History of Milken-Hurwitz relationship part III

Subsequent To The PL Takeover

January 1986. Milken & Boesky add PLC transactions to “arrangement” reconciliation list

Jan. 10 Maxxam owned 64.7% of PL. Maxxam appraisal for depreciated tax purposes set the value of PLC at $2.1 billion with PALCO Industries at $210 million, misc other at $169 million

Jan. 22 Notice of special PL stockholders meeting and proxy statement (including Salomon’s report) sent to stockholders

Feb. Milken says, “First Executive & Columbia are successful because they flaunt conventional practices”. He praised them for using “different investment techniques” (271) at the Predators Ball?

Feb. 12 Fuqua buys Georgia Fed Bank FSB for $225mm cash from JB sale

Feb. 12 Schwarzer denies injunction in Murphy v.Hurwitz “a difference in business philosophy, no evidence to support Murphy’s claims”

Feb. 25 Special meeting of shareholders to approve merger. Maxxam/PLC merger approved by stockholders

After February 25, 1986, with the merger vote behind them, Hurwitz and Maxxam began planning the sale of PALCO Industries. Irving Trust, with $300mm invested in Maxxam in bank loans lead the financial analysis and recommended organizational changes leading to the planned but unconsummated sale of PALCO to a group made up of Maxxam, TSG and Milken favorite, KinderKare. KinderKare’s CEO Richard Grassgreen is now a confessed felon for his dealings with Milken.

Riklis says, “Milken must create monsters or his business stops” (142)

Clients of Salomon Bros. now with Drexel: Northwest Industries, Uniroyal, National Can, TWA, Beatrice, Pacific Lumber

Mar. Fuqua receives $34mm from sale of Triton stk and $11mm profit

In March, following the announcement of an LBO led by a management group from Alimito Co, Maxxam in a partnership with Bear Stearns made a tender offer for Alimito Co. Drexel followed with its own offer through Ventana Electric Co. In 1987, it was learned through a public release by the Dingle Committee of the NYSE investigation into the PL takeover that the Alimito takeover and Hurwitz’ role had been the subject of investigation in what is known as the ” Yuppie 5″ insider trading case. The Yuppie Five case eventually resulted in a prosecution in a related case which included a conviction of a Drexel employee.

Mar. Maxxam Associates sold Amsted for $11.2 million gain; MPI sold its 4,372,700 shares of UNC for a pretax gain of $9.8 million. MPI received $50.3 million in cash and a warrant for 3,500,00 shares @ $12.50 per share after 1988.

Mar. Milken and Boesky falsely report $5.3 million reconciliation payment from Drexel to Boesky to hide its true purpose. Milken raised $660 million for Boesky, the total for ’85 to ’86 is $800 million. USAT bought $10mm junk bonds through Drexel in IFB Co., LP

Ivan Boesky, so helpful in supporting Hurwitz in the PL takeover at Milken’s order, shortly afterward he and Milken do two pieces of business. First, Drexel pays Boesky $5.3 million to even their accounts on the secret arrangement. The payment covers a number of deals including $1.25 million for the PL stock and an additional sum for CenTrust. Because of this transaction, Hurwitz would later claim to be Milken’s and Boesky’s $60 million victim, but while Hurwitz was Chairman of the UFG Board in March 1986, UFG-USAT purchased a $10 million note in I F Boesky, Co, Boesky’s billion-dollar arbitrage fund. UFG-USAT joined fewer than 10 other S&L’s along with the others in Milken’s network in purchasing notes in Boesky’s Drexel underwritten issuance in IFB Co.

TSG and Boesky

In March 1986, Boesky was long on Revco. TSG’s wholly owned subsidiary Pantherhouse was a limited partner in IFB Co with USAT a bondholder in IFB Co.

