Columbia Savings & Loan late Wednesday sued former Drexel Burnham Lambert junk bond wizard Michael Milken and nine former associates, alleging that they manipulated and coerced Columbia into becoming the biggest buyer of risky junk bonds among the nation's savings and loans.
The 176-page lawsuit, filed in U.S. District Court in Los Angeles, effectively portrays Columbia as a puppet that Milken manipulated in almost a cult-like way. It alleges that beginning in 1982 the thrift was targeted for an "ongoing effort to indoctrinate Columbia personnel" into believing in the virtues of junk bonds. It also claims that Milken and his associates manipulated the market through a complex web of partnerships, creating an illusion that the market was healthy.
Columbia, which is expected to eventually be seized by regulators because of its losses, did not say in the lawsuit how much it is asking in damages. The thrift maintains that its overall losses on junk bonds underwritten by Drexel total $1.5 billion, and it aims to prove in court how much can be blamed on Milken and his associates.
The lawsuit is especially ironic because the Beverly Hills thrift and its former chief executive, Thomas Spiegel, were once among Milken's closest allies. Columbia once owned more than $4 billion in junk bonds bought largely through Drexel. Spiegel was not named as a defendant in the lawsuit, which also names more than 300 investment partnerships used by Milken and his associates.
An angry statement released on Milken's behalf by a spokesman said Columbia and its attorneys have "invented a revolutionary new legal strategy--having a plaintiff plead insanity."
The statement accused Columbia's "government-approved executives" of trying to tap some of the $400 million in civil restitution that Milken is paying as a result of his guilty plea to six felony counts. The statement accused Columbia executives of "shifting the blame to the most convenient scapegoat on the financial scene--Michael Milken--who has been blamed for every problem facing the U.S. economy except the Iraqi invasion of Kuwait."
The statement further described Columbia as a "fiercely independent financial institution" whose executives often disagreed with Milken. It said Columbia's problems were caused by congressional actions that forced thrifts to devalue their bonds.
A source in the Columbia camp, who asked not to be identified, responded to Milken's statement by saying Milken "doesn't seem to realize important customers are entitled to feel betrayed when they finally uncover a mass manipulation through a web of entities designed solely to avoid detection and line his own pockets."
Milken, who ran Drexel's junk bond operation from offices in Beverly Hills, was sentenced last month to 10 years in prison for six felony securities violations.
Columbia also alleges that improper inducements were provided savings and loans executives to buy bonds, such as valuable securities in companies. As a result, it alleges, Milken and his associates created the illusion that junk bonds were a good investment for Columbia.
The other former Drexel executives listed in the lawsuit are Chief Executive Frederick Joseph; senior executive Edwin Kantor; Milken's brother, Lowell; Peter Ackerman, chief of capital markets; Lorraine Spurge, chief of syndicates; director of research Robert Davidow, and trader Warren Trepp. Also named is Milken's personal lawyer, Richard V. Sandler, Los Angeles accountant Richard A. Bergman and his accounting firm, Bergman, Knox & Green.
None of the defendants could be reached for comment.
The lawsuit is one of a number of civil complaints against Milken. Last month, Columbia filed a claim in Drexel's U.S. Bankruptcy Court case in New York demanding that Drexel reimburse Columbia more than $4.5 billion for alleged fraud. The Federal Deposit Insurance Corp. filed a similar claim against Drexel seeking $6.8 billion in damages, alleging that it manipulated and plundered more than 40 savings and loans that have failed.