Bankrupt Drexel facing $5 billion in federal claims

November 09, 1990|By New York Times

NEW YORK -- Federal savings regulators plan to file claims expected to reach billions of dollars against Drexel Burnham Lambert Inc., former employees and related entities, people with direct knowledge of the plans said yesterday.

The claims are expected to run as high as $5 billion to $10 billion for substantial losses the agencies say were incurred by a number of the nation's largest savings and loans that had invested in high-yield "junk bonds."

The claims are to be filed by the Federal Deposit Insurance Corp. and the Resolution Trust Corp., which oversee the savings industry.

Savings institutions invested heavily in junk bonds in the 1980s, and their losses on these risky investments are said to account for a large amount of losses in the huge savings debacle.

A number of claims would be filed as part of the bankruptcy proceeding of Drexel and a number of its related companies.

The firm, which grew into a Wall Street powerhouse in the 1980s through the efforts of its junk bond division, headed by Michael R. Milken, filed for protection from its creditors earlier this year.

In a filing with the bankruptcy court, lawyers for the FDIC and Resolution Trust said the agencies expect to make "substantial claims" against Drexel by Nov. 15, the deadline for filing all claims. Other claims, against employees and related entities, are expected to be filed in other proceedings.

A spokesman for Drexel declined to comment on any possible claim, saying the firm would wait until one is filed.

The development comes as a number of investors, former clients and government agencies are seeking billions of dollars for what they say was fraud by Drexel and are negotiating with the firm to determine the legal procedures under which it will be determined how much money they will receive.

The investors and others with claims say they were damaged by stock manipulation, insider trading and other illegal acts by the firm.

While the government and others with claims against the firm may state they believe they are owed a precise amount of money, the procedures would be necessary to make the final determination.

In the plan now under consideration, the claims would be heard by Federal District Judge Milton Pollack, who has presided over the civil case against Drexel since it was filed.

The most important claims in the case may turn out to be those by the FDIC and Resolution Trust. Those claims, referred to by one person working with the firm as "the big bear," have been the focus of great attention in the bankruptcy hearings since June.

In recent filings in the bankruptcy, the FDIC and Resolution Trust provided the most vivid image to date of the agencies' efforts to obtain money they believe was lost at some of the nation's largest savings institutions because of actions by Drexel.

The filings, made in an effort to gain an extension of the deadline, describe the destruction of documents by senior executives at some savings and loans, and lack of cooperation ** on the part of key Drexel employees because of fear of criminal prosecution.

They also imply that some lawyers with clients in the case fear they themselves might be prosecuted.

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