On March 31, 1986 TSG stockholdings included the Drexel related issues
Target Stores
Beatrice also held by Maxxam and Boesky
TSG also held
Union Carbide also held by Maxxam and Boesky
Jack Eckerd also held by Maxxam and Boesky
General Oriental also held by Maxxam and Boesky
Shamrock also held by Boesky
Revco also held by Maxxam and Boesky
Note that trading in Union Carbide by unnamed individuals was the subject of an SEC inside trading investigation.


UFG forms United Republic Reinsurance Corp

Apr. In Feb. & Apr. Maxxam sells 3,700,000 shs of TSG

In April 1986, the FHLBB Dallas determined UFG-USAT to be negative $14.4 million in regulatory net worth for the last quarter.

Apr. Market hits 2-year high

Apr. 03Jefferies letter to NASD re Pacific Lumber trades – “no agreements with Maxxam”, “position sold to Maxxam Group and to Maxxam Properties.”

Apr. 08 Drexel pays Boesky $5.3 million fee.

In May 1986, the Houstonian/Livingwell, an affiliate of UFG-USAT issued $52 million in bonds through Drexel. Drexel partnership, Pacific Asset Holdings became the buyer of this issue and later took a controlling interest in Livingwell. Livingwell entered bankruptcy soon thereafter.

Apr. 09 Ronald A. Alghini is named co-head of Dillion Read & Co.’s, equity trading operation in Los Angeles.

May 10 Buffington grants demurrer in Slack

May 12 SEC v. Dennis Levine of Drexel filed. Levine arrested.

Jun. Fries v Carpenter ruling: “appraisal sole remedy”

Jun. Fries filed in Fed Crt

Jun. Levine consent judgment guilty: securities fraud, perjury, tax fraud

In June, Drexel underwrote Maxxam-PL Bridge Notes for $480 million to replace those issued in November 1985.

Jun. 30 FHLBB of Dallas determines USAT to be $14.4mm below regulatory net worth for last quarter???

Jul. Slack general release

By mid 1986, Drexel had restructured Maxxam’s debt. Drexel sold $480 million in debt for Maxxam, the Bridge Notes, in June 1986 and Drexel underwrote $575 million for PL, the Reset Notes. The Pacific Lumber issues were $260 million 12% Series A Senior Notes (July 1, 1996); $355.472 million 12.2% Series B Senior Notes (July 1, 1996); $75 million 12.5% Senior Subordinate Debentures

Drexel earned $48 million in fees ($46 million from Maxxam) from the PL takeover during last year and a half. This was the third stage of Drexel junk bond issues for the takeover of PL. The first was building the blind pool for Maxxam and MCOH in the spring and summer of 1985. The second was the sale in November to fund the tender offer and the third, was a two step offerring, the Bridge Notes and the Reset Notes to replace the unregistered securities with a new issue under Section 3(a)9 of the Securities Act of 1933???.

Jul. 13 Internal Drexel Memo (P24B) lists entitled Maxxam incl. 38 who are re: commitment fee. Said to include:
Charles Keating of Lincoln S&L
Angel Cortina & David Paul of Centrust
Paul Cheng of Guaranty Federal
Also another list with
Marvin Davis of Davis Oil
Martin Davis of Gulf & Western Oil

Jul. 23Maxxam Discretionary Account opens with Jefferies & Co, but never completes the paperwork, so this account is probably closed on 8/27/86.

Aug. 08 MAC-NOYE v. MCO filed; alleges fraud at Lake Havasu (RICO)

Sep. 23Drexel interoffice memo re: MCOH-Maxxam mergers; Given the realted party nature of this transaction as well as the fact [it is]…fashion(ed) to avoid appraisal rights, litigation is expected.

Sep. 30USAT holds $504mm in Corp. Sec’s & other investment Securities.

Oct. Thompson v. Elam filed

Oct. SEC confidential memo reveals Jefferies connection to PL takeover; made public in Oct. 1987 when subpoenaed by Dingle Committee

Oct. 22Thompson AMENDED

MCOH-Maxxam merger proposed, Drexel advises MCOH in the MCO-Maxxam merger and in an obvious conflict of interest, Drexel represented Maxxam in the sale of Palco.

