Southmark Sues Milken Over Junk Bond Deals : Litigation: The Dallas real estate development firm contends that he and others at Drexel caused its collapse.

DALLAS —  Southmark Corp. has filed a $200-million suit contending that former junk bond king Michael Milken and others at Drexel Burnham Lambert Inc. are responsible for the real estate development company’s demise.

The suit, filed in U.S. District Court, said Milken and others “saddled Southmark with a crushing burden of public debt, then encouraged Southmark to divert the proceeds of that debt from legitimate operating needs to highly speculative investments.”

The recommendations were made “solely to satisfy the greed of the Milken group and other defendants,” Southmark said in the suit.

The company, now controlled by creditors owed more than $1 billion, once flew high with property and other investments underwritten by Drexel junk bonds. The 1987 stock market crash and the subsequent failure of the junk bond market pushed it into bankruptcy.

Shortly before the 1989, Chapter 11 filing, new management wiped out shareholder equity with a massive $1-billion writedown of assets. Southmark’s former leaders, Chairman Gene Phillips and Vice Chairman William Friedman, are defendants in another lawsuit brought by the company.

The new suit contends that the Milken-led group “knowingly and intentionally manipulated” the junk bond market.

The group persuaded Southmark to sell more junk bonds than the company could pay back, the suit said. Some Drexel associates then encouraged Southmark to take the proceeds from those bonds and purchase junk bonds issued by other Drexel clients, it said.

In 1986, that activity resulted in Southmark’s debt ballooning from $50 million to $484 million in just three months, the suit said.

“The issuance of high-cost public debt in excess of the legitimate operational needs of the company, and the investment of the excess proceeds in speculative junk bonds, were completely inconsistent with Southmark’s financial interests, and were done solely to satisfy the greed of the Milken group and other defendants,” Southmark said in the suit.

In addition to Milken, the suit names 21 people, including Milken’s brother Lowell, a former senior vice president of Drexel, former Drexel Chief Executive Frederick Joseph and one-time junk bond trader Bruce Newberg.

The lawsuit also accuses several overseas Drexel-affiliated investment partnerships of participating in the transactions and earning “exorbitant and illegal profits” by manipulating the sale and resale of Drexel underwritten securities to Southmark.

A Milken spokesman on Friday described the suit as “meritless.”

“Michael Milken’s business was trying to help companies grow,” the spokesman said. “He has become an easy scapegoat to sue and is not going to take responsibility for things he didn’t do. “

Lowell Milken’s attorney, Eugene Licker, of the law firm Lord Day & Lord, Barrett Smith in New York, said he hadn’t seen the complaint and therefore would withhold comment.

Steven S. Anreder, Drexel’s chief spokesman, said he had no immediate comment concerning the allegations against Joseph, who is still affiliated with the firm.

Southmark has since emerged from bankruptcy proceedings and is liquidating its remaining assets to pay creditors.