Wall Street firm Drexel Burnham Lambert and several of its employees are likely to be charged in the next few weeks with a wide range of criminal activities, including racketeering, conspiracy, mail fraud, wire fraud, and possibly tax fraud, according to sources familiar with the investigation. These charges would stem from a nearly two-year investigation of Drexel and some of its key employees on insider trading and other violations of securities laws. The case has proceeded on two prongs. First, on Sept. 7, the Securities and Exchange Commission (SEC) filed a civil complaint against Drexel, alleging that the firm defrauded clients, traded on inside information, and violated a battery of securities laws when it financed 18 different stock transactions. The second prong of the investigation involves the impending criminal charges.
On Monday Drexel received a ``target letter'' from the US attorney's office in Manhattan, indicating that the firm is the subject of a criminal investigation.
Drexel lawyers were scheduled to meet with Justice Department officials today about racketeering charges, but the meeting has been postponed, according to sources close to the investigation. (Background of racketeering law, Page 6.) Such meetings give defense lawyers a last shot at dissuading the government from bringing charges. However, one lawyer who used to work in the Manhattan US attorney's office says he has ``never seen'' a case in which informal approval to indict someone for racketeering was given and then later revoked after the defendants told their side of the story.
Drexel and the employees who are subjects of the investigation have denied that they breached any civil or criminal laws.
Conviction, and even indictment, under the Racketeer Influenced and Corrupt Organizations Act (RICO) could sound the death knell for the careers of the Drexel employees and cut off the engine of Drexel's business. Among the individuals expected to be charged is Michael Milken, who virtually transformed Drexel from a small brokerage house into a heavyweight on Wall Street.
RICO charges would probably be the most dramatic part of what is believed to be a wide-ranging criminal case against Drexel and several individuals. From a reading of the SEC allegations, securities lawyers are beginning to draw the broad outlines of the criminal case being assembled by Rudolph Giuliani, the federal prosecutor in Manhattan. It will probably be based on the same set of facts but could focus on different issues, including:
Tax fraud. One former prosecutor from Mr. Giuliani's office predicts there will be a ``heavy tax component'' in any criminal indictments. The prosecutor who initially oversaw the case, Charles Carberry, concentrated on tax fraud cases early in his prosecutorial career.
Mr. Carberry had ``a whole stable'' of Internal Revenue Service investigators, this lawyer says. ``When the Drexel case was launched, he had a large IRS input,'' he says.
Paul Fischer, a former associate director of enforcement at the SEC, concurs, pointing out that the SEC complaint has a ``hint of tax violations'' that will probably be expanded in the criminal indictments.
The SEC alleges that in March 1985, Drexel, Milken, and Wall Street arbitrageur Ivan Boesky sought to create fictitious tax losses for Seemala Corporation, a limited partnership controlled by Mr. Boesky. The SEC focuses on possible trading violations involved with creating that loss. But, Mr. Fischer says, the US attorney would probably concentrate on the tax loss itself, and thus allege tax fraud.
Conspiracy and insider trading. The SEC alleges that Boesky, who is serving a three-year sentence in connection with his trading activities, acted as a ``front'' for Drexel to commit illegal activities. For nearly three years, the complaint says, Boesky, Drexel employees, and two others conspired to trade on ``inside,'' or nonpublic, information. The SEC also claims they manipulated stock prices and committed other securities violations.
Giuliani is ``going to charge everything in the SEC complaint,'' says one lawyer familiar with the investigation. Under the securities laws, he notes, a prosecutor can flip civil charges into criminal ones by merely alleging the violation was done willfully. (He must also prove his case ``beyond a reasonable doubt'' in a criminal case, a tougher standard.)
Wire and mail fraud. If securities violations are proved, the activities associated with those violations - such as depositing a check, writing a memo, or making a phone call to one's co-conspirator - generally constitute mail and wire fraud, says John Coffee, a securities expert at Columbia University Law School.
Racketeering. To be convicted for racketeering, the prosecutor must show a ``pattern'' of illegal activity, such as wire fraud, mail fraud, or securities fraud.
The SEC complaint on civil charges set up such a scenario. It alleged that Drexel, Milken, and others engaged in trading on inside information in four separate transactions; defrauding their clients twice; manipulating the price of stocks twice; concealing the true ownership of stocks three times; and filing false documents with the government four times.
If and when the indictments are announced, the criminal case would probably nudge the SEC's civil case onto the back burner. But even before the criminal case is made official, Drexel lawyers are gathering ammunition against it.
Since the SEC has filed its complaint, Drexel lawyers now have access to witnesses and documents they could not get before. They are zeroing in on Boesky, the government's star witness, and several other Boesky employees who are cooperating with the government.