THE MILKEN INDICTMENT : Q&A; : Drexel, Milken Cases Travel Tangled and Expensive Path

Times Staff Writer

Question: How did the Drexel case get started?

Answer: The case is an outgrowth of the 1986 insider trading case against former investment banker Dennis B. Levine. Levine, who had built a personal fortune by illegally trading on his advance knowledge of takeover deals, was tracked down through international detective work by the Securities and Exchange Commission. He agreed to cooperate with prosecutors in exchange for reduced charges.

Levine implicated Wall Street stock speculator Ivan F. Boesky in widespread illegal stock trading based on inside information about pending takeovers and mergers. Boesky also agreed to cooperate with the government after pleading guilty and paying a $100-million penalty. Boesky, in turn, alerted prosecutors to allegedly illicit activities by Drexel’s “junk bond” department in Beverly Hills. The investigation of Drexel has gone on for two years.

Q: Why is the case important?


A: Drexel’s innovative use of high-yield junk bonds to finance corporate takeovers turned the firm into a major force behind the 1980s wave of corporate raids and leveraged buyouts. Prosecutors claim that key figures at Drexel, as well as elsewhere on Wall Street, have operated as though they were above the law, routinely violating laws on insider trading, market manipulation and securities fraud.

Manhattan U.S. Atty. Rudolph W. Giuliani, who left office after overseeing the investigation for nearly two years, viewed it as part of the government’s attempt to rein in corruption in securities firms. But the individual defendants in the Drexel and related cases have claimed that they are victims of overzealousness by Giuliani and the U.S. Attorney’s Office in Manhattan.

Q: What are the main charges?

A: The 98-count indictment issued Wednesday includes charges of racketeering, mail and wire fraud, securities fraud, stock parking, market manipulation and making false statements. Michael Milken is also charged with assisting in the preparation of a false tax return.


Q: What is stock parking?

A: Stock parking occurs when someone attempts to hide ownership of a block of stock by arranging with another person or firm to hold the stock as if it were their own, in their own name. Parking can be done to evade taxes, avoid SEC disclosure requirements during corporate takeover attempts or to allow a securities firm to acquire big stock positions without seeming to violate rules about how much capital such firms must have on hand. Parking often involves secret agreements in which the person parking the stock agrees to reimburse the holder for any losses incurred.

Q: What is insider trading?

A: Insider trading occurs when someone buys or sells stock based on “inside” information that, when made public, is likely to affect the market price of the stock. An example of insider trading would be when someone who has information that a particular company is about to become the target of a takeover attempt buys stock in that company, knowing that the price will soon go up.

Q: What is market manipulation?

A: Illegal stock market manipulation takes place when someone trades stock to deliberately drive the market price down or up.

Q: Who is Michael Milken?

A: Milken, 42, almost single-handedly developed the U.S. market for junk bonds. His personal wealth is said to be around $1 billion, and he was to have received a $200-million bonus for 1988. In the 1970s, he persuaded investors that a mixed portfolio of junk bonds would have high yield and low risk. His operation transformed Drexel from a second-string investment house to one of the five largest on Wall Street. After moving Drexel’s junk bond operation to Beverly Hills in 1978, Milken turned to using the high-yield, high-risk bonds to finance corporate raids. His expertise and contacts enabled him to raise billions in days to back proposed takeovers or leveraged buyouts.


Q: Who are the other defendants?

A: Lowell Milken, 40, helped his brother, Michael, manage the Beverly Hills office. A lawyer by training, Lowell Milken also attended to family holdings and independent partnerships in which he and Michael as well as other Drexel employees held interests.

Bruce L. Newberg, 31, who was also indicted in a separate racketeering case involving Princeton/Newport Partners, is a former Drexel junk bond trader.

Q: Why wasn’t Drexel itself indicted?

A: To head off racketeering charges, Drexel has agreed to plead guilty to six lesser felony counts and pay $650 million in penalties. The agreement hasn’t gone into effect yet because Drexel must first conclude settlement talks with the SEC on separate pending civil charges. Those talks lately have bogged down, reportedly over the SEC’s demand that Drexel immediately fire Milken.

Q: Does the case mean that all corporate takeovers have been based on fraudulent activity?

A: No. Although the case suggests that questionable activity was relatively commonplace in takeover battles in which Drexel played a role, the evidence put forward by prosecutors relates to only a limited number of deals.

Q: How does this compare to other scandals on Wall Street?


A: The scope of the investigation and the number of man-hours invested both by the U.S. Attorney’s Office in New York and by the Securities and Exchange Commission makes the case the biggest ever brought against a Wall Street firm. Prosecutors charge that there weren’t just a few individual incidents of criminal wrongdoing but a consistent pattern of illegal activity continuing for years. As the large number of indictments brought by federal prosecutors in New York in the past two years shows, however, suspected wrongdoing wasn’t confined to Drexel but included other securities firms, both large and small.