‘Junk Bond’ King Milken Indicted for Stock Fraud
Michael Milken, the Drexel Burnham Lambert “junk bond” wizard in Beverly Hills who revolutionized U.S. corporate finance and raised funds for dozens of corporate raids, was indicted Wednesday on federal racketeering, insider trading and other securities fraud counts.
The long-expected indictment also named Milken’s brother, Lowell Milken, and a former Drexel trader, Bruce L. Newberg.
If convicted on the racketeering charges, the three could face an astronomical amount in financial penalties: The indictment asks that they forfeit a total of $1.85 billion, representing their salaries, other compensation and their share of Drexel profits, all earned in what the government charges was a continuing criminal enterprise operated at the New York-based investment banking firm.
Fines Could Be Doubled
In addition, the federal racketeering law, known as the Racketeer Influenced and Corrupt Organizations Act, or RICO, at least theoretically could subject them to twice that amount in fines. This means each defendant could face up to $3.7 billion in fines on the two RICO charges. They also face additional fines on the other counts totaling in the millions of dollars.
Michael Milken faces a maximum jail sentence of about 300 years, with lesser amounts for the other two defendants.
The indictment apparently marks the end of Milken’s 20-year career at the firm that his junk bond operation transformed from a second-rank investment bank to one of the powerhouses on Wall Street. Junk bonds are high-risk, high-yield debt securities.
Immediately after the 98-count indictment was returned by a federal grand jury, Drexel said that Milken, 42, and his brother, 40, had requested and been granted leaves of absence. John Kissick, formerly head of the firm’s corporate finance department in Beverly Hills, has been expected to take Michael Milken’s place.
The criminal charges result from the biggest criminal securities fraud investigation ever undertaken by the government. The inquiry has been under way for over two years. Benito Romano, the U.S. attorney in Manhattan, said “this specific investigation is continuing” and didn’t rule out the possibility that additional individuals may be charged soon.
The charges filed Wednesday mean that Newberg is now facing two separate racketeering indictments. He is also named as a defendant in an indictment returned last July relating to Princeton/Newport Partners, a small investment firm that did business with Drexel. The charges against him in the two indictments appear to cover the same general chain of events.
Lowell Milken, a lawyer, gave up a promising legal career in the 1970s to help his brother run Drexel’s Beverly Hills office. The indictment charges that Lowell “was his brother’s principal adviser in the conduct of the conspiracy.”
Sources at the firm said the indictment of Michael Milken probably would clear the way for Drexel to swiftly settle civil charges filed by the Securities and Exchange Commission. Milken’s continued presence at the firm was a major sticking point in the talks.
Settlement with the SEC, in turn, would remove the last obstacle to Drexel’s carrying out its pledge to plead guilty to six criminal counts and pay $650 million in financial penalties. The firm had entered into that agreement in December, in part to avoid more serious racketeering charges and a possible huge forfeiture of assets.
The 110-page indictment returned Wednesday appears to closely follow the civil charges contained in an SEC lawsuit filed in September against Drexel and the Milkens. It contains only a few charges that weren’t in the SEC’s complaint and leaves out a number that were.
The indictment accuses Michael Milken of a prolonged pattern of insider trading, stock market manipulation and defrauding clients. It claims that he sought to enrich himself through self-dealing at the same time that he was acting on behalf of Drexel’s customers.
Areas of Wrongdoing
The indictment charges three broad areas of wrongdoing. One involves transactions with former stock speculator Ivan F. Boesky, who pleaded guilty to a single criminal charge and gave prosecutors the information that touched off the Drexel investigation. The indictment charges that Milken used Boesky’s firm to hide illegal stock trading.
The second broad area involves transactions with Princeton/Newport Partners, in which Drexel and Milken allegedly helped Princeton/Newport carry out tax fraud through sham securities trades with Drexel. Among other charges, the indictment alleges that Drexel used Princeton/Newport to illegally manipulate the price of COMB Co. securities in 1985.
