THE MAYOR UNDER FIRE : The Finances : ‘Junk Bond’ Deal Put Bradley in Select Company

In a deal that was not available to ordinary investors, Mayor Tom Bradley purchased $100,000 in “junk bonds” through Drexel Burnham Lambert’s high-yield department in Beverly Hills, The Times has learned. The March, 1986, transaction suggests that the mayor had an unusual relationship with the junk bond department headed by Michael Milken.

Bradley apparently lost most of his previously undisclosed investment in Gibraltar Financial Corp. bonds, said two independent sources familiar with the transaction.

But his access to a private placement of the Gibraltar bonds by Milken’s department appears to be inconsistent with the mayor’s recent statement that he was “not aware” of receiving any investment opportunity not available to the general public.

The junk bond department normally dealt only with institutional investors, such as insurance companies, mutual funds and banks. Former Drexel employees said in interviews that the department maintained accounts for only a very select, limited number of individuals, primarily top executives at companies that did business with Drexel and friends and relatives of Milken and employees of the department.

Bradley’s investment in the Gibraltar bonds, technically referred to as senior subordinated debentures, was revealed in records turned over to The Times by the mayor’s office in response to a state Public Records Act request. Two sources familiar with the mayor’s finances said Bradley invested in at least two other previously undisclosed junks bonds issued by Drexel, though it is not known whether the transactions were handled by Milken’s unit.

The discovery that the mayor invested in these three junk bond issues adds to evidence suggesting he made numerous omissions and errors in the annual financial disclosure statements he is required to file with the state under penalty of perjury.

The mayor has refused to elaborate on his ties to Drexel, although he has acknowledged that he has an account with the firm.

Bradley and Milken are acquaintances who have appeared together at Drexel’s annual junk bond conference--informally known as the “Predators’ Ball”--and at a variety of programs benefiting charity and nonprofit organizations. Since 1983, the mayor has received at least $125,000 in campaign contributions from Drexel and its network of employees and associates. Bradley recently played a key role in launching a Capitol Hill lobbying campaign to persuade the Securities and Exchange Commission to drop its demands that Drexel move Milken’s junk bond operation from Beverly Hills to New York.

Walter Zelman, executive director of California Common Cause, said if Bradley received special treatment from Milken’s unit it could, among other things, raise questions about his independence in leading the lobbying effort. “Our general rule of thumb is that political leaders should not receive favored treatment because they are officeholders, especially if that favored treatment is given by someone who may want or need something from them as public officials,” Zelman said.

Milken Indictment

Milken stepped down as head of the hugely profitable junk bond department in March, after he was indicted on federal racketeering and securities fraud charges. He has pleaded innocent to the charges, which are unrelated to dealings with politicians. However, The Times reported last week that the U.S. attorney’s office in Manhattan recently subpoenaed Bradley’s trading records at Drexel as part of an investigation of the firm’s relations with several government and political figures.

The SEC is already reviewing public reports of Bradley’s investment portfolio, and the city attorney’s office is investigating the mayor’s paid relationship with two local financial institutions that had business dealings with the city.

The records obtained by The Times consist of a log of correspondence to the mayor from various Drexel officials. The letters and packages described in the log range from one official in the municipal finance department raising the possibility of new public financing methods to others sending paperweights to the mayor. Several of the 28 entries to Bradley from Drexel are marked “personal and confidential.”

The records show direct communications between the mayor and Milken’s junk bond department, including a letter from an administrative employee in the department, Jillian H. Mendorff. The letter enclosed a form that the mayor needed to sign to authorize the sale of the Gibraltar bonds in January, 1989.

For the junk bond unit’s preferred customers, “the most important thing you get is product (securities) that generally the average retail client does not see,” said one former Drexel executive, who asked not to be named. “The other thing you get in the high-yield department is real good advice. These are the people who have put together the deal. . . . They are aware of the shortcomings or the advantages. That’s the type of advantage you don’t always get from a retail broker.”

Private Placement

Gibraltar Financial officials confirm that its bonds were sold in March, 1986, by Drexel under a private placement, which meant that they weren’t offered to the public. The bonds were available only to clients of the junk bond department and were not registered with the SEC for public trading until more than eight months later.

Such private placements were not available to Drexel’s regular retail customers, said one former Drexel retail broker.

“The only way you could get those private placement bonds was to deal directly with the high-yield bond department,” the broker said. “Nobody in retail is allowed to touch any private placement bonds at all.”

He said that individual investors who did not have an established relationship with the junk bond department were normally turned away if they attempted to contact the department. The broker said such callers were transferred to the retail department.

Steven Anreder, Drexel’s spokesman, refused to discuss the Gibraltar offering. “We never talk about terms of private placements under any circumstances,” Anreder said.

Wall Street traders, however, said the Gibraltar bonds weren’t considered a “hot issue,” meaning that there was not an exceptionally high level of investor interest and that the bonds did not shoot up significantly in value after they began trading publicly.

Comment Refused

It is not clear why Bradley decided to invest in the bonds. The mayor has refused to comment.

Bradley sold the bonds in January after the ailing thrift’s bond ratings had declined for months, said two independent sources familiar with the transaction. The mayor sold his bonds only days before the company disclosed that federal regulators considered the company’s main subsidiary, Gibraltar Savings, “a troubled institution” operating in an “unsafe and unsound condition.”

A securities analyst familiar with the Gibraltar bonds said that, if the mayor sold them in January, he would have received only 20 to 30 cents on the dollar for his original investment. The mayor, therefore, would have lost between $70,000 and $80,000.

Bradley’s purchase of the bonds does not appear to violate any rules or laws, although one SEC source said there may be a question about whether Drexel violated rules concerning private placements in selling to the mayor. The rules, in most cases, limit private placements to “sophisticated investors” who have substantial assets and a high degree of investment savvy.

In addition to the Gibraltar bonds, The Times has learned that Bradley obtained junk bonds of two other companies in 1986 after leveraged buyouts for which Drexel arranged the financing. The companies were BCI Holdings, the holding company created after the buyout of Beatrice Cos., and SCI Holdings, created after the buyout of Storer Communications. In a leveraged buyout, a company’s public shareholders are bought out and the company is taken private, in part with funds raised from high-yield bonds.

In his financial disclosure forms, Bradley failed to list his SCI, BCI and Gibraltar bonds. Instead, he stated that he owned “common stock” in each firm. Sources close to Drexel said Bradley did not hold common stock in either SCI or BCI.

Bradley has publicly reported investing in only one issue of junk bonds--in 1984--when he invested up to $100,000 in Metromedia securities issued by Drexel. The bonds were redeemed at a profit the following year when publisher Rupert Murdoch purchased several of the firm’s television stations.

This story was reported and written by Times staff writers Glenn F. Bunting and Rich Connell in Los Angeles and Scot J. Paltrow in New York.