United States v. Ostrander

Drexel Burnham Lambert (Drexel) was an investment bank that often sold junk bonds and other securities to finance its clients’ acquisitions. Kohlberg Kravis Roberts & Co. (KKR) specialized in leveraged-buy-outs (LBOs) and decided on an LBO of Storer Communications, Inc. (Storer). KKR hired Drexel to underwrite the securities for the financial transactions. The publicly offered securities included zero-coupon bonds, debenture bonds, and preferred stock. 67,840,000 warrants were also created, which allowed warrant holders to exchange each warrant for one share of common stock in Storer at an exercise price of $2.05. The warrants were designed to assist in the sale of debentures and preferred stock, and Drexel told KKR that warrants would only be offered for private sale to institutions that had purchased zero-coupon bonds, debentures, or preferred stock. The head of Drexel’s high-yield bond department, Michael Milken, told KKR to reduce the price of each warrant, and the warrants were then offered only to a few select investors, including Drexel employees. One Drexel employee kept their warrants in the partnership MacPherson Investment Partners L.P. (MacPherson). Patricia Ostrander (defendant) was a portfolio manager for Fidelity Management Research and Fidelity Management Trust Company (Fidelity), and in 1985, she purchased for Fidelity millions of dollars of Storer securities issued under the LBO. Later that year, Milken offered Ostrander the opportunity to invest her personal funds in MacPherson. Ostrander invested $13,200 in MacPherson. By 1988, Storer stock went up in value and Ostrander’s $13,200 investment increased to a value of $750,000. In 1991, the United States charged Ostrander with accepting unlawful compensation in violation of § 17(e) of the Investment Company Act. The jury convicted Ostrander. Ostrander appealed, arguing that the trial court erred in instructing the jury that the opportunity to purchase warrants might constitute a violation of § 17(e).