State to Audit Milken Trusts in Search for ‘Self-Dealing’

The state Attorney General’s Office launched an audit Thursday of the charitable foundations established by embattled Beverly Hills “junk bond” genius Michael Milken, citing concerns that the tax-exempt groups’ directors may have benefited personally from the foundations’ activities.

Meanwhile, a powerful congressman asked the Internal Revenue Service to investigate the largest of the foundations, charging that “its assets may have been diverted” to advance the interests of Milken and his associates.

“It would be manifestly unfair for a tax-exempt charity, which is in effect subsidized by the taxpayers, to be used by the people who created it for self-aggrandizement, private profit and illegal ends,” Rep. John D. Dingell (D-Mich.), chairman of the investigative subcommittee of the House Energy and Commerce Committee, said in a letter to IRS Commissioner Lawrence B. Gibbs. The letter was released by Dingell’s office.

Foundation officials denied any wrongdoing. “The foundations have acted properly at all times, and we are proud of their record in serving the public,” said Lance Morgan, a spokesman for Milken and the foundations. “We hope any review will be conducted expeditiously.”

Milken, the head of high-yield, high-risk bond trading for Drexel Burnham Lambert, already is the defendant in a Securities and Exchange Commission civil complaint charging him, the firm and others with securities fraud and illegal insider trading. A parallel Justice Department criminal investigation also is under way.

Milken has contributed nearly $263 million to three endowments over the past six years, with a total of $17 million being distributed to help more than 200 organizations, including groups involved in education, health research, the arts and social services.

The Times reported Thursday that congressional investigators believe that Milken and some of the other officers and directors of his largest foundation, the $170.5-million Capital Fund Foundation, may have violated federal tax laws by doing business with the foundation.

Subcommittee investigators also said the foundation may have helped Drexel manage the junk-bond market to its advantage.

In addition, the SEC’s civil complaint identifies Capital Fund as one of the entities with close ties to Milken that allegedly was used to disguise illegal scheming by Milken and Drexel with imprisoned stock speculator Ivan F. Boesky.

Assistant Atty. Gen. Carole Ritts Kornblum, who directs state oversight of charitable trusts, said Thursday that the state’s audit would focus on possible “self-dealing” by officers of Milken’s foundations.

Included in the review will be a $1.45-million bond sale in 1986 by Capital Fund to a company, owned by Milken and brother Lowell Milken, whose directors also were directors of the foundation, she said.

Further, the state will examine fees paid by Milken’s foundations to Century Institutional Advisors, a Beverly Hills investment management firm headed by Richard V. Sandler, Milken’s personal attorney, and his law partner, Craig M. Cogut. Capital Fund paid Century more than $468,000 in fees in 1986 and 1987, according to the foundation’s publicly available tax returns.

Kornblum said the state planned to audit all three of Milken’s foundations--Capital Fund, the Milken Family Foundation and the M & L Milken Foundation--as well as Lowell Milken’s charitable group, the L & S Milken Foundation, all of which are based in Encino.

Violations of state law could result in a civil suit seeking the return of any losses to the foundations or a reorganization of the foundations’ management, Kornblum said.

Federal tax laws impose a levy on a person or organization engaged in self-dealing with a foundation, but not on the foundation. Tax law allows the IRS to shut down a foundation engaged in fraud, according to Keith M. Loebig, an IRS expert in Los Angeles on tax-exempt organizations.