Two securities officials and an accountant were arrested today and charged with fraud in the demise of Drysdale Government Securities Inc., a bond trading firm whose spectacular failure last year nearly paralyzed trading in government bonds and caused $290 million in losses at two major New York banks.
Manhattan District Attorney Robert Morgenthau said Joseph Ossorio, chairman of the now-defunct parent Drysdale Securities Corp., and David Heuwetter, who effectively ran the government securities affiliate, were charged with defrauding Chase Manhattan and Manufacturers Hanover Trust Co. in an attempt to avoid bankruptcy.
Warren Essner, formerly a senior partner with the accounting firm Arthur Andersen & Co., was charged with issuing false financial statements on Drysdale's behalf and with falsifying business records. Essner prepared Drysdale Government Securities' initial financial statement for Andersen.
All three pleaded innocent in court today.
Essner was released on his own recognizance yesterday afternoon. Heuwetter and Ossorio each posted $750,000 bail. In a statement released by his attorneys, Essner said he did "nothing wrong. I had no knowledge of any wrongdoing at Drysdale and acted in complete good faith."
The Securities and Exchange Commission also filed a complaint in federal district court against Ossorio, Heuwetter and Essner, as well as Dennis J. Ruppert, former treasurer of Drysdale Securities and, like Ossorio, a director of the government securities affiliate.
In effect, a New York grand jury charged, Drysdale Securities, a 92-year-old Wall Street firm, set up the securities affiliate to rid itself of losses incurred in trading government securities. Assistant District Attorney John Moscow said the $5.5 billion bond portfolio that Drysdale transferred to the securities affiliate had an excess of liabilities over assets of $150 million.
Drysdale Securities itself failed in June 1982.
Drysdale Government Securities Inc., theoretically separate from its parent, opened its doors on Feb. 1, 1982, and closed them less than three months later after defaulting on about $290 million in interest payments it owed other brokerage firms whose securities Drysdale borrowed and then traded.
Chase Manhattan was Drysdale Government's principal middleman. It borrowed the securities anonymously for Drysdale. When Drysdale failed, Chase had to pay about $270 million in accrued interest to brokerage firms that lent Chase the securities, using a standard technique called a repurchase agreement. Manufacturers Hanover, which also acted as middleman for Drysdale, paid about $20 million.
Morgenthau said today that Drysdale Government reported it had capital of $20.8 million when it opened its doors. Its financial statement induced Chase and Manufacturers to act on its behalf. In reality, Morgenthau said, Drysdale Government was in the hole by almost $150 million on Feb. 1, 1982.
Morgenthau said the $20.8 million represented $15.8 million in cash allegedly invested by Heuwetter and another $5 million that represented the net value of securities transferred by parent Drysdale Securities to its offspring.
However, Morgenthau said, Heuwetter obtained his funds from Drysdale Securities and transferred back $12.3 million of the funds to the parent on the day the government securities affiliate opened. The securities portfolio had a net loss of $150 million.
Drysdale Securities Corp. set up the government securities trading affiliate after being pressured by the New York Stock Exchange in late 1981. Stock exchange officials said the company's abrupt plunge into trading huge amounts of Treasury bonds was too high-risk an activity for the small firm. To protect brokerage customers, the exchange tries to make sure member firms have enough assets to conduct business safely.
Chase Manhattan and Manufacturers Hanover sued Drysdale and its former officials last October for $306 million. A spokesman for Chase said the bank was pleased the indictments support Chase's contention that it had been defrauded.