Congressional investigators are portraying Drexel Burnham Lambert Inc. as a greedy firm that elbowed its own clients aside so top employees could profit on hot new issues of high-yield, high-risk "junk" bonds.
But Drexel chief executive Frederick H. Joseph, in 61/2 hours of testimony Thursday before the investigations subcommittee of the House Energy and Commerce Committee, steadfastly defended the firm's practice of permitting employees to form private partnerships to compete with other investors for bonds underwritten by Drexel.Under questioning from Rep. John Dingell, D-Mich., chairman of both the committee and subcommittee, Joseph acknowledged "the perception of a conflict is troublesome."
Still, he said Drexel not only condones the partnerships but believes they benefit corporate bond issuers by making more money available to buy the bonds.
However, documents released by the subcommittee showed that on several occasions Drexel employees purchased bonds from much-sought issues for their own accounts at the same time the firm's public customers were being turned away.
In the case of Texstyrene Corp., a Phoenix, Ariz., manufacturer of styrofoam products, partnerships owned by Drexel employees purchased $12 million of an initial $50 million offering in February 1986, according to the subcommittee.
Public customers were allowed to buy only some of the bonds they wanted, and within 17 days Drexel employees made more than $900,000 profits by selling the bonds back to Drexel, subcommittee documents indicate.
In another case, the subcommittee said, Drexel employees purchased $235 million of a $2.5 billion issue in the April 1986 leveraged buyout of Beatrice Cos., a diversified food and consumer products company.
Again, other customers were denied the chance to purchase as many bonds as they had initially ordered. And less than three months later, the employees made a $2.8 million profit by selling $61.4 million of the bonds, the subcommittee said.
"Any way you slice it, the people on the outside aren't getting the same deal as the people on the inside," said Rep. Ron Wyden, D-Ore.
Rep. Dennis E. Eckart, D-Ohio, said Drexel, in effect, "elbowed aside" its own customers and "cut to the head of the line." He said a telephone survey of five top competitors of Drexel, whom he declined to identify, showed that none would permit similar practices.
Joseph said it is quite common that investors will want to buy more bonds than are available and said Drexel used the same criteria for deciding how many bonds employees could purchase as it did for its other customers.
He said purchases by Drexel employees are closely monitored for propriety by the firm's compliance department.
However, Rep. Norman Lent of New York, ranking Republican on the committee, said the purchases for "insider accounts" appear to violate the regulations of the Securities and Exchange Commission and the National Association of Securities Dealers.
Joseph argued that the rules applied only to sales of stock because bond prices are not subject to manipulation in the same way prices of new stock issues are.
Lent said high-quality, investment-grade bonds are exempt from the rules, but not the risky bonds of the type Drexel issued.