THE CREATORS AND CORRUPTORS

OF AMERICAN FINANCE

E D WA R D M O R R I S

M I C H A E L R . M I L K E N : 1 9 4 6 – � 243

The problem with that payment arose when Boesky’s arbitrage funds were being audited, at which time he brushed off the auditors’ request to explain the purpose of the payment to Drexel, calling it just a “consulting fee” he owed the firm. In response to the auditors’ dogged insistence on more backup documentation, he coaxed the Beverly Hills officials into pro-viding an after-the-fact letter for substantiation. The resulting letter, signed by Lowell Milken, stated that the $5.3 million was paid for “advisory and consulting services.”18 If any piece of evidence could be called a smoking gun in the legal investigations into the business of Drexel and Milken that followed, it was that letter.

Path to Conviction

As with so many other high-flying financiers, Milken’s great success had a hand in his downfall. By 1986, the year that would mark the begin-ning of his problems, more than nine hundred companies had issued junk bonds—more than the number of corporations raising capital with investment-grade bonds. Each month, billions of dollars of new money flowed into companies that only a few years earlier had no access to the long-term capital markets to fund their growth. Milken could rightfully claim that his junk bond innovation was contributing to the real growth of the U.S. economy. Less convincingly he could point to the power his junk-financed LBOs had in shaking out complacent and low-performing managements and making American industry leaner and tougher and bet-ter able to compete in world markets. He believed in the efficacy of junk bonds to his very core.

But the benefits of operating lean and mean were by no means uni-versally shared. Corporate management and union officials were aligned in their perception of the evils that junk bonds and hostile takeovers pre-sented. Opponents of takeovers cited the inevitable reduction in the num-ber of employees following a takeover and the dangers takeovers posed for the continued stability of long-established corporations. And they pressed their concerns to their legislators.

Before long, states were adopting antitakeover protections for their local corporations; state insurance commissions began lowering the amount of permissible junk bond purchases; and, at the national level, Congress opened hearings on takeovers and junk bonds. Congressman John Dingell convened a hearing on the issues, and his opening statement left little to the

244 M I C H A E L R . M I L K E N : 1 9 4 6 –

imagination regarding the direction in which his committee was heading: “Companies which have existed for decades, which have carried the brunt of our national defense through two World Wars, which have provided employment in the heartland of America, no longer exist. They have been victims of takeovers, financed through the junk bond market.”19

William Proxmire, chairman of the U.S. Senate Banking Committee, also took up the issue. He convened hearings in 1986 to investigate the prac-tice of takeovers, asking at the beginning of the deliberations: “How much do we really know about the corporate takeover game and the complex net-work of information that circulates among investment bankers, takeover lawyers, corporate raiders, arbitrageurs, stock brokers, junk bond investors, and public relations specialists?”20 Evoking the spirit of the Pecora hearings of more than fifty years earlier, Proxmire emboldened Rudolph Giuliani, since 1983 the U.S. attorney for the Southern District of New York, to be “the Ferdinand Pecora of the 1980s” by looking for instances of insider trading, and bringing the culprits to justice.21

Giuliani readily took up Proxmire’s open-ended charge. He had made a name for himself in his first few years on the job with high-profile pros-ecutions of organized crime figures and hoped to enjoy even greater public recognition by going after many of the rich and powerful on Wall Street. With Milken now the most prominent name in corporate takeovers, he was Giuliani’s ultimate target. If anyone was to be identified as the central fig-ure in the “complex network of information” that was purportedly costing American jobs and perverting high finance, it was Milken.

The path to a Milken prosecution, however, was not direct. It started with New York–based Drexel investment banker Dennis Levine and none other than arbitrageur Ivan Boesky. Levine worked on Drexel’s mergers and acquisitions business and therefore was in a position to trade on inside information. He made a great deal of ill-gotten money by buying and sell-ing stocks of his clients based on confidential information. He also sold his privileged information to Boesky, who used it to turn large profits for his merger arbitrage accounts. So when Giuliani nabbed Levine—thanks mainly to the SEC’s investigative efforts—he negotiated a criminal plea agreement that reduced his likely jail time if he could offer testimony use-ful in indicting Boesky.

