THE MILKEN INDICTMENT : What’s at Stake : Racketeering Charges Leave Milken Open to Huge Financial Penalties

The racketeering charges against Michael Milken expose him to some of the harshest and most controversial financial penalties available to prosecutors, along with the prospect of a long prison term.

Milken, who the government says earned $550 million in salary and bonus in 1987 alone in addition to income from myriad investments, could be stripped of a huge portion of his $1-billion empire, if convicted.

The government could take his Encino house, where Clark Gable once lived; his interest in the Beverly Hills buildings where Drexel Burnham Lambert maintains offices; his bank and investment accounts; his wife’s jewelry, and his interests in numerous business partnerships, including his 6% ownership of Drexel.

Assets, Cash Can Be Seized

Even some of the millions Milken used to establish three large charitable foundations could be forfeited if the government can show that the money came from the proceeds of securities fraud.

“You can take anything that someone bought or invested in using the profits of the illegal enterprise,” said S. Gay Hugo, a federal prosecutor now in San Diego who used the statute frequently against mobsters in Chicago.

If prosecutors cannot identify specific assets acquired with illicit money, the racketeering statute allows them to go after assets and cash with an equivalent value. Equally important, if illegal money was invested in legitimate deals, proceeds of the legal transactions can be seized.

In Milken’s case, the complexity and extent of his investments would make sorting out proceeds from illegal deals far tougher than in the cases of the mobsters and drug traffickers who are the most frequent targets of the racketeering law.

20-Year Prison Terms

“These insider trading and securities law violations are totally new to criminal RICO,” said Donald B. Marks, a Beverly Hills attorney specializing in white-collar defense. “A real issue is what does the potential seizure extend to.”

RICO is the common name for the disputed statute labeled officially the Racketeer Influenced and Corrupt Organizations Act. It was passed by Congress in 1970 to stop organized crime figures from laundering illegal money through legitimate businesses.

RICO provides that any individual or corporation guilty of committing two felonies as part of a pattern within a 10-year period can be convicted as a racketeer.

Conviction carries a prison term of up to 20 years, but that term can be increased by separate convictions for each felony that formed the pattern. The law also contains the forfeiture provision covering earnings and other profits from the racketeering enterprise.

In the charges against Milken, the government alleges that the corrupt enterprise was the “junk bond” operation that he ran in Beverly Hills for Drexel, the New York investment firm that has already agreed to plead guilty to securities crimes.

Criticized for Abuse

An unusual section of RICO allows the government to freeze a defendant’s assets once charges are filed, without waiting for a conviction. This is the only U.S. criminal law that authorizes this prejudgment action, and it has raised constitutional questions before the U.S. Supreme Court.

Some federal courts have ruled that the government can freeze assets and refuse to permit defendants to hire lawyers, forcing them to rely on free, court-appointed attorneys. Other judges have said such a prohibition violates a defendant’s constitutional right to choose a lawyer.

Prosecutors have been criticized for abusing RICO in the securities investigation, but supporters of the law have argued that it was designed to be used in the pursuit of white-collar criminals as well as mobsters.

The menace of RICO stems not only from its criminal provisions but from the way a conviction exposes the defendant to increasingly popular civil RICO lawsuits. By piggybacking on the prosecution’s findings and showing that the same actions damaged them, investors can obtain judgments for millions of dollars.

Amounts are magnified because civil RICO provides for triple damages--an investor who lost $1 million because of a racketeer’s criminal activity could collect a judgment of $3 million.

In Milken’s case, a RICO conviction would open the door for a wave of lawsuits from investors who claim that they were damaged by the deals in which he allegedly manipulated the markets and committed securities fraud.

Examining Finances

RICO contains elements to guard against abuses by overzealous prosecutors. For instance, U.S. attorneys must obtain approval from the Justice Department in Washington to file a RICO case, although detractors claim that few requests are turned down.

Also, freezing assets before conviction requires a court hearing and approval by a judge. A defendant can retain control over the assets pending trial by posting a bond to cover their value.

To assist prosecutors in tracing illegal profits, the court can allow government-appointed experts to examine a defendant’s finances in enormous detail. The Milken indictment provides an opportunity for the government to try to untangle his complex web of partnerships and investment deals.

If a jury returns a RICO conviction, the panel then considers the government’s request for forfeiture. Prosecutors present evidence about what should be seized, and defense attorneys can try to protect assets, leaving the jury to determine the actual figure and assets.

If Milken is convicted, the government could face a sensitive task in going after the assets of the charitable foundations that he and his family have established in Encino.

Milken has contributed nearly $263 million to three endowments during the past six years, and more than $17 million has been distributed to about 200 organizations, including programs for education and health research.

“You could go after the charities, but you would have to prove that it was illegal money that went in there,” said Hugo, the prosecutor.

There have been indications that the charities played a role in Milken’s alleged wrongdoing, which could also open the door for seizure efforts.

A civil lawsuit brought by the Securities and Exchange Commission against Milken and Drexel last September identified the largest endowment, the Capital Fund Foundation, as one of the entities used to disguise their illegal scheming with imprisoned stock speculator Ivan F. Boesky.

Congressional investigators have said the Capital Fund’s securities trading indicated that it may have been used to assist Milken and Drexel in managing the junk bond market to their advantage.

It is unlikely that recipients of Milken’s charitable donations would have to return money. The RICO statute allows bona fide parties to keep funds paid to them under legitimate circumstances, even if the money came from illegal activities.

“You can’t demand a refund from a dentist who put braces on a drug dealer’s kid, and we’d look pretty stupid trying to go after a $100,000 contribution to the American Cancer Society,” said a federal prosecutor who has handled RICO cases.