BECG write-up_Group 10 (1)

8/7/2019 BECG write-up_Group 10 (1)

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Drexel Burnham

LambertSubmitted to Dr. J. L. Gupta

In partial fulfillment of the requirements of the course

Business Ethics and Corporate Governance

Submitted By Group 10

Abhinav Dandona10PGHR02

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 ofBelgian-based Groupe

Bruxelles Lambert. The firm was renamed Drexel Burnham Lambert.

DBLs 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 insidertrading. 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 Hickmans 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 Drexels 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

nations 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 Drexels 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 couldnt use it to control

him or his department. He allocated the bonuses for his department from the 35

percent returned to him. Drexel couldnt 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 accepteda 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.

LearningAt 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 thejunk 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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