TSG and Palco

In November 1986, Maxxam,TSG and Kindercare planned a joint acquisition of Victor & Palco Ind, two divisions of Pacific Lumber.

On November 26, 1986, ITC approved financing for Palco Industries sale.

On Jan 28, 1987, a proposal was made for the purchase of Palco Industries by TSG(50%), Kindercare(25%) and MCOH(25%)

On March 13, 1987, an ITC internal memo sought a buyer for Palco Industries and stated that the proposal to sell Palco to TSG was abandoned.

Nov. Maxxam, TSG, Kinder-Care Plan never carried out.


Nov. Drexel underwrites sale of $135 million in Auction Market Preferred for USAT Finance II and USAT Finance III.

Nov. 14 Ivan Boesky arrested. SEC settles Boesky civil suit with guilty plea to insider trading and $100,000,000 fine

Nov. 20 Jefferies & Co. emerges as important focus in investigation of illegal trading; firm has often acted as catalyst in takeover attempts.

Nov. 20 Michael Singer, formerly of Jefferies & Co. Mergers and Acquisitions, subpoenaed regarding the Boesky scandal, and resigns his job at Salomon Bros. SEC intensifying its scrutiny of Jefferies and Boesky ties.

Nov. 21 Jefferies & Co. receives federal subpoenas in Boesky investigation

Nov. 21 Article on Jefferies & Co. under B.L. Jefferies leadership; traders say company may have nation’s most detailed computerized data banks of trading patterns among those professional investors who often are decisive in takeover battles; Government investigators have subpoenaed Jefferies.

In November, Drexel underwrote $135 million in Pf Stock for UFG-USAT subs USAT Finance I and USAT Finance II.

In December, Drexel underwrote $200 million in Pf Stock and $775 million in Collateralized Mortgage Obligations for UFG-USAT subs.

A USAT sub, USAT Finance II, Inc. directors are Gross, Crow, Berner, Wms., Wolfe & Lario Marini (Also, a director of Centrust Capital with David Paul, Wm. McIlvain of Far West S&L, W.C. Barry & Angel Cortina, Jr. Centrust is part of Milken’s Daisy Chain of Lincoln- CenTrust-Imperial-Western (DA)-San Jacinto).

Dec. 08 Confidential NYSE memo to `SEC re Pacific Lumber’ insider trading, suggests further investigation of Jefferies purchases. The memo revealed Jefferies connection to PL takeover when it was made public in October, 1987 when subpoenaed by Dingell’s Committee.

December 19 Of the $120-$125 billion in existing junk bonds, thrifts own about $10 billion. According to FHLBB the 3,100 Federally insured S&L’s held $6.6 billion in junk bonds; 6/10’s of 1% of all the S&L’s total assets of $1.124 trillion. Only 130 S&L’s held Junk Bonds, 10 held 85%. Those cited were as follows:
CenTrust SB held $500-$600 million in junk bonds or 9% of assets.
Lincoln S&L had $264.1 million or 6.8% of assets.
Gilbraltar Financial, $550 million or 4.8% of assets.
United Savings Association of Texas had $549.6 million or 8.6% of assets.
Coast S&L had $250-$300 million or 3% of assets
Columbia S&L had $2.33 billion or 28% of its assets
Imperial Corp. of America had $1 billion, 10.6% of assets.

UFG from December 1986-May 1987 buys 6.28%-7.24% of TSG.

During 1986

Drexel owned 9.7% of UFG.

UFG-USAT bought $688 million in Drexel issued bonds. Drexel was the sole underwriter of 40% of USAT junk bond purchases. UFG-USAT ranked fourth amongst S&L’s in junk bond holdings as a percent of total assets behind Columbia, Imperial and Centrust. As to dollar amounts, UFG-USAT was tied for third with Centrust behind Columbia and Imperial. On December 31 USAT holds $549.5mm in junk bonds. 97% its investment securities. USAT bought $3,173,284,000 in investment securities, earning $179,761,000.

