Drexel to Fire Milken, Withhold Huge Bonus

Drexel Burnham Lambert Inc. formally agreed to fire Michael Milken, the Beverly Hills financier whose creative use of junk bonds built the firm into a powerful force in corporate America, and to withhold his bonus for 1988, estimated at $200 million.

In a plea agreement with federal prosecutors, made public Wednesday, Drexel agreed also to place other employees on unpaid leaves of absence if they are indicted and to withhold half of the 1988 compensation owed to Milken’s brother, Lowell Milken, who also is a Drexel employee.

Still Employees of Firm

The firing of Michael Milken is not contingent on his being indicted first. At the moment, both Milkens remain Drexel employees.

Although formally filed in court, the agreement will become effective only after Drexel follows through on an agreement to plead guilty to six pending criminal charges and after the accord is reviewed by U.S. District Judge Kimba M. Wood.

The charges against Drexel involve such matters as stock manipulation and hidden ownership of corporations. The federal investigation into Drexel, the Milkens and other company employees ranks as the largest securities fraud case ever.

The firing of Michael Milken, 42, would end a remarkable era at Drexel in which he was largely responsible for turning the once-sleepy company into one that was feared for its role in corporate takeovers but also admired for its nurturing of risky, entrepreneurial enterprises typically shunned by old-line Wall Street firms.

In the 1970s, through creative insight and powerful salesmanship, he almost single-handedly created the U.S. market for high-risk, high-yield debt obligations known as junk bonds. In the 1980s, Milken turned the junk bond market into a source of billions of dollars to finance corporate raids and buyouts.

Lowell Milken, 40, gave up a promising career as an attorney to join his brother at Drexel. Lowell helped his brother administer Drexel’s junk bond department in Beverly Hills but spent much of his time overseeing the Milkens’ personal investments, including many private partnerships, some of which included other Drexel employees.

Legal Experts Puzzled

The plea agreement’s provisions relating to the Milken brothers brought immediate protests from their attorneys. And the provisions were called unprecedented by independent legal experts, who said it is not clear what legal grounds the government had to force Drexel to withhold the brothers’ earnings or to fire Michael Milken.

The agreement requires Drexel to cooperate with the government’s continuing investigation by throwing open its books to the U.S. attorney’s office and the Securities and Exchange Commission and by making employees available for interrogations.

Drexel agreed also to pay for independent accounting firms and consultants selected by the government to go through its books.

In exchange, the government promised not to charge Drexel with any more crimes related to a broad area of activity spelled out in the agreement. But the accord made clear that the government is free to indict the Milken brothers and other employees who have been subjects of the two-year investigation.

Agreement Assailed

Martin Flumenbaum, an attorney for Michael Milken, said in a written statement Wednesday that “the provision in the agreement that requires Drexel to discharge Mr. Milken and to refuse to pay him the compensation due for his service in 1988 is a violation of due process and an infringement of Mr. Milken’s constitutional rights.”

Flumenbaum added: “This is punishment without trial, sentence before verdict.”

Michael Milken’s 1988 bonus amounts to nearly all of his compensation from Drexel for the year. Sources have placed his salary at less than $100,000. Milken reportedly has received his salary already, and it would be unaffected by Drexel’s agreement with the prosecutors.

Michael Armstrong, Lowell Milken’s lawyer, also called the Drexel agreement unconstitutional. He said he would ask Judge Wood to reject the parts of the agreement relating to Lowell. Armstrong, a former head of the U.S. attorney’s securities fraud division in New York, said he did not know of any other case in which the government had required a company to withhold salary or bonuses from employees as part of a plea agreement.

Stephen Gillers, a professor at New York University Law School, said he doubts that the government has legal standing to require Drexel to withhold the money or fire Michael Milken. “This is entirely novel,” Gillers said. “I’ve never heard of anything like this.”

Jess Fardella, one of the assistant U.S. attorneys handling the Drexel case, refused to discuss the prosecutors’ legal reasoning.

‘Can’t Give Discourse’

“I can’t give you a discourse on constitutional law off the top of my head,” Fardella said Wednesday. But he added: “We don’t enter into agreements which we think have unlawful provisions in them.”

Fardella refused to say why prosecutors insisted that the provisions be included in the plea agreement.

Drexel in December agreed to plead guilty to six felony charges to avoid being prosecuted on more serious and potentially damaging racketeering counts. The firm agreed also to pay $650 million in penalties.

Most of Drexel’s legal problems stem from the activities of the firm’s Beverly Hills-based junk bond department, headed by Michael Milken.

The six securities fraud charges were filed in federal court in New York on Tuesday. The plea agreement also was filed Tuesday but was sealed by Judge Wood. She made it public Wednesday after Drexel lawyers dropped their objection to its being disclosed.

Being Sued by SEC

Drexel will not actually plead guilty to the charges until it settles a pending civil suit filed by the Securities and Exchange Commission. Negotiations with the SEC were proceeding slowly this week, although Drexel lawyers said in court that they thought an agreement could be reached by early next week.

Meanwhile, Michael and Lowell Milken and several other Drexel employees are expected to be indicted soon on racketeering and securities fraud charges. Through their lawyers, the targets of the government investigation have denied any wrongdoing.

The plea agreement seems certain to anger Milken loyalists in the firm’s Beverly Hills office.

A source close to Milken said: “As a friend of Michael’s, I think this is outrageous.” He said: “It was basically a situation (in which) the U.S. attorney asked Drexel to jump and Drexel asked, ‘How high?’ ” He noted that Milken has yet to be charged with any crime.

An employee in the Beverly Hills office, who asked not to be identified, said the continuing investigation has made staff members feel that “we are in the middle of a witch hunt.”

But he said: “I can’t blame the firm for wanting to cut a deal, when the choices are you pick up a gun and kill yourself or they pick up a gun and kill you.”

Racketeering charges against the firm could have enabled the government to freeze a substantial part of Drexel’s assets pending a trial.

The agreement spells out how Drexel’s $650 million in penalties is to be allocated. The first $300 million will be for criminal and civil penalties under the federal Insider Trading Sanctions Act.

To Set Up Special Fund

The rest will be set aside in a special fund to pay off any civil judgments Drexel may face from private lawsuits stemming from the allegedly illegal activity. Any amount left over after all of the judgments are paid will go to the government.

Drexel is to allocate $500 million of the penalty as soon as it pleads guilty. It will pay $50 million in the next year and the remaining $100 million in the third year.

Observers have noted that, by withholding Milken’s bonus, Drexel will have offset a big part of the cost of its financial penalty.

No New Targets Named

In recent weeks, as some Drexel employees have decided to cooperate with the government in exchange for immunity from prosecution, there has been speculation that prosecutors intended to broaden the inquiry to include possible wrongdoing by Drexel customers. The plea agreement does not name any additional targets of the investigation.

But, in setting out the scope of information Drexel must provide to the government, the agreement seemed to leave the prosecutors great leeway. Drexel must make available records from 1978 to the present of virtually all activity by the high-yield department.

The agreement makes clear that, if Drexel fails to live up to any provisions of the document, it could be prosecuted on a broad array of additional criminal charges.

Staff writers Bill Sing and Douglas Frantz in Los Angeles contributed to this story.

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