Drexel was the most feared firm on Wall Street — then a $650M fine killed it

Drexel Burnham Lambert was a Wall Street powerhouse that, under Michael Milken, almost single-handedly created the market for high-yield junk bonds. The firm used these bonds to finance the 1980s takeover boom, funding deals for T. Boone Pickens, Carl Icahn, Ted Turner, and KKR's landmark buyout of RJR Nabisco. In its most profitable year, 1986, Drexel netted $545.5 million. Milken was paid $295 million that year and $550 million the next.

The scandal began in May 1986, when managing director Dennis Levine was charged with insider trading. Levine implicated arbitrageur Ivan Boesky, who led the SEC and US Attorney Rudy Giuliani to Drexel and Milken. In September 1988, the SEC sued Drexel for insider trading, stock manipulation, and defrauding clients. Giuliani threatened to indict the firm under the RICO Act, which would have required a $1 billion performance bond. To avoid that, Drexel entered an Alford plea to six felonies in December 1988 and agreed to a $650 million fine — the largest ever under securities laws.

The fine crippled the firm. Drexel posted a $40 million loss in 1989. On 13 February 1990, after regulators saw 'no light at the end of the tunnel,' the board voted to file for Chapter 11 bankruptcy — the first Wall Street firm forced into bankruptcy since the Great Depression. Milken was indicted in March 1989, pleaded guilty to securities and tax violations, and was sentenced to 10 years in prison (serving 22 months), fined $200 million, and ordered to pay $400 million in restitution.