Drexel’s Mortgage-backed Securities dept. ranked in top 5. USAT purchased $251 million in Drexel mortgage backed securities. USAT bought $6,474,199,000 in mortgage backed securities & earning $74,988,000.
Finance subs of UFG: USAT Finance & USAT Finance, Inc. & USAT Mortgage Securities, Inc. raised $200 million and $775 million in Preferred stock and CMO sales respectively. These may have all been through Drexel.
USAT holds $657,800,000 in brokered CD’s and $804,277,000 in negotiated CD’s.
Sale of WRI yielded $25.4mm in gains
USAT booked a $118mm loss for 1986


January, 1987, Gerald Williams resigned as USAT president

Maxxam holds 7.1% Triton

Hurwitz sued by Maxxam shareholder re: merger of Maxxam/MCOH for fraud, deceit and misrepresentation; Hurwitz pays $2 million in an out of court settlement and rewrites merger agreement.

Horizon borrowed $3 million from MCOH. Horizon was then threatened with delisting by NYSE for not informing the shareholders of the loan.
Feb. 02 “Hurwitz is a dealmaker not a corporate manager…he’ll never build an organization for the future!” (a former Hurwitz Lt. in Business Week)

Freeman, Wigton, Tabor arrested

Action filed against USAT seeking `recission’.(Allison & TE Petrolium v USAT) (295 JDC Harris Co.)

Mar. UFG underwent a major effort to sell off its joint ventures

March 2 Jefferies & Co. cooperated in an SEC investigation into the roles of Drexel Burnham Lambert and Jefferies & Co. in a takeover bid for TRE Corp. by Burt Sugarman; and a related role by Steinberg’s Reliance Group.

SEC questioned Jefferies & Co.’s method of accounting for a mystery settlement that was a $5 million loss. The loss was split between Boyd Jefferies personally ($3.8 million) and Jefferies & Co. ($1.2 million) in order to avoid litigation. It involved stock; Jefferies was the only person who worked on the transaction, and the settlement occurred prior to the November 14, 1986 Boesky announcement. (Fireman’s Fund probably mystery transaction per USA Today March 23, 1987.)

Mar. 20 Jefferies admitted he stretched some Wall Street rules too far and said he will plead guilty to two Federal Securities laws and resign; count related to Boesky; agreed to an order barring him from the security’s business for five years; Jefferies & Co. named Frank Baxter as head.

Mar. 20 MCOH owned 45.7% Horizon Corp.

Mar. 21 SEC subpoenaed American Express, Shearson Lehman, and Salomon Bros. in an inquiry into illegal stock manipulation in 1986 involving Jefferies; subpoenas involved underwriting of shares in Fireman’s Fund; also involved Salim Lewis, a trader.

Mar. 23 Baxter will have task of cleaning up his firm’s image, growth and keeping up close relationships with large institution investors created by Jefferies. Analysts gave Baxter high marks as manager.

Mar. 23 Jefferies & Co. when it settled with the Government, agreed to an injunction prohibiting it from future securities law violations, and to increasing internal controls to comply with federal laws.

Mar. 24 The SEC dropped its accounting dispute with Jefferies Group after Jefferies pled guilty. Baxter said the SEC decision was unrelated to the Jefferies’ plea.

Mar. 26 Jefferies cooperated with authorities when assured of lenient charges in exchange for making investigators aware of stock manipulation.

Apr. An action alleging violation of fiduciary responsibilities, breach of contract, interference in business, etc. was filed against USAT. (Kingsburst Ltd. v. USAT) 215 JDC Harris Co, Tx.

Apr. 03 Employees of Jefferies were protected by his plea agreement.

Apr. 16 Jefferies plead guilty to felony stock fraud. Jefferies plead guilty to conspiracy with Boeskey to defraud. Jefferies signed guilty pleas including those for stock parking, false invoices, misrepresentations.

Apr. 17 Judge Lasker accepted Jefferies guilty plea. One count falsify records to conceal illegal stock parking with a firm controlled by Boesky.

