U.S. Prosecutors Expected to Seek Indictments Against Milken, Drexel in 4-6 Weeks
Federal prosecutors are expected to seek indictments within four to six weeks in a criminal investigation related to the massive civil lawsuit that the Securities and Exchange Commission has filed against “junk bond” dealer Michael Milken and his brokerage house, Drexel Burnham Lambert Inc., sources close to the case disclosed Thursday.
Attorneys for the SEC filed their civil action Wednesday only after receiving assurances from U.S. Atty. Rudolph W. Giuliani in Manhattan that he was prepared to seek criminal prosecution promptly, according to the sources, who spoke on the condition that they not be identified.
SEC lawyers deferred to Giuliani because they did not want to hamper his criminal prosecution, the sources said. SEC investigators have assisted Giuliani in his months-long, coast-to-coast investigation of a Wall Street scandal that started more than two years ago, when the SEC accused Drexel investment banker Dennis B. Levine of illegal insider trading.
Initial Glee Fades Somewhat
The scope of the indictments, which prosecutors plan to seek from a federal grand jury in Manhattan, could not be learned immediately. But some sources predicted that they would be less sweeping than the SEC’s civil complaint, because the standard of proof in a criminal case is far more demanding, requiring a determination of guilt beyond a reasonable doubt, as opposed to the preponderance of evidence standard in a civil trial.
Some defense attorneys expressed gleeful surprise when the SEC’s action was announced, saying the broad discovery rules applying in such a civil proceeding would enable them to gain valuable government information that could help them build a better defense for their clients against the long-expected criminal charges. They cited, for example, their right to take a lengthy sworn statement from stock speculator and convicted insider trader Ivan F. Boesky, the government’s principal witness.
But sources stressed Thursday that the swiftness of the expected criminal charges will not allow the attorneys enough time to use the SEC’s civil case to obtain such closely held government data.
“The government can stall a few weeks in light of the coming criminal case,” one source said. “And, once Giuliani files his case, it will take precedence over any civil proceeding. The criminal case will have to be disposed of first.”
The SEC-Justice Department investigations of Wall Street have centered on violations of insider trading laws. These statutes prohibit anyone from buying or selling corporate securities based on so-called “inside,” or non-public, information about a major corporate development that could affect the price of its shares.
The SEC’s 184-page suit, filed in U.S. District Court in Manhattan, alleged a web of secret connections between Drexel, some of its employees and companies controlled by Boesky. The complaint included charges of insider trading, stock manipulation and fraud against clients of the firm.
Milken, of Encino, and the Drexel firm have denied wrongdoing. Other defendants include Miami Beach investor Victor Posner, a longtime Drexel client, and his son Steven N. Posner, both of whom are accused of participating in securities law violations.
Sources who disclosed plans for seeking indictments soon said they did not know how closely the criminal case would parallel the civil complaint. The civil suit could result in monetary penalties and injunctions against defendants regardless of the outcome of the criminal case.
Milken’s creative use of high-risk, high-yield junk bonds to finance hostile takeover attempts made him a major force in the world of corporate takeovers beginning in the early 1980s. Drexel dominates the junk bond market, and the Beverly Hills-based division that handles such transactions is the company’s most profitable.
Boesky, who made millions of dollars as a stock speculator, is serving a three-year prison term and is cooperating with the government after pleading guilty to one criminal charge. He also agreed to pay $100 million to settle civil insider trading charges.
Parallel Investigations
His testimony in any criminal or civil proceeding would be subject to challenges by defense attorneys on grounds that he is a convicted felon. Government lawyers contend, however, that Boesky’s testimony would be buttressed by that of other witnesses.
The parallel investigations by the Justice Department and the SEC have often been marked by strained relations between Giuliani, a hard-driving, politically ambitious prosecutor who has specialized in white-collar criminal cases, and Gary G. Lynch, the SEC’s even-tempered director of enforcement.
At one point more than a year ago, Giuliani declared that some of his SEC colleagues did not understand what a criminal case involved. But one SEC official said Thursday that, at least in recent months, the two men have had “a very, very close working relationship.”
Another SEC source said that members of the commission secretly voted approval of the massive civil action nearly two months ago but that the action was delayed out of deference to the U.S. attorney.
“Usually, the enforcement division is ready to proceed within a day or two of such approval,” he said. “But this one was held up, apparently awaiting word from Giuliani.”
JUNK BOND MARKET SHARE
Drexel Burnham Lambert Inc. accounts for almost half of the $17 billion worth of junk bonds sold so far this year.
1. First Boston 14.16%
2. Morgan Stanley 8.79%
3. Salomon Bros. 7.15%
4. Donaldson Lufkin 4.57%
5. Merrill Lynch 4.03%
6. Smith Barney 2.93%
7. Goldman Sachs 2.27%
8. Prudential-Bache 2.18%
9. Bear Stearns 1.65%
10. Others 2.30%
Source: Associated Press
Los Angeles Times