After receiving a subpoena in August in connection with his dealings with Levine, Boesky caved quickly. He entered into his own plea agree-ment in September with Giuliani. Boesky, like Levine, agreed to provide testimony to aid in the prosecution of another suspect—and that suspect

M I C H A E L R . M I L K E N : 1 9 4 6 – � 245

was Milken, the end target from the start of Giuliani’s Wall Street crusade. In exchange for his full cooperation in indicting Milken—including wear-ing a wire in meetings with him and allowing the recording of their phone conversations—Boesky was allowed to plead to only one felony count of insider trading. On November 14, 1986 (a day that became known on Wall Street as Boesky Day), Giuliani proudly announced the government’s deal with Boesky. At Boesky’s sentencing shortly afterward, the government fol-lowed through with its leniency, handing down a three-year sentence and $100 million fine, both just half the penalty called for by the single offense to which he pleaded guilty.

By the time the Wall Street prosecutions reached Milken in 1989, both Giuliani and the SEC had already taken action against Drexel, with the bulk of their charges revolving around the $5.3 million payment from Boesky to Drexel. In his prosecution of the firm, Giuliani hauled out his ultimate weapon, charging that Drexel was a “racketeering enterprise.” That meant that under the provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO) the government could freeze Drexel’s assets at the time of indictment—before any conviction. In the same spirit, Giuliani demanded that Drexel fire Milken if he were indicted—again, before Milken was actually convicted or pleaded guilty. Fred Joseph, by this time Drexel’s CEO, knew that no investment firm could operate if its assets were frozen and also knew that Milken’s indictment was a near certainty. So in December 1988, Drexel pleaded that it was “unable to contest” the govern-ment’s charges (a guilty plea in gentler terms) and settled the government’s lawsuit, paying a record-setting fine of $650 million and firing Milken. In reality, Joseph’s decision to cooperate with the government only prolonged the agony and Drexel declared bankruptcy in early 1990.

Between Drexel’s guilty plea and its ultimate collapse, Giuliani’s inves-tigation continued with the obvious mission of indicting Milken. There were a few vocal Milken supporters—one of them memorably stating, “Corporate America is hoping to indict Mike Milken so it can go back to sleep for another thirty years.”22 But in the main, public opinion was decid-edly not in Milken’s favor. It was the tail end of the “decade of greed,” and Milken, rightly or wrongly, had become its most visible symbol. The savings and loan industry was collapsing as a result of high interest rates and inept management. The U.S. government had authorized thrift institutions to buy high-yield bonds just a few years earlier, and Milken became a convenient scapegoat for that crisis as well, with allegations that he foisted worthless bonds on unsuspecting savings institutions—although junk bonds never

246 M I C H A E L R . M I L K E N : 1 9 4 6 –

accounted for more than the 1 percent of S&L assets and the Government Accounting Office testified that the bonds had no role in the crisis.23

In March 1989, at the height of anti-Milken sentiment, the U.S. attorney, as expected, handed down a massive indictment against both Michael Milken and Lowell Milken. While the same New York office had allowed Boesky, its prime witness, to plea to a single count, its ninety-eight-count indictment threw the book at the Milken brothers. The charges included insider trading and various forms of fraud, but most alarmingly for Michael and Lowell, it alleged violations under RICO. If they were convicted of the indictment’s charges at trial they would face many decades behind bars—housed with an unsavory group of tradi-tional RICO convicts.

The most newsworthy revelation from the 1989 indictment was not the long list of alleged crimes or even the RICO charges, but rather, on the second page of the indictment document itself, the fact that Drexel paid Michael Milken $550 million in the prior year. It was an unprecedented amount, greater than any business executive had ever made. As a prosecu-torial tactic, it served to establish that Milken was indeed the personifica-tion of greed.

Faced with the multicount indictment, Milken’s first impulse was to go to trial and take his chances with a jury. Unlike most defendants prosecuted in federal court, he could easily afford to hire an all-star team of crimi-nal lawyers to refute each and every one of the government’s ninety-eight charges. But the reality was that prosecutors would have at their disposal a growing cast of witnesses to testify before the jury as to Milken’s guilt, not just Boesky, but many others from Drexel who had turned state’s evidence to protect themselves in connection with the firm’s prosecution.

Given all this, Milken’s lawyers realized that a conviction at trial was highly likely with the result that Milken would be incarcerated for the bet-ter part of his remaining years. In addition, the government indicated that it would drop the charges against Lowell if Michael Milken, the true tar-get, entered into a plea agreement. Perhaps most difficult to overcome at trial would be the $550 million compensation. The jurors may have never heard of the nineteenth-century writer Honoré de Balzac, but at some gut level they too were likely to feel that, as Balzac famously put it, “Behind every great fortune lies a great crime.” Ultimately, following the advice of his lawyers and their counsel that “only religious fanatics believe they have to go to trial,”24 Milken pleaded guilty to six relatively minor counts of criminal behavior, none of which involved racketeering or insider trading.

