Pact in Drexel Bankruptcy Sways Creditors

NEW YORK â€”  A key accord on turning over information about Michael Milken and other former employees of Drexel Burnham Lambert Inc. smoothed the way for the proposed settlement that is expected to bring a speedy end to the firm’s bankruptcy, lawyers involved said Monday.

The settlement, first announced Friday, was hailed as a model compromise brought about by Milton Pollack, a strong-willed U.S. District Court judge determined to avoid years of litigation.

Lawyers said peace among divergent groups of creditors was obtained when Drexel agreed to turn over information about Milken and other former company executives that the Federal Deposit Insurance Corp. sought for use in civil fraud lawsuits against Milken and others.

The 470-page settlement agreement was made public Monday and details how the once-powerful investment banking firm’s $2.48 billion in assets will be divided among its thousands of creditors.

However, lawyers said they were still working to resolve a $5.3-billion Internal Revenue Service claim against Drexel. Alan B. Miller, Drexel’s bankruptcy lawyer, said “this whole deal blows up� unless the IRS claim can be reduced below a set amount.

Neither Drexel nor the creditors would disclose the amount. Nevertheless, lawyers said they had made progress in negotiations with the IRS and were hopeful that the tax claim could be settled before it is due to go to trial in bankruptcy court June 24.

The settlement will be the subject of a “fairness� hearing in federal court in New York on Aug. 9, during which any individual creditors who object to it will have a chance to state their cases.

But the settlement now has the unanimous approval of the creditors committees formed to represent the interests of broad classes of creditors. Lawyers said the earliest that creditors could begin receiving payment is early 1992.

Lawyers also disclosed Monday that Frederick Joseph, Drexel’s chief executive during its meteoric rise and subsequent downfall, won’t be employed by a small new company, temporarily named Newco, that will remain to manage Drexel’s remaining assets after the reorganization.

Joseph, who could not be reached for comment, is now Drexel’s vice chairman. The lawyers also said Joseph won’t be covered by an agreement that protects most of the other employees who remained with Drexel after its bankruptcy filing from new lawsuits.

Lawyers said the new company most likely will gradually sell off its assets or be acquired, and Miller squelched speculation that it might return to prominence on Wall Street. “This is not going to look like a mini-Drexel coming out of the ashes,� Miller said.

One of the main hurdles in winning the overall settlement between Drexel and its creditors was getting the agreement of the FDIC and others who claim in lawsuits that they were victims of fraudulent activities by Drexel. Those claims, pending in courts throughout the country, totaled about $20 billion, vastly exceeding the firm’s $2.48 billion in assets.

In a press briefing and in separate interviews, lawyers involved in the bankruptcy made clear that a crucial element in getting the FDIC and other securities claimants to settle was an agreement throwing open to them Drexel’s books and records.

Thomas D. Barr, a lawyer at the firm of Cravath, Swaine & Moore, which represents the FDIC, said he expects the information to help the FDIC and others to pursue separate civil suits against Milken and other former Drexel employees. In exchange, the FDIC and other securities litigants agreed to turn over to Drexel’s other creditors a small portion of whatever they collect in the separate lawsuits.

The FDIC originally made an $11.3-billion dollar claim against Drexel for the firm’s alleged role in bringing on the nation’s savings & loan debacle.

Drexel also agreed to waive attorney-client privilege, which would have kept much of the information confidential. However, the waiver is expected to stir up strong legal challenges from former Drexel employees who shared information with the company in the belief that they were protected by the privilege.

Drexel’s pioneering use of junk bonds turned the firm into one of Wall Street’s most profitable investment banking houses.

Drexel’s Reorganization Claims to be paid first from Drexel’s assets include administrative costs and legal fees; up to $200 million owed to secured lenders and priority claims, including a disputed IRS tax bill and SEC fraud settlement.

A new company, Newco, will be formed with up to $400 million in junk bonds and other assets. Former employees who held Drexel stock will receive up to a 20% stake; other creditors will own the rest.

Drexel’s remaining assets will be divided between Drexel’s fixed creditors--those who loaned the firm money--and the securities litigants, who claim in lawsuits that they were victimized by Drexel’s illegal activities. Fixed creditors will receive a larger percentage.

* Drexel will pool its claims against third parties, such as Michael Milken and other former employees, with those against the same individuals filed by the FDIC and private litigants.