Drexel Burnham

Lambert
Submitted to Dr. J. L. Gupta

In partial fulfillment of the requirements of the course

Business Ethics and Corporate Governance

Submitted By Group 10

Abhinav Dandona 10PGHR02

Chhavi Gupta 10PGHR13

Kartik Gupta 10PGHR18

Piyushi Sobti 10PGHR33

Shikha Goyal 10PGHR45

Vidhi Verma 10PGHR59

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About Drexel Burnham Lambert
In 1837, Drexel was founded under the name F. M. Drexel, Exchange Broker, in
Philadelphia. In 1871, the firm of Drexel, Morgan and Company was opened in
New York to engage in both commercial banking and investment banking. In
1934, both companies dissolved their partnership. Drexel took on the investment
banking function, while Morgan took commercial banking. In 1971, Drexel merged
with Burnham and Company, a sub-major investment banking firm. In 1976, it
merged with William D. Witter, the small American arm of Belgian-based Groupe
Bruxelles Lambert. The firm was renamed Drexel Burnham Lambert.

DBL’s way of doing business

DBL was more aggressive in its business practices than most. When it entered
the mergers and acquisitions field in the early 1980s, it didn't shy away from
backing hostile takeovers. Its specialty was the "highly confident letter," in which
it promised it could get the necessary financing for a hostile takeover. Although it
had no legal status, Drexel's reputation for making markets for any bonds it
underwrote was such that a "highly confident letter" was as good as cash to many
of the corporate raiders of the 1980s. It is often said that the firm's aggressive
culture led many Drexel employees to stray into unethical, and sometimes illegal,
conduct.

The Scandal
In May 1986, Dennis Levine was charged with insider trading. Levine pleaded
guilty to four felonies, and implicated Ivan Boesky. Boesky promised to provide
information about his dealings with Michael Milken. The Securities and Exchange
Commission initiated an investigation of Drexel in November.

Dennis Levine
In 1985, he moved to Drexel. Levine spent most of his career as a specialist
in mergers and acquisitions. Over the years, Levine built up a network of
professionals at various Wall Street firms who engaged in insider trading. Levine
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placed his trades through an account maintained under an assumed name
at Bahamian subsidiaries of Swiss banks, using pay phones to prevent his calls
from being traced. Levine believed he was safe from detection since the Bahamas
had some of the strictest bank secrecy laws in the world.
As a managing director at Drexel Burnham Lambert, he was charged with insider
trading. Faced with overwhelming evidence, he pleaded guilty to securities fraud,
obstructing justice, tax evasion and an unrelated charge of perjury. He also
agreed to cooperate with the government and revealed the other members of his
insider trading ring. As a result of his cooperation, he was given a lenient
sentence of two years in prison and a $362,000 fine. He also settled an insider
trading suit by the SEC, agreeing to forfeit his illegal profits. He also accepted a
lifetime ban from the securities industry. In 1991, he wrote a book in which he
claimed that his willingness to plunge into insider trading came from not hearing
anything about ethics in his classes at Baruch.

Ivan Boesky
By 1986, Boesky became an arbitrageur who had amassed a fortune of more than
US$200 million by betting on corporate takeovers. The U.S. Securities and
Exchange Commission investigated him for making investments based on tips
received from corporate insiders. These stock acquisitions were sometimes
brazen, with massive purchases occurring only a few days before a corporation
announced a takeover. Although insider trading of this kind was illegal, laws
prohibiting it were rarely enforced until Boesky was prosecuted. Boesky
cooperated with the SEC and informed, including the case against
financier Michael Milken. Boesky received a prison sentence of 3.5 years and
was fined US$100 million. Although he was released after two years, he was
permanently barred from working in securities.

Michael Milken
Milken, influenced by Hickman (1958), found that a low-grade portfolio, if very
large, diversified & held over a long period, was higher yielding than a high-grade
portfolio. He started working for Drexel in 1969. During the 70s’ recession, he
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used Hickman’s advice and his own knack to make money for himself, his traders,
his firm and his investors. In 1973, when he expressed a desire to quit Drexel due
to a low operating capital, he was given a position of $2million as his value to the
firm was already evident. That year, Milken made $2million in profits (100percent
return) for Drexel Burnham. The next year, his capital was doubled. From 1977,
Milken headed Drexel’s High-Yield Bond Department. Drexel became the
undisputed king in this market.
By 1983, he had revolutionized Drexel and to some extent the investment
banking industry by redirecting his department to finance assaults on some of the
nation’s largest and most well-established firms. Milken created the junk bond
market by putting together deals that needed capital, which he supplied in the
form of high-risk bonds. The industry and sometimes Drexel’s New York office
were stunned by the rise of the High-Yield Bond Department and by its aggressive
tactics. It provided a wide range of M&A services for its clients. It advised the
acquiring firm, devised tactics designed to stampede a sale or to deter Mergers
and takeovers.
Despite being a mid-level manager, he gained control of the reward system for
his High-Yield Bond Department. Upper management couldn’t use it to control
him or his department. He allocated the bonuses for his department from the 35
percent returned to him. Drexel couldn’t bring Milken to heel because Milken
controlled a sizeable portion of corporate profits and brought business to other
departments (such as M&A). If Drexel had tried to direct him, Milken could have
taken his knowledge of the market and techniques to another firm. His network of
buyers and issuers would have followed him. Milken was under nearly-constant
scrutiny from the SEC from 1979 onward due to unethical and sometimes illegal
behavior in the high-yield department. The SEC inquiries never got beyond the
investigation phase until 1986, when Ivan Boesky pleaded guilty to securities
fraud as part of a larger insider trading investigation. In March 1989, Milken was
indicted on 98 counts of racketeering and fraud. The indictment accused Milken
of a litany of misconduct, including insider trading, the concealment of the real
owner of a stock, a practice known as stock parking, tax evasion and numerous

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instances of repayment of illicit profits. In April 1990, Milken pleaded guilty to six
counts of securities and tax violations. Three of them involved dealings with Ivan
Boesky to conceal the real owner of a stock. As part of his plea, Milken agreed to
pay $200 million in fines and he agreed to a settlement with the SEC in which he
paid $400 million to investors who had been hurt by his actions. He also accepted
a lifetime ban from any involvement in the securities industry. In total this means
that he paid $1.1 billion for all lawsuits related to his actions while working at
Drexel.

Drexel after the Scandal

The firm's aggressive culture led many employees to stray into unethical, and
sometimes illegal, conduct. In February 1990, it was forced into bankruptcy. Even
before the firm's bankruptcy, Tubby Burnham spun off the firm's funds
management arm as Burnham Financial Group, which currently operates as a
diversified investment company. The rest of Drexel emerged from bankruptcy in
1992 as New Street Capital, a small investment bank with only 20 employees. At
its height, Drexel employed over 10,000 people and was the fifth-largest
investment bank in the United States.

Learning
At Milken's sentencing, the Judge told him, “You were willing to commit only
crimes that were unlikely to be detected.... When a man of your power in the
financial world... repeatedly conspires to violate, and violates, securities and tax
business in order to achieve more power and wealth for himself... a significant
prison term is required.”
We agree because, “Integrity is doing the right thing, even if nobody is watching.”
Also, Milken was in a respectable, envious position. He was looked up to in the
junk bond market. In such a prestigious stature, if someone is a role model or an
inspirational figure, it becomes all the more important for that person to have an
ethical code of conduct, because he/she is being observed and possibly followed.
When an eminent personality pleads guilty to felony, a certain section of the
society tends to lose its faith in the system as a whole!
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