Southland Firm Files $200-Million Lawsuit Against Drexel, Milken

The investment banking firm of Drexel Burnham Lambert and the head of its “junk bond” operation, Michael M. Milken, have been sued for $200 million by a Santa Monica brokerage that claims it was underpaid commissions on billions of dollars in securities transactions.

The civil lawsuit was filed in Los Angeles Superior Court by JWD Financial, which is operated by Maurice L. Weiss, who formed the company after leaving his job as a broker for New York-based Drexel in 1979.

Among other claims in the lawsuit, Weiss said Milken acknowledged to him in 1980 or 1981 that Milken was “parking” stock for the accounts of Fred Carr, chairman of First Executive Corp., a fast-growing insurance holding company in Beverly Hills and a major purchaser of the high-risk, high-yield investments known as junk bonds.

Parking stock generally refers to the practice of one investor buying securities on behalf of a second investor who wants to remain anonymous. The practice, which sometimes violates securities laws, has become a major focus of the continuing federal investigation into corruption on Wall Street.

Longstanding Dispute

It has been reportedly previously that Drexel, Milken and Carr are under investigation in that wide-ranging inquiry. All have denied any wrongdoing and none has been charged with a violation.

The lawsuit said Weiss was unaware in 1980 and 1981 that parking may have violated the law and still does not know whether any securities were actually parked by Milken.

Steven S. Anreder, a Drexel spokesman, denied the allegations in the JWD lawsuit, saying: “This disagreement with Mr. Weiss goes back several years and had been thoroughly investigated by the firm. His position is groundless.”

A spokesman for Carr said he was out of town and that First Executive would have no comment.

In the suit, Weiss said Carr and his firms had been brokerage clients of his for years. He said he was working at the Stern Frank brokerage when it was acquired by Drexel in 1977 and that he brought the Carr accounts with him to Drexel.

When Weiss left Drexel to form his own company in 1979, the Carr accounts remained with Drexel. However, the suit said, Weiss reached an agreement under which Drexel would continue to pay him a portion of the commissions on future transactions for the Carr accounts.

The suit said the agreement was struck with Milken, who was eager to expand the firm’s business with Carr through the junk bond department that Milken runs out of Drexel’s Beverly Hills office.

However, Drexel has paid Weiss only $300,000 since 1980 despite Drexel’s trading of $30 billion worth of securities, mostly bonds, for Carr’s First Executive and related accounts, according to the suit.

No precise figure is placed on the amount that Weiss claims he is owed but the suit said his share should have been substantially more. The suit seeks damages of $100 million and punitive damages of another $100 million.

Fraud Charged

After repeated attempts to learn how much he was owed by Drexel in late 1985, the suit said, Weiss and JWD began a yearlong investigation into Drexel’s ties with the Carr accounts. The suit said the inquiry discovered that Drexel and Milken “intentionally and fraudulently concealed” the amount of compensation the firm had received from Carr and his affiliates.

The investigation also uncovered a complex financial arrangement among First Executive, Drexel and Milken that included Milken and 22 other Drexel junk bond employees buying a large chunk of First Executive stock, the suit said.

The alleged reference to stock parking arose in 1980 or 1981 when, the suit said, Weiss asked Milken about some commissions he felt he was owed on securities bought for the Carr accounts.

“When Weiss inquired about these transactions, Milken stated that the securities had been ‘parked’ rather than sold, and therefore JWD was not entitled to any commissions,” the suit said.