NEW YORK — Two government agencies are expected to seek up to $10 billion from Drexel Burnham Lambert Inc. for alleged fraud in junk bond dealings with several savings and loan institutions, sources said today.
The Federal Deposit Insurance Corp. and the Resolution Trust Corp. have until next Thursday to file claims against the collapsed Wall Street firm, which is in Chapter 11 bankruptcy proceedings.
The filings are expected to seek from $5 billion to $10 billion for losses incurred by several major S&Ls from investments in high-yield securities marketed by Drexel, people with knowledge of the agencies' plans said.
The total is expected to reflect a tripling of damages based on allegations of antitrust law violations, people involved in the talks said. The FDIC insures deposits for the nation's savings and loans, while Resolution Trust oversees the federal thrift bailout.
Lawyers for Drexel and investors, ex-clients and government agencies are negotiating over the total compensation to be alloted in Drexel's bankruptcy court reorganization.
About 100 civil securities fraud lawsuits nationwide are outstanding. The claims allege stock manipulation, racketeering, insider trading and numerous other crimes by Drexel and its junk-bond department led by convicted financier Michael Milken.
Litigated separately, they would take 10 years or more to resolve. Instead, attorneys plan to negotiate an estimate of maximum damages Drexel should pay. A figure would have to be approved by U.S. District Judge Milton Pollack and would be included in a reorganization plan to pay Drexel creditors.
"It's a major stumbling block to the plan," Drexel lawyer Alan Miller said. "You have to figure out how much you owe, how high is up. And you have to figure out how to get it done in our lifetime."
Final damage awards will likely be only a fraction of the billions of dollars being sought because of Drexel's limited assets.
The claims include class actions by shareholders of companies that did business with Drexel or whose securities were affected by Drexel deals, individual firms and federal agencies.
The negotiations do not cover 200 arbitration disputes and another 100 lawsuits alleging wrongdoing other than securities fraud, which also must be addressed in the bankruptcy.
Drexel already has agreed to pay $350 million into a civil restitution fund to compensate investors harmed by its actions.
If the civil litigation settlement exceeds $350 million--which is likely--Drexel will be liable for the rest. The litigation automatically came to a halt when Drexel filed for Chapter 11 on Feb. 13.