business.

Among the others expected to be indicted along with Milken are his brother, Lowell Milken, who also works at the firm’s Beverly Hills office; Pamela Monzert, an aide to Milken, and Bruce Newberg, a former Drexel trader who was also indicted in the Princeton/Newport case.

A lawyer for Lowell Milken said he doubted that the firm’s settlement would have much impact on the individuals’ ability to defend themselves if they are indicted. Lawyers for Michael Milken, Newberg and Monzert couldn’t be reached for comment late Wednesday.

One source disclosed that part of the negotiations with the government had to do with whether Frederick H. Joseph, the firm’s chief executive, would face civil SEC charges, including an accusation of failing to supervise his employees properly. The source said the accord will prevent such a charge. If the SEC had found Joseph had failed to supervise, he could have been required to leave the firm.

Gary Lynch, the SEC’s director of enforcement, declined to comment on any aspect of the case Wednesday. The enforcement division is expected to negotiate details of a settlement of the pending SEC lawsuit, which would then have to be approved by the agency’s commissioners.

A final settlement might clear the way for the appointment of former Sen. Howard H. Baker Jr. as chairman of the firm. Baker recently confirmed that he has held talks with the firm.

Much of the internal dissent at Drexel about the settlement is said to have stemmed from employees in Beverly Hills and New York who feel intense loyalty to Milken. There was fear that some of the charges to which the firm was considering pleading guilty would have severely damaged Milken’s ability to defend himself. Milken’s almost single-handed development of the U.S. “junk bond” market transformed Drexel from a second-tier firm into one of the largest on Wall Street.

Junk bonds are high-risk, high-yield debt securities that frequently have been used to finance corporate takeovers.

“A lot of people may feel that we did not stick with Mike to the extent that we should have,” a Drexel source said.

Important Drexel clients also rallied to Milken’s defense, lobbying the firm not to settle on terms unfavorable to him, the source said. Individuals close to the firm also said that many clients expressed strong sentiment that the government was abusing the RICO law, which Congress passed to make it easier to prosecute organized crime figures.

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