Michael Milken, the king of high-yield "junk bonds," refused Wednesday to answer questions from a congressional subcommittee investigating a $145-million fund that allegedly invested in bond issues before they were distributed to the public. Milken invoked his Fifth Amendment constitutional right against self-incrimination when he refused to discuss Otter Creek Associates, a partnership with 20 of his fellow employees at the investment firm of Drexel Burnham Lambert.
Frederick Joseph, Drexel's chairman, is scheduled to testify today and is expected to respond to questions by members of the investigations subcommittee of the House Energy and Commerce Committee. Joseph will be asked about three issues underwritten by Drexel: offerings for Hanover Petroleum Corp., Texstyrene Corp. and a buyout of Beatrice Cos.
The investigation seeks to determine if it was improper to withhold portions of the bond issues, place them in special accounts for Drexel employees and later sell the bonds at a big profit after the issue had been marketed to the general public.
Milken, who had been subpoenaed by the subcommittee, was sworn in, gave his name and address, and then refused to answer questions from the panel's chairman, Rep. John D. Dingell (D-Mich.), about Otter Creek.
"I've been under grand jury investigation in the Southern District of New York for 18 months," Milken said. "I have been advised by my lawyer to decline to answer all questions" according to the constitutional right "not to give evidence against myself lest my answers be used in an attempt to incriminate me," he said.
The U.S. attorney in Manhattan is investigating Milken's relationships with convicted stock manipulator Ivan F. Boesky, now serving a three-year sentence for trading with illegally obtained inside information.
Otter Creek Associates was the biggest single personal trading partnership for Milken and his Drexel colleagues, with as much as $145 million in the account at one time.
There were 20 to 30 accounts, possibly involving as many as 100 individuals, through which flowed hundreds of millions of dollars for trading in bonds issues handled by Drexel, according to congressional sources.
Milken, who pioneered the widespread use of high-yield bonds for American corporations seeking to raise large sums of money, and for the financing of takeover campaigns, was the focus of intense congressional and public interest. He runs the Drexel junk bond division from the firm's Beverly Hills office and reportedly has amassed a personal fortune of several hundred million dollars.
Every seat in the hearing room was filled and a standing-room crowd lined the walls and spilled out into the hallway of the Rayburn office building.
Accompanied by his attorney, prominent Washington lawyer Edward Bennett Williams, Milken arrived early for the hearing. He and Williams sat at the witness table, striving successfully to look relaxed as a dozen photographers snapped a barrage of shots and five television cameras focused on them.
Chairman Dingell's insistence on summoning Milken with a subpoena caused concern and division within the committee. It was known for days that Williams would advise Milken to take the Fifth Amendment.
However, Dingell insisted that it was necessary for the inquiry to have Milken formally summoned before the committee for its continuing probe of the junk bond market.
The money raised by high-yield bonds--known as junk bonds because they are classified by bond-rating firms as riskier than "investment grade" issues--"develops a great share of the new goods and services" in the U.S. economy, Dingell noted. However, he said, the committee is worried about the ability of companies to make payments on the bonds if there is a serious economic slump.
Drexel handled 40% of the $32 billion in junk bonds issued in 1986, Dingell noted. "The one individual most knowledgeable of, and most responsible for, the dominant role that Drexel has played is Michael Milken," he said.
Republicans suggested that publicity was Dingell's motive in summoning Milken for a sworn session without any answers.
"All of us knew in advance that Mr. Milken would assert his constitutional rights," said Rep. Thomas J. Bliley (R-Va.). "From basic civics classes, we know that Mr. Milken was entitled to do so, and the fact that he did should not infer any wrongdoing. Today's hearing accomplished little other than to gain publicity for the hearing tomorrow."
Republican members of the subcommittee plan to question Joseph today about Drexel's involvement with the Home Shopping Network, a cable-television retailing channel whose stock has slumped badly.
Home Shopping sued Milken and Drexel on Monday, accusing them of involvement in a scheme to drive down the price of the shares.