Denial of Due Process? : Milken Penalties Bring Up Issue of Constitutionality
Questions about whether federal prosecutors have overreached their authority in pursuing evidence of corruption in the securities industry gained fresh urgency with the disclosure that Drexel Burnham Lambert Inc. will fire Michael Milken and withhold his $200-million bonus from 1988 as part of its settlement with the government.
The newest complaints center on the fact that the investment house is meting out punishment to Milken, even though he hasn’t been charged with a crime. One of the Beverly Hills financier’s attorneys said the action represented “punishment without trial, sentence before verdict.”
Laurence H. Tribe, a leading expert on constitutional law, said Thursday that Drexel may have violated Milken’s constitutional right to due process if it acted against him under pressure from the government.
But the debate over prosecutorial behavior goes beyond the single issue of firing Milken and keeping his bonus. It encompasses tactics used in the overall investigation in New York and the aggressive probe of the futures exchanges under way in Chicago.
The focus of the broader objections lies in the government’s use of the controversial federal anti-racketeering law, known as RICO, in both cities. In addition to carrying stiff prison terms, the law allows the government to seize virtually all of the assets of an individual or corporation convicted of racketeering.
In New York, defense lawyers claim the U.S. attorney’s office violated Justice Department guidelines governing RICO by threatening Drexel with racketeering charges unless it agreed to plead guilty to lesser charges and cooperate against Milken and others.
In Chicago, defense lawyers have told numerous stories of late-night confrontations in which FBI agents and federal prosecutors have warned traders at the Chicago Board of Trade and Chicago Mercantile Exchange that they would lose their homes and savings under RICO unless they cooperate in the wide-ranging inquiry there.
RICO’s emergence as a potent weapon in the securities fraud investigations has stirred controversy among lawyers in both cities.
“At this stage here, it is being used as a club and not as a sword,” said Stephen J. Senderowitz, who helped pioneer the expanded use of RICO as a prosecutor in Chicago in the early 1980s and is now defending traders in the current commodities investigation.
“It is like introducing the atomic bomb when a rifle would do,” said Gary P. Naftalis, a prominent white-collar defense attorney in New York. “A lot of people suddenly feel that they have to make deals because they are afraid they might lose everything they have worked for their whole lives.”
Defense attorneys and Milken partisans argue that it was the mere threat of RICO that pushed Drexel into agreeing to plead guilty to securities fraud, pay a record $650 million in penalties, fire Milken and withhold his 1988 bonus.
Critics also say Congress intended RICO to fill a gap in the prosecution of organized crime and its infiltration of legitimate businesses, not white-collar criminals in securities cases.
“You have plenty of securities laws to use against people who defraud the public in connection with the stock market,” said Naftalis, an ex-federal prosecutor.
But G. Robert Blakey, who drafted the law for Congress in 1970, said it was clear from the start that RICO was meant to reach beyond traditional organized crime to securities fraud.
“The remarkable thing about the Drexel-related cases is not that they were conceptualized as RICO but that similar cases have not been brought in the past,” said Blakey, a professor at Notre Dame Law School.
The criticisms of RICO in New York and Chicago, however, have been heard on Capitol Hill.
Rep. William J. Hughes (D-N.J.), chairman of the House Judiciary subcommittee on crime, said: “RICO was never intended to be used as a club to make individuals or corporations knuckle under in fear of prosecution.”
Hughes said his panel will consider holding hearings on the use of the statute by prosecutors, but a decision will have to await the outcome of congressional wrangling over which subcommittee has jurisdiction over the law.
The constitutional questions over Drexel’s action against Milken may be aired sooner.
Lawyers for Milken and his brother Lowell, who would be denied half of his 1988 bonus, could raise objections to the terms of Drexel’s agreement at a court hearing in New York scheduled for Wednesday.
Drexel’s agreement with the prosecutors will be finalized once the company settles its civil lawsuit with the Securities and Exchange Commission. At that time, the federal judge presiding over the case will have to approve the deal. Lawyers for the Milken brothers will ask the judge to reject the pact because of what they feel is the unconstitutional punishment of their clients.
Legal experts differ sharply over the appropriateness of the company’s decision to refuse to pay Milken’s bonus and fire him.
“Prosecutors frequently ask for changes in personnel in white-collar crimes,” said Joseph E. diGenova, a former U.S. attorney in Washington. “There is the suggestion that certain people are culpable or likely to be determined to be culpable, and the corporation is asked to show good faith by punishing the employees. These tactics are not pretty sometimes, but they are valid and used frequently.”
The difference in this instance, said the former prosecutor, is that the Milken case involves far more money than usual and much more publicity.
But attorneys for the Milken brothers argue strenuously that, even if Drexel Burnham had the right to fire Michael and suspend Lowell if he is indicted, the company has no legal right to withhold money they earned legitimately in 1988.