Apr. 23 Boesky plead guilty to conspiracy to defraud

May A sub of UFG purchased 6.28-7.24% TSG over the last 6 months

May 21 TBK Partners & Tweedy Browne, Inc. acquired 5.5% of Jefferies Group.

May 27 Maxxam properties account at Jefferies & Co. changed its address from New York to “Maxxam Properties, Inc.
Attn: James V. Iaco
10880 Wilshire Blvd., Suite 1600
Los Angeles, CA 90024”

This is also MCO Holding’s address. The letter making the address change is from MCO Holdings to Jefferies & Co., dated 5/27/87, signed by Delona Bowlds, Senior Accountant, MCO Holdings.

In May 1987, prior to the action date on Series C Pf Stock, UFG-USAT replaced Series C with Series D thus avoiding the planned conversion to common and thus avoiding the undisputed control of UFG-USAT by FDC-MCOH with the implications of networth maintenance.

Jun. 11 Jefferies & Co. executives Herbert Denton and brother Robert L. Denton and Michael Katz discuss their success in forming M&A Department for Jefferies.

Jul. L. Connell, ex-Chairman, CEO of Commodore S&L during its bailout, was hired as President of USAT. This was caused by the FHLBB insisting upon new management at USAT.1988?

Jul. 17 Jefferies Group reported a 56.8% drop in net income in 2nd quarter. Their loss was $1.6 million compared to $3.7 million in the same quarter of 1986. Revenues dropped.

Jul. 22 Management changes at Jefferies & Co. using bonuses, title changes, etc. was seen to increase employee loyalty after Jefferies departure.

Boyd Jefferies is in Aspen, Colorado, overseeing a golf program for 100 children ages 7 to 17.

Aug. 18 Maxxam sold PALCO Industries, for $320 million with Drexel as its advisor.

Sep. UFG sold 14 branches to Guarentee Fed S&L. USAT transferred deposits & required a participation interest in another project. USAT issued a note for $287 million.

Sep. USAT owned $550 million in junk bonds – 97% of its debt securities

Sep. 03 ANAC Holdings Corp. bought out REVCO. General Partners in ANAC incl. DS Partners LP with 36.2% interest. DS Partners is a sub of TSG

REVCO defaults by mid-1988. Republic Bank of Dallas was involved in REVCO LBO as was Kramer-Levin.

Sep. 30 Bank Board revealed nation-wide thrift losses of $1.6 billion in the 2nd Quarter of 1987, the largest in 4 years. In the 1st Quarter of 1987 the industry had a net income of $100 million while Texas S&L’s lost $1.1 billion. 281 federally insured TX S&L’s lost $1.67 billion in the 2nd Quarter with only 85 units showing a profit totaling $43 million.

USAT was determined to be insolvent and was told to restrict its risk investments. Art Leiser was involved in this decision. USAT failed to meet its minimum regulation capital requirement as set by the FHLBB. USAT failed by at least $45.6 million. In November the FHLBB Dallas began an examination of USAT.

Oct. 2 Buffington stays Fries

Oct. Fries v. Hurwitz filed

Oct. Fries v. Jefferies filed

Oct. 5 U.S. House of Representatives hearing on Pacific Lumber takeover

Oct. 5 Dingell letter released showing Jefferies role in PL takeover

Oct. 6 Hurwitz denies illegality to Dingle Committee

Oct. Hurwitz, at Dingell p. 116, to be chairman of UFG. Ron Huebsch, FDC’s arbitrageur holds accounts for Maxxam, MCOH, MPI, PLC and USAT. UFG had a $500 million arbitrage account per FHLBB report (Dingell p. 118), Hurwitz claims $150-$200 million. Drexel owns 6% of UFG (Dingell p. 120) Hurwitz claims 6.3% (Dingell p. 122).

