Houdini Of The Drexel Scandal

In the recently published book Den of Thieves, James Herbert Dahl is described as "the Robert Redford of the bond market." Dahl, now 38, made $100 million during the 1980s by selling junk bonds for Drexel Burnham Lambert Inc. While his weather-beaten good looks are indeed reminiscent of Redford's, a more apt com-parison would be with America's most famous escape artist: James Dahl is the Harry Houdini of the Wall Street insider-trading investigations.

Three years ago, Dahl was a junk-bond salesman in a tight spot. In September, 1988, he got a letter warning of his imminent indictment in the U. S. government's sweeping investigation of Drexel. Instead of indicting Dahl, the Justice Dept. granted him immunity to induce his testimony against his boss, Michael R. Milken. By all accounts, Dahl was the most prolific and highest-paid of Drexel's junk-bond brokers.

Having secured his freedom, Dahl safeguarded his fortune by agreeing last April to cooperate with another arm of the government, the Federal Deposit Insurance Corp., which, on behalf of failed savings and loan associations, is pressing the largest of the multi-billion-dollar class-action fraud claims pending against Milken and his minions. Dahl not only was dropped as a defendant in some 20 civil suits but was indemnified by the FDIC against all Drexel-related civil claims.

In the coming months, Dahl is likely to take the stand in several high-stakes trials in which, for the first time since he cut his deal with the FDIC, he will face top-notch defense lawyers bent on impugning his credibility. Although Dahl cannot be prosecuted for anything he did at Drexel, his immunity does not extend to protecting him from charges of giving false testimony. In court, he must be careful not to contradict his past sworn testimony, which is voluminous and, by BUSINESS WEEK's analysis, appears to contain at least one important contradiction (table).

In a 1987 deposition, Dahl asserted that he had acted on his own in trading Staley Continental Inc. stock for Drexel's house account. "I took it upon myself," he said, adding that he had the authority to trade not just in Staley stock but any security. Yet at Milken's pre-sentencing hearing in 1990 before Judge Kimba M. Wood, Dahl testified that he could not execute any trade without getting approval from Milken or another trader. (In her findings, Judge Wood lauded Dahl as a "credible, earnest witness" before sentencing Milken to 10 years in prison.)

In addition, in interviews conducted with BUSINESS WEEK some of Dahl's colleagues disputed certain aspects of his past testimony--especially his assertion that he never saw Drexel's restricted-securities list, which was circulated daily to prevent employees from inadvertently trading on inside information. "I know for a fact he got the list," says someone who worked closely with Dahl and could well be called as a witness in the upcoming trials.

'SCOREKEEPER.' In a four-hour interview with BW conducted poolside at his home in Jacksonville, Fla., Dahl denied that his past testimony is flawed or inconsistent in any way. He insists that he was not privy to the restricted list and that, as he testified in 1990, he needed the approval of Milken or another trader for every trade he executed. Why, then, didn't he say this in his 1987 Staley deposition? Dahl says that he did so off the record. However, the transcript of his deposition notes no departures from the record during the relevant part of his testimony.

Dahl is likely to make his first court appearance of 1992 as a witness against Thomas Spiegel, the former chief executive of Columbia Savings & Loan Assn., which failed earlier this year. Spiegel, who already is fighting civil suits, is expected by sources close to the case to be indicted soon on fraud charges. Dahl specialized in S&Ls, and Columbia was one of his best customers, along with two other equally infamous thrifts: CenTrust and Lincoln, both now subjects of grand jury investigations. The FDIC included Spiegel as a defendant in its civil suit, which accuses him of accepting bribes and engaging in fraudulent trading with Drexel. Spiegel has denied the charges. After getting immunity, Dahl testified that, acting on instructions from Milken, he had implemented a series of phony, "parking" transactions with Columbia that generated tax losses for the thrift and profits for Drexel. Dahl kept a ledger recording these trades, which spanned five years. "I was just the scorekeeper," he says now.

Dahl is also likely to take the stand against Milken in a civil trial slated to begin next Apr. 1. Last fall, lawyers for bankrupt Drexel filed suit against Milken and his brother, Lowell, seeking the return of the $1.1 billion paid them by the firm from 1985 through 1989. Although the nominal plaintiff is Drexel, the suit really is being pressed by the firm's creditors, chief among them the FDIC. Cravath, Swaine & Moore, the high-powered New York law firm, is handling both Drexel vs. the Milkens and the FDIC's massive suit against Milken. The two suits share the same basic aim: to separate Drexel's richest ex-employees from their wealth.

While Milken declines to respond to Dahl on the record, he has not admitted to any additional wrongdoing since pleading guilty to six felony counts before Judge Wood. In fact, his lawyers have denied all of the charges made in the pending civil suits and recently filed counterclaims in Drexel vs. Milken. Alan Dershowitz, Milken's lead lawyer, has gone to court seeking to invalidate the FDIC's agreement with Dahl on the grounds that the agency, in effect, is buying his testimony.

