Drexel-SEC Deal May Cost Milken His Job, Most of ’88 Earnings

Michael Milken, the man who did much to build Drexel Burnham Lambert Inc. into a financial powerhouse, will be forced to give up nearly all of his pay for 1988 and leave the firm under a settlement being worked out between Drexel and the Securities and Exchange Commission, sources said.

The SEC also is insisting that someone from Drexel’s New York headquarters be assigned to supervise the firm’s high-yield “junk bond” department in Beverly Hills, which for years was run almost independently by Milken. In addition, the firm would be required to make changes in its senior management structure, although Chairman Robert E. Linton and Chief Executive Officer Frederick H. Joseph would be allowed to remain, the sources said.

Negotiations between top Drexel officials, the firm’s lawyers and SEC officials in Washington were said to be continuing Thursday. The firm’s recently announced plan to settle federal criminal charges by pleading guilty to six felony counts and paying $650 million in financial penalties hinges on Drexel also settling pending SEC civil charges. Drexel has a deadline of Jan. 10 to settle with the SEC, although sources said it is possible that the time could be extended.

Drexel has been under investigation for more than two years by the U.S. attorney’s office in Manhattan and by the SEC for suspected securities fraud, stock market manipulation and insider trading.

In a related development, sources said a dispute has erupted between Milken’s lawyers and U.S. Atty. Rudolph W. Giuliani over whether the amount of Milken’s salary and bonuses over the past three years will be mentioned in the criminal complaint being prepared against Drexel. The complaint, detailing the six felony counts to which the firm will plead guilty, is now expected to be filed in U.S. District Court in New York sometime next week.

One source said it is possible that Milken’s attorneys will go to court in the next several days to try to prevent Giuliani from publicly disclosing how much Milken has made at Drexel. Sources close to the firm declined to provide a specific figure for Milken’s annual compensation but said his annual bonus is in excess of $100 million. Milken owns about 6% of Drexel’s stock.

It wasn’t clear why Giuliani’s office wants to include Milken’s earnings in the complaint. Bruce Baird, head of the securities fraud unit in the U.S. attorney’s office, declined to comment on any aspect of the case. But one Drexel source asserted that Giuliani, always conscious of publicity, wanted to make the complaint “as juicy as possible.”

The Drexel source said Milken’s lawyers don’t want the amounts disclosed publicly because they fear that it might prejudice potential jurors against him. Milken isn’t covered by the Drexel settlement and is likely to be indicted on racketeering and securities fraud charges within the next few weeks.

A personal spokesman for Milken declined to comment on Drexel’s talks with the SEC or the dispute with prosecutors over disclosing his pay. Milken has consistently maintained that he is innocent of any wrongdoing. Martin Flumenbaum, one of Milken’s lawyers, didn’t return a phone call to his office Thursday.

Steven Anreder, a spokesman for Drexel, also refused to discuss the settlement talks.

Milken’s personal net worth has been estimated at about $1 billion, and nearly all of his direct compensation from Drexel comes in the form of an annual bonus. His actual salary is tiny by comparison, well below $100,000 a year, one source said. Under the settlement being discussed, Milken would lose the bonus but receive his salary, the source said.

Milken also has substantial income from personal investments, including a series of partnerships held with other Drexel employees. Income from these partnerships apparently wouldn’t be affected by the settlement. Milken and his brother, Lowell, also own the Beverly Hills building that houses Drexel’s West Coast operations. Lowell Milken, also employed by Drexel, is expected to be indicted too.

It has been anticipated for some time that Michael Milken would take a leave of absence or resign from the firm if he were indicted. But the accord on the table with the SEC would require the firm to sever its ties with him almost immediately, the sources said.

It wasn’t clear Thursday what legal authority the SEC or Drexel would have to deny Milken his bonus for 1988. One Drexel source noted, however, that if the firm doesn’t have to pay Milken his bonus, which is in excess of $100 million, that would in effect compensate the firm for a part of the $650-million financial penalty Drexel has agreed to pay under its settlement agreement with Giuliani’s office.

The SEC is also demanding that a compliance officer approved by the agency be appointed to monitor Drexel’s trading operations and certain other activities.

People close to the Drexel case emphasized Thursday that a final accord hasn’t yet been reached with the SEC and that there was still a possibility that the tentative agreement with Giuliani could collapse. That would leave Drexel exposed to an indictment on racketeering charges under the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO.

Such an indictment might allow prosecutors to obtain a court order freezing much of the firm’s assets pending a trial.

A Drexel source said Thursday that the main reason the firm’s board voted last month to settle was because most board members were convinced that a RICO count would destroy the firm. The source said: “The reason that the bulk of the board decided to vote for settlement was the belief that the firm couldn’t withstand a RICO charge and survive long enough to be exonerated.”