Oct. 05 Dingell reveals TSG in four NYSE investigations within last 2 years, Houston Natural, Merabank (Phoenix S&L) and Hoover Universal (where TSG, Rosen and Kassan bought on same day) all were preannouncement buys as was TSG buys of PLC in Sept. ’85

Oct. 13 Hurwitz settled litigation with Shamrock Associates, an investment partnership based in Far Hills, N.J. and boosted its stake in Horizon, a real estate development concern based in Fountain Hills, AZ

Oct. 19 Stock market crash, drops 508 points.

Oct. 26 Clore negotiating sale of his 37.6% stake in KaiserTech

Oct. 31 Jefferies Group, house that pioneered round-the-Clock trading, anticipates $5-$10 million loss for October due to stock market plunge.

Nov. 16 Maxxam Properties purchased the Zero (2007) from Clarendon Ins. Co. of Bermuda 2 days before Hurwitz is contracted to purchase the $8.1 million note. Maxxam gives Hurwitz a put-call agreement for the zero to replace the one he had with Clarendon.

Nov. 17 Jefferies & Co.’s counsel Juliana Otis sent Jefferies’ documents to Ellen Ross, SEC Enforcement.

Dec. 18 Boesky sentenced to 3-year term

Dec. 31 USAT failed again to meet minimum capital requirements for 2nd quarter in succession.

During 1987

Connally became a director of Coastal Corp.
Drexel underwrote 24% of USAT junk bonds purchased this year (through
Sept. ’88). USAT bought $321 million in Drexel junk bonds during 1987.
Drexel was the counterpart for $788 million in mortgage backed securities purchased by USAT
USAT booked a $118mm loss???


Mar 1988 USAT was determined to be insolvent by FHLBB. UFG stock became worthless. UFG agreed to infuse sufficient capital into USAT so as to meet its minimum regulatory capital requirements set by FHLBB. Hurwitz resigned from UFG BOD – “his time is better spent elsewhere”.

Mar. 1 Maxxam agreed to buy from Alan Clore stock and options on Pf. Kaiser for $190 million for 6.2mm shs & 8.2mm voting convertible Pf shares.

Hurwitz bought 27% of KaiserTech stock. Hurwitz was negotiating with Jefferies for 2.8 million more shares that Clore had contracted to buy from Jefferies. Jefferies had recorded $9.7 million on loss from the default by Clore. Clore’s order for Kaiser stock had come in October 1987 before the market crash.

March 2 Jefferies & Co. to sell 1.4 million shares of KaiserTech Stock to Maxxam Group, Inc. for $16.8 million.

March 4 KaiserTech goes to court against its chairman Alan Clore, seeking resignation for breach of contract.

March 9 Maxxam was negotiating the purchase of 1.4 million shares from Jamie Securities and two others.

March 11 Maxxam sues in Delaware to end standstill agreement.

March 24 Boesky began serving his sentence. He was to serve just over 2 years.

April 5 MCOH owned 53% MCOR. MCOR was in default on its bank debt.

April 20 Net earnings of Jefferies Group rose 30% to $4.7 million from $3.6 million.

May 6 Jefferies Group announced first-ever quarterly dividend. Boyd Jefferies had always opposed dividends, but now said as a major shareholder, he could “use the money”. Jefferies appeared at a shareholder meeting looking tanned and fit. Jefferies was the company’s third largest shareholder, with a 10% stake. His stock was held in a voting trust.

Baxter announced Jefferies’ employees were to own 30% of company through an ESOP.

May 13 Jefferies Group received an unsolicited takeover inquiry from an unidentified third party and adopted a poison pill defense measure.

May 18 MPI and Hurwitz amend their put-call agreement.

May 20 MCOH merged Maxxam into a wholly owned subsidiary. Now named Maxxam, Inc. The Maxxam-MCOH merger created $45 million, 16% Senior Reset Notes (May 20, 2000). Underwriters: Drexel and Paine Weber. Maxxam’s bonds were downgraded because management “upstreams cash”.

May 24 KaiserTech agreed to be acquired by Maxxam for $19/share or $872 million.

May 29 Hurwitz’ stake in Maxxam, Inc. listed at $122 million.