The third general area involves alleged straight insider trading in the securities of Lorimar Inc. and Viacom Inc. by Michael Milken.
Although the government could immediately ask a federal judge to freeze the three defendants’ personal assets, Romano, the U.S. attorney in Manhattan, said he probably will not do that. He said his office has been negotiating with the defendants’ lawyers and added that he expects a bond to be posted by the three men, covering at least a part of the amount they may be required to forfeit to the government.
Expects Assurances
Romano said he expects to receive written assurances that assets covering the rest will not be dissipated before a trial is held.
When asked about the huge amounts, among the largest that individuals have been asked to forfeit in a RICO case, Romano said the numbers represented “the extraordinary levels of compensation and stock ownership in the (illegal) Drexel enterprise” paid to Michael Milken and the others. The indictment notes that Milken received $1.1 billion in direct compensation from Drexel from 1984 through 1987, as well as millions in other forms of compensation, and that he is Drexel’s largest individual stockholder, owning about 6% of the firm.
According to the indictment, Milken’s pay was $123.8 million in 1984 and $135 million in 1985, then more than doubled in 1986 to $294.8 million. In 1987, he was paid $550 million. The indictment says that, during those years, Milken’s personal compensation amounted to between 28% and 44% of the junk bond department’s gross revenues.
Lowell Milken allegedly received $102 million in direct compensation during the same period.
Drexel’s tentative settlement of the six criminal charges pending against the firm calls for it to withhold nearly all of Michael Milken’s compensation from 1988, as well as about $13 million owed to Lowell Milken. But the brothers are challenging that in court as a violation of their constitutional rights, and it will be up to a federal judge to decide.
The $1.85-billion total that the three are being asked to forfeit was based in part on calculations of how much each of them had received from Drexel. But Romano said that, under the law, each of them could be held “jointly and separately” liable for the full amount. Michael Milken has been reported to have a personal net worth of nearly $1 billion.
Arthur L. Liman, one of Milken’s main defense lawyers, said in a written statement that Milken “will plead not guilty with confidence that in a fair trial he will be acquitted.” Liman said: “The charges against Mr. Milken are essentially a repetition of the accusations made by Ivan Boesky and others as they bargained for leniency or immunity from prosecution.”
Both Milkens strongly denied the charges against them. Michael Milken said in a written press release: “I am confident that in the end I will be vindicated.” Lowell Milken said that “the proof will show that I had virtually no contacts with Ivan Boesky, and that I had little, if anything, to do with the events the prosecutors misrepresent in order to construct their charges.”
He added that “I have been thrown into this indictment because of a fact in which I take great pride--I am Michael Milken’s brother.”
Michael Armstrong, Lowell’s lawyer, said in a brief interview that he found little that was unexpected in the indictment. “It seems like little more than a rehash of what the SEC came out with six months ago,” he said.
In another statement, two lawyers representing Newberg accused the government of seeking to punish Newberg for refusing to become a prosecution witness by indicting him twice on racketeering charges.
“The second RICO indictment of Mr. Newberg, containing essentially the same charges as those in the first indictment, is a total perversion of the RICO statute,” the lawyers said. Newberg could not be reached for comment. He left Drexel when it became apparent that he was going to be charged in the Princeton/Newport case.
Romano said that none of the three would be arrested. Instead, they will be allowed to present themselves for arraignment, probably one week from today. The government requested that U.S. District Judge Kimba M. Wood be assigned to the case, because she is already presiding over the case in which Drexel is expected to plead guilty to six charges.
The indictment conspicuously leaves out a number of names of Drexel employees who reportedly have been under investigation. Several of them had received “target” letters from prosecutors warning them that they faced indictment. Defense lawyers said they believe that the government may file additional indictments, or file a new indictment, superseding the one handed up Wednesday, that would include more individuals as defendants.
