Regulators said Friday they filed suit seeking more than $500-millionfrom Drexel Burnham Lambert Inc., the parent of Shearson Lehman Hutton Inc. and others over an alleged fraud scheme that led to the failure of a Texas savings institution. The Federal Deposit Insurance Corp. alleges that five former salesmen at Drexel, whose parent filed for bankruptcy this week, and the now-defunct E.F. Hutton & Co., which was absorbed by Shearson, helped put together a scheme to defraud Guaranty Federal Savings and Loan Association of Dallas.
Meanwhile, Drexel fired the bulk of its 5,300 employees Friday and doled out slim severance packages as the Wall Street wonder of the 1980s headed into oblivion.
Those workers were turned loose into a slumping securities industry that already has witnessed tens of thousands of layoffs since the 1987 stock market crash.
The FDIC, which provides deposit insurance for banks and S&Ls, seeks $129.2-million in actual damages and $387.6-million in punitive damages from Drexel. The suit was filed Wednesday in U.S. District Court in Dallas.
A Shearson spokesman disputed the allegations and said the company would seek to have the suit dismissed.
The suit alleges that the sales representatives helped two former chairmen of Guaranty Federal, Paul Sau-Ki Cheng and Simon Edward Heath, divert profits from government securities trading into trusts and corporations controlled by the two.
"The central purpose of the fraud scheme was to divert federally insured deposits to shore up a takeover attempt by Cheng and Heath of U.S. Home Corp., a large publicly traded home building company," the FDIC said.
At the time, Drexel was U.S. Home's investment banker. The suit says personnel from Drexel's Beverly Hills, Calif., office "advised and encouraged" Heath and Cheng to attempt the takeover.
The acquisition failed, resulting in a loss of $68.5-million to Guaranty Federal but profits of $49.6-million to brokers and $11.1-million to trusts controlled by Heath and Cheng, the FDIC said.