Creditors of Drexel Burnham Lambert Group said Wednesday that they are considering legal proceedings to try to recover as much as $350-million paid out to executives of the company's brokerage unit. The cash payments had been paid to the executives since December, but a large portion of them were made as recently as three weeks before the Feb. 13 bankruptcy filing.
One of the main options that Drexel's creditors are contemplating is an attempt to force the brokerage unit into bankruptcy proceedings. So far, only the parent, Drexel Burnham Lambert Group, has filed. It was the brokerage unit that paid the bonuses.
By forcing the brokerage into involuntary bankruptcy proceedings, creditors open the possibility of having a judge reverse major financial transactions made by the company as long as 90 days before a bankruptcy filing. That could include payment of the bonuses, as well as Drexel's rapid sale of much of the company's portfolio of securities. Drexel said Tuesday that it had liquidated 82 percent of its inventory during the past week.
The swift selloff of securities has raised questions among creditors about whether Drexel has received the best possible price. But creditors said Wednesday that they were most immediately concerned about the payment of bonuses.
"We were quite surprised to hear that $350-million in bonuses were paid out within a matter of weeks of the company going bankrupt, for want of approximately the same amount of credit," said William G. Schopf, general counsel for First City Bancorporation of Texas, Drexel's sixth-largest creditor.
Drexel's parent company filed for bankruptcy protection after it failed to obtain bank loans to carry it through a liquidity crisis. The amount Drexel was seeking in loans was never officially disclosed but reportedly was at least $300-million. Since the filing, Drexel has said the brokerage will be closed, and a majority of employees have already been dismissed.
In a separate development, Rep. Edward Markey, D-Mass., chairman of the House telecommunications and finance subcommittee, said Wednesday that his panel will look into the payment of the bonuses.
The subcommittee some time ago held hearings on Drexel and the junk bond industry.
The size and timing of the bonuses, some of which were said to exceed $20 million, raise the question of whether Drexel's management understood how badly the firm's financial condition was deteriorating.
Steven Anreder, Drexel's spokesman, said there was nothing unusual about the bonus payments. He said that the company was obliged to pay them under the employment arrangements Drexel had with its executives. "It was all in line with the industry norm and industry practice," Anreder said.
Participants in a conference call made by Drexel chief Frederick Joseph said he told them the firm had made a commitment to some top executives early in 1989 that they would receive at least 75 percent of the bonus they had received in 1988.
The promise of bonuses came at a difficult time for Drexel.
In late December 1988, Drexel agreed to plead guilty to six felony charges and to pay $650-million to the federal government as part of the settlement.
As the specifics of the settlement agreement leaked out, many executives worried that the firm would not be able to pay them as handsomely as it once had.
"There were a lot of guarantees," said one person involved in the payments. "But the firm had to balance its interest in keeping the good people, many of whom were already getting other offers."
Anreder, the spokesman, said that the company strongly opposed putting the brokerage unit into bankruptcy proceedings and said the move "would cost creditors a fortune." He said that the unit isn't insolvent and is able to pay all bills. Anreder said a bankruptcy filing might destroy the value remaining in the unit.
Sources said not all of the bonus money was paid out in cash. A small percentage, probably less than 20 percent, was in the form of Drexel preferred stock that some high-earning executives were required to take as part of their bonuses in lieu of cash. That stock may now be worthless.
Joseph was said to have received his entire bonus for 1989 in preferred stock. It could not be learned, however, how much stock he received.