This Drexel Treasure Trove May Hold Fool's GoldAnthony Bianco
From his earliest days on Wall Street, Mike Milken and his minions invested in junk bonds through an interlocking network of private partnerships. By doing so, Milken added greatly to his net worth while binding his employees tightly to one another and to him.
But the Federal Deposit Insurance Corp. alleges, in addition to these legitimate functions, that Milken used the partnerships as part of a scheme to rig the junk-bond market. Whether the FDIC can prove its allegation is an open question. Even if it can, though, the agency may come away disappointed with the damages it collects from the partnerships. Sources close to Milken suggest that the partnership network is no longer a treasure trove.
The Drexel Burnham Lambert network burgeoned in the mid-1980s as the firm began financing leveraged buyouts. For almost every LBO it financed, Drexel set up at least one partnership to invest in warrants issued by its client company. Many of these LBO partnerships--including SCI Capital and BCP Capital--have proved phenomenally lucrative.
Even the most basic information about the partnerships remains scarce. Indeed, Drexel itself, in mid-1990, sued to obtain the records kept by Bergman, Knox & Green, the partnerships' accountants, whose offices are in Beverly Hills, Calif., Milken's base. In court, Drexel said that the LBO interests of its Beverly Hills employees "were held in a labyrinth of investment vehicles . . . which obscure the identities of the beneficial owners of the equity and the actual holdings of the partnerships, as well as the circumstances under which the securities were acquired."
SUSPECT DATA. In 1988, the House subcommittee on investigations and oversight held inconclusive hearings examining the activities of the Drexel partnerships. At the time, the General Accounting Office had uncovered 35 Drexel partnerships. By the time the GAO completed its probe last December, it had identified 517. According to the GAO, the 25 largest partnerships alone distributed $2 billion from 1981 to 1988, with $1 billion going to Mike Milken.
In compiling these data, however, the GAO relied heavily on incomplete information supplied by Drexel itself. In February, the House panel authorized new subpoenas as part of a second-round probe of the partnerships. Milken is virtually certain to be served, as is Bergman Knox, which still hasn't turned over its records to Drexel.
In hopes of "demystifying" the partnerships, Milken advisers recently made available to BUSINESS WEEK previously undisclosed information. They say that the value of the assets in the partnership network peaked at about $500 million in the mid-1980s and has declined sharply since. Although 415 partnerships were named as defendants in the FDIC suit, sources say that 75 were never activated or had invested in something other than securities--usually real estate. More than 35 were duplicates--that is, new names for old partnerships. Some 87 have no connection with Milken and may not even exist. "We don't know what they are," says one insider, "and I'm sure the FDIC doesn't either."
Milken sources say that Bergman Knox is resisting turning over its records not because it has anything to hide but because the demands placed on it are overly broad and duplicative. While insiders concede that Bergman Knox will eventually surrender the documents, they predict an anticlimax. Says one: "People are going to be very disappointed."
THE BIGGEST PAYOUTS FROM DREXEL PARTNERSHIPS Partnership Distributions to partners 1981-88 Millions of dollars OTTER CREEK ASSOCIATES $437 SCI CAPITAL ASSOCIATES 271 BCP CAPITAL PARTNERS 204 CHAMPLAIN ASSOCIATES 96 WESTHAM CAPITAL GROUP 74 INT'L CONSOLIDATED ASSOCIATES 69 BMA LIMITED PARTNERSHIP 63 RALEIGH INVESTMENT MGMT. 63 WHILSHIRE FIRST ASSOCIATES 60 WHITEHALL FINANCIAL ASSOCIATES 52 DATA: GENERAL ACCOUNTING OFFICE ESTIMATES