Hindsight is everything when it comes to ... everything!

When Drexel Burnham Lambert let talks with U.S. Attorney for the Southern District of New York Rudy Giuliani collapse, on December 19th 1988, the firm’s leadership found Giuliani’s settlement terms too harsh and geared itself for a Racketeer and Corruption Organizations Act (RICO) indictment – this despite Drexel Managing Director Dennis Levine pleading guilty to four felonies (1986).

Even worse was Levine’s implication of super-arbitrageur Ivan Boesky because the latter’s eventual admitted guilt to securities fraud, as part of an insider trading investigation, revealed illegal financial shenanigans with Junk Bond King and Drexel money machine, Michael Milken.

Nevertheless, Drexel maintained its innocence, even after the SEC sued the once richest firm on Wall Street. Only until the threat of a RICO indictment did Drexel feel the need to begin again plea bargain talks as this powerful legal tool, usually aimed at organized crime, would have required a performance bond of up to $1 Billon in lieu of freezing assets. Drexel, like most, largely existed on borrowed capital, and with banks refusing loans to RICO tainted companies, its ability to continue operations would have been tenuous, at best.

Giuliani’s stipulation’s that Drexel waive attorney-client privileges and dismiss Milken was a deal Drexel’s Board unanimously turned down. Two days later, however, firm lawyers uncovered a serious breach involving a self-dealing, and potentially bribe-ridden, limited partnership scheme involving Milken. This led to an agreement with the government, costing Drexel a record $650 million fine.

This Week in Wall Street History

12/17/07