Jun. 15 Maxxam bought 8 million shares of Kaiser for $120 million from Clore.

Jun. 17 Jefferies & Co. get $6.9 million in accord with a standstill agreement with Alan Clore concerning KaiserTech.

Jul. 07 GAF and Sherwin indicted; accused of entering secret agreement with Jefferies & Co. brokerage house, to buy blocks of Union Carbide (UC) stock in order to drive up price and allow GAF to dispose of its holdings in UC at more favorable price; Guiliani to prosecute.

Jul. 11 MCOR was sold to United Meridian Corp.

Jul. 11 Strongest proof will come from testimony of Boyd Jefferies in GAF trial.

Aug. 18 Labor Department announced an inquiry into whether transactions involving Drexel Burnham Lambert defrauded pension funds and other customers; Dept. is also examining whether transactions conducted by Jefferies & Co. violated Federal law on pension funds; Labor Dept. working from material from Congressman Dingell

In August 1988, Drexel advised Maxxam on UFG-USAT bailout plan.

Sep. SEC v Drexel was filed calling “Hurwitz a victim” of Boesky’s PL purchases.

Lincoln Savings was seized by the Feds

October 1, Maxxam hired Connally as a consultant. San Francisco Chronicle calls Connally an old friend of Hurwitz. Connally named to Maxxam Board of Directors on October 28.

Oct. 21 Thompson v. Maxxam filed

Oct. 26 Maxxam to pay $13 million to Wesray Capital, which it defeated in bidding battle for KaiserTech.

Oct. 28 KaiserTech, Ltd. merged into a wholly owned subsidiary of Maxxam.

Nov. Hurwitz, Maxxam made a bid to `bailout’ USAT without Drexel’s participation; Jenard Gross resigned. USAT forced to sign consent decree agreement with FSLIC. Both UFG & Maxxam submit plan to reorganize. UFG BOD approved Maxxam plan. The FHLBB rejected both plans.

Dec. 21 First GAF trial starts. First tests of government’s case using Jefferies evidence; Jefferies pled guilty last year – two felony counts – after Boesky implication.

Dec. 22 Prosecutor says Samuel J. Heyman, Chairman of GAF, set up original contract between senior executive and brokerage firm that led to conspiracy to manipulate stock prices.

Dec. 22 Bilzerian indicted – 12 counts securities and tax laws, conspiracy, false statements to government; charges Bilzerian made millions by accumulating stock in takeover targets, hiding his ownership using secret accounts at Jefferies & Co., and later selling his holdings when price of stock had risen.

Dec. 30 Feds placed USAT in receivership; USAT net worth was estimated to be minus $289,700,000. The estimate of USAT’s negative networth increased to over $500 million in later tabulations. UFG’s capital loss in 1988 was $186 million. FSLIC demanded UFG return $14 million to USAT as a return of pre-paid Federal Income tax and a payment in excess of $100 million to meet net worth requirement. UFG fought both demands. UFG offered a settlement for $6.25 million in January 1989.

Drexel owned nearly 10% of USAT when seized. In 1988 USAT had bought $58 million in Drexel’s junk bonds. According to Lewis Ranieri, who took over USAT from the FDIC, USAT had a classic Drexel junk bond portfolio with a total of $670 million in junk bonds. USAT was considered a member of the Drexel deep-pocket investors. These investors helped Drexel to do “difficult deals that worked, including Pacific Lumber and Revlon”.

UFG 10K’s show that the following amounts were involved in the trading of investment securities including junk bonds and risk arbitrage, CMO’s and MBS’s
1983: $ 506,950,000
1984: $ 1,394,921,000
1985: $ 6,069,097,000
1986: $ 18,921,948,000
1987: $ 15,767,523,000 (year USAT came under restrictions for maintaining net worth)

This measures the potential gross business UFG represented to Drexel, Salomon Bros. and others in these markets.

In 1988, Drexel underwrote bond offering for Kaiser refinancing.