M I C H A E L R . M I L K E N : 1 9 4 6 – � 247

Unsurprisingly, four of the six counts involved his dealings with Boesky and Posner and the $5.3 million payment.

Mixed Verdicts

Milken was certainly avaricious beyond any normal limits, and it’s clear that his pursuit of ever-higher markers of success clouded his judg-ment, but whether he engaged in actual criminality remains a subject for debate. His detractors tend to cling to the “evidence” that anyone who could become so wealthy at such a young age must be doing something illegal. His supporters, believing Milken was a political pawn, liked to point out that the offenses to which he ultimately pleaded guilty were mere technicalities and committed every day on Wall Street’s trading desks. The truth is probably somewhere in between and certainly more nuanced, but the comment attributed to business writer Michael Lewis may be apt: “Mike Milken was convicted of loitering in the vicinity of the savings and loan crisis.”

At sentencing, Milken was ordered to ten years of confinement. That sentence was reduced shortly afterward to just twenty-two months in light of “substantial cooperation” with the government in later cases. But there was little that Milken testified to of any importance, and most observers believe the very large sentence reduction reflected the judge’s reconsidera-tion of the penalty in light of the substance of the case. When stripped to its essentials, Milken was convicted primarily of stock parking, an offense for which no one had ever before gone to jail.

Despite the controversy his career generated, the effect that he had upon the financial world was irreversible and monumental. In his twenty-year stint with Drexel, he had transformed the way businesses raised money and he had created a widely accepted financial instrument called a junk bond. Beginning with Milken’s one-man operation, trading in a corner of the New York office of Drexel Harriman Ripley, the high-yield market has expanded to thousands of corporate issuers. During Drexel’s collapse and Milken’s brief imprisonment, new junk bond issuance slowed to a trickle, and many were predicting a total collapse of Milken’s “Ponzi scheme.” But several Wall Street firms quickly took up the slack, most notably Donald-son, Lufkin & Jenrette. As a result, the market value of all outstanding junk bonds has increased from about $150 billion when Milken went to jail to approximately $1.5 trillion today.

248 M I C H A E L R . M I L K E N : 1 9 4 6 –

Books and articles that appeared during and after his tenure seem evenly split between naming Milken the devil incarnate or, alternatively, the savior of modern finance.25 But few would argue that he conforms to the typical vision of an ex-con—especially an ex-con with several hundred million dollars at his disposal. He still lives in an unpretentious house in Encino, not far where he met his first and only wife. He still drinks no alcohol or caffeinated drinks and in manner, physique, and dress could pass for a somewhat intense high school science teacher—who might double as the track coach.

In her sentencing memorandum to the court, his probation officer Michalah Bracken captured the essence of Milken as well as anyone:

Among Milken’s strengths are his inability to accept defeat, his total commitment to causes he considers “just and right,” and his vision concerning business and society. His weakness was that, as creator and head of the High-Yield Bond Department at Drexel, these convic-tions were more important than his responsibilities and obligation to conduct business fully within the parameters of the law. Yet, despite his fall, Milken is an individual still able to contribute to society and to create positive changes in the future.26

Bracken was correct in her opinion about Milken’s future contributions. The former financier is now an entrepreneur for philanthropy, putting his considerable money, energy, and intellect into new ventures in medical research, education, and social causes. Based on his initiatives in health-care, Fortune called him “The Man Who Changed Medicine” in a 2004 piece that described Milken’s help in speeding up and improving cancer research. (The focus on cancer is personal; Milken contracted prostate can-cer at about the same time he was freed from prison.) His pace in later life appears to be as frenetic as it was on the trading desk at Drexel, with one of the cancer researchers he works with complaining to the Fortune reporter that Milken “is exhausting—physically, mentally, and emotionally exhaust-ing.” Even Rudolph Giuliani, Milken’s onetime nemesis and also a prostate cancer survivor, told Fortune, “I realize now that I didn’t know him then. The man I now know is able to do tremendous things. He took the tremen-dous talent he had in business and is using it to fight prostate cancer. What more could you ask for?”27