Costly Caper

Climax to a $270 million scam

One of the most complex cases of fraud ever to hit the arcane world of high finance is ending. Two men last week pleaded guilty to stealing $270 million from New York's Chase Manhattan Bank. Joseph V. Ossorio, 43, and David J. Heuwetter, 42, face prison sentences of up to 18 and seven years, respectively, for their roles in the Drysdale Government Securities scam.

The deception by the two men showed how vulnerable the financial system is to artful chicanery. Drysdale Government Securities, officially started in February 1982, was a spin-off of Drysdale Securities, a 92-year-old Wall Street brokerage house. It was created solely to deal in such U.S. Government securities as bonds, notes and bills, currently a $1 trillion market. Using only 20 or 30 traders who operated out of a fifth-floor room above a Wall Street-area clothing shop, Drysdale quickly managed to amass a $4 billion-plus portfolio of borrowed U.S. Treasury securities.

But the company was built on a series of misrepresentations. At the time Drysdale went into business, it claimed to have $20.8 million in capital when, in fact, it had liabilities of more than $190 million, in part from interest payments owed to owners of bonds. Yet on that false basis, it did business with the financial community, including several big banks. The firm used money from borrowed bonds to generate capital. It would sell the bonds at prices that were high because of several months of accumulated interest. The money from the sale would be greater than what Drysdale had paid for bonds put up as collateral. It would pocket some of the difference, using the money to cover expenses instead of paying interest obligations.

High interest rates, though, helped derail the whole tactic. They drove bond prices down just when Drysdale was counting on them to go up. The ploy was exposed in May 1982, when Drysdale defaulted on $160 million in charges it owed Chase Manhattan. Ultimately the bank lost a total of $270 million in trading expenses and interest payments. During the summer of 1982 Drysdale's parent company went out of business, and Chase Manhattan took over the portfolio of Drysdale Government Securities.

Ossorio, who was chairman of the parent Drysdale firm, steadfastly maintained his innocence, saying last week that he was entering a guilty plea only to avoid "prolonged and expensive" litigation. Said he: "I voluntarily plead guilty even though I do not believe I am guilty." Co-Defendant Heuwetter, the owner of Drysdale Government Securities, said that the charge against him was "substantially" true. Said he: "I had hoped that I could make up the losses."