FRAT BROTHERS. For his part, Dahl has not admitted to involvement in wrongdoing aside from the Columbia S&L "parking" transactions. Early in the government's Drexel probe, he invoked his Fifth Amendment right against self-incrimination before the SEC and the grand jury. Dahl says he had nothing to hide but was urged to take the Fifth by his lawyers. He was represented by Williams & Connolly, which also was advising Milken at the time.

Hiring Williams & Connolly was a mistake, Dahl says now. "It was like waving a big yellow flag in front of the government, saying, 'Look how close I am to Mike,' " he says. Williams & Connolly has denied any conflict of interest in representing both Milken and Dahl, who did not dismiss the firm until after he received a target letter from prosecutors in late 1988. The first thing Dahl did after that was hire someone whom he trusted implicitly -- Tallahassee lawyer Stephen M. Andrews. Dahl and Andrews met as fraternity brothers at Florida State University and have remained good friends ever since.

The target letter sent by the SEC to Dahl made no mention of Columbia, focusing instead on a series of suspicious trades between Drexel and confessed felon Ivan F. Boesky--trades that would form the core of the government's case against Milken. Dahl's initials appeared on most of the trading tickets flagged by prosecutors, suggesting that he had been instrumental in perpetrating the fraud. Dahl had done much business with Boesky, but he insisted then, as now, that he had no involvement in the fraudulent Boesky trades. While Dahl couldn't deny that his initials appeared on the tickets, he maintained the handwriting wasn't his but that of his assistant, who had processed transactions done by Milken. But how to prove it?

Dahl and his lawyers assembled the tickets from all the trades he had done with his 10 largest accounts over a six-month period. On virtually every sale that Dahl had handled himself, the ticket was in his own handwriting. Since the Boesky tickets were not in his handwriting, it followed that Dahl hadn't done them--or so argued Andrews in a voluminous submission to the U. S. Attorney.

NO STIGMA. Apparently, prosecutors were convinced Dahl had played no part in the Boesky trades. In any event, Dahl was not indicted. When he resisted signing a cooperation agreement, the U. S. Attorney obtained a compulsion order, which removed his Fifth Amendment protections while giving him immunity. Meanwhile, the SEC agreed to take no action against Dahl, who retains all his securities licenses. "The SEC gave me a clean bill of health," says Dahl.

Dahl overstates the case considerably. At the time, prosecutors were focused on making an insider-trading case against Drexel on the basis of the Boesky dealings. Whether the government examined Dahl's S&L dealings in any detail before granting him immunity isn't certain. Nor is it clear whether the value of Dahl's testimony justified immunity. The news that Dahl had begun talking to the grand jury persuaded other Drexel employees to do likewise. Yet when Milken was indicted in March, 1989, none of the 98 counts in the government's indictment was based on information supplied by Dahl, according to Den of Thieves.Unlike the typical plea-bargaining witness, say, Dahl obtained immunity without admitting to any wrongdoing. And because he made no agreement with prosecutors, he avoided the stigma attached to being a cooperating witness. It is a point of pride with Dahl that all his subsequent grand jury appearances have been compelled, too.

Nonetheless, last April, Dahl became a cooperating witness when he settled with the FDIC and other civil litigants. Dahl handed over to the FDIC rights to 90% of his interest in dozens of Drexel employee partnerships of indeterminate worth and made what amounted to a downpayment of $5 million. That didn't put much of a dent in his fortune, thought to total about $50 million. 'LOUSY DEAL.' The consensus among Dahl's ex-colleagues--some of whom are now eager to settle with the FDIC themselves--is that he cut himself a sweet deal. But if Dahl is gloating, he is doing it in private. For the record, he blasts his agreement as "a lousy deal. I don't think the FDIC should be entitled to any of my money. I was not an officer or director of Drexel. I was just a salesman."

Dahl is as ambitious a witness as he was a salesman. He not only hopes to be seen as credible but blameless. Aside from the Columbia parking, he admits to no offense, not even to disloyalty. Asked to respond to ex-colleagues who accuse him of betraying Milken, Dahl says: "I feel betrayed by Mike. If he'd exercised better judgment, 11,000 Drexel employees would still have their jobs."

On the other hand, Dahl's agreement with the FDIC doesn't prevent him from denying its basic allegation: that by massively manipulating the junk-bond market, Milken and his inner circle systematically defrauded S&Ls of billions of dollars. "Drexel didn't force these S&Ls to buy bonds," Dahl insists. "The reason why S&Ls lost a lot of money in high-yield bonds was because they were so leveraged and they didn't have the staying power to ride out the down cycle in the market." Milken's lawyers wouldn't have put it any differently.

Dahl, it seems, wants it all: immunity, indemnity, and innocence. As a result, he once again could find himself in a tight spot. He can only go so far--perhaps not far at all--in helping the FDIC make its fraud case without either compromising his protestations of innocence or contradicting past sworn testimony. On the other hand, if the FDIC feels that Dahl is not testifying truthfully or fully, it could seek to abrogate its agreement with him. Either way, the Houdini in Dahl is likely to be tested again in 1992.

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