THE MILKEN INDICTMENT : Sources Say U.S. Wants Milkens as Evidence in Case

Prosecutors still hope to persuade Drexel Burnham Lambert “junk bond” chief Michael Milken and his brother to cooperate with the government’s widening investigation that now targets prominent Drexel clients, sources directly involved in the case said Thursday. They said this is part of the government’s strategy in naming Milken in a 98-count indictment carrying enormous potential financial penalties and hundreds of years in prison.

One source who has knowledge of the government strategy said prosecutors still desperately want Milken and his brother, Lowell Milken, to become government witnesses. The source declined to name the Drexel clients under investigation. But he said prosecutors believe that certain Drexel customers may have conducted insider trading, stock market manipulation and illegal “parking” of securities on a scale even bigger than the wrongdoing allegedly committed by the Milkens.

Racketeering Charges Included

Representatives of the Milkens on Thursday didn’t hold out any hope that a settlement was possible. “We’re getting ready for trial and we’re going to beat . . . them,” said Michael Armstrong, a former federal prosecutor who represents Lowell Milken. A spokesman for Michael Milken also said he had every expectation that the case will proceed to trial.

The Milkens and Bruce L. Newberg, a former Drexel trader, were named in the indictment returned Wednesday by a federal grand jury in New York. Michael Milken is named in all 98 counts, which include racketeering charges. The government is demanding that the three defendants forfeit a total of $1.85 billion, which prosecutors claim is the amount of ill-gotten gains obtained through a long-operating criminal enterprise at Drexel.

Each defendant also faces a potential fine of twice that amount, or $3.7 billion, on the racketeering counts, as well as additional fines and the possibility of long prison terms. The three are expected to plead not guilty before U.S. District Judge Kimba M. Wood on April 7.

All three have vigorously maintained their innocence and have said they expect to be vindicated in a trial.

Benito Romano, the U.S. attorney in Manhattan, confirmed Wednesday that “this specific investigation is continuing,” although he refused to elaborate.

There has been speculation for months that the Drexel investigation was turning toward clients of the firm as potential targets. Although the indictment of Milken seemed imminent at the end of last year, it apparently was put off as additional employees of Drexel’s junk bond department in Beverly Hills agreed to testify before the grand jury in exchange for promises of immunity.

Two of those witnesses in particular, James Dahl, one of Drexel’s top junk bond salesman, and Terren S. Peizer, who also works in the Beverly Hills office, are believed to have given prosecutors information that implicates clients but has little bearing on the charges against the Milkens contained in Wednesday’s indictment. “Dahl and Peizer play no part in this indictment,” said another source close to the case.

‘More or Less Typical’

John Carroll, one of the two assistant U.S. attorneys handling the Drexel prosecution, refused to comment Thursday on the government’s strategy or the possibility of indictments against clients. But he didn’t rule out the possibility of a settlement with the Milkens. Emphasizing that he wasn’t referring specifically to the Drexel case, Carroll said: “I’m not aware of any case where the government was unwilling to seek a resolution.”

Bruce Baird, head of the U.S. attorney’s securities fraud unit in Manhattan, denied that the indictment had been designed to apply pressure. He said the number of counts “is more or less typical for a large case.” And he said the $1.85-billion forfeiture sought, while probably the largest ever demanded of individuals in a RICO case, was simply based on the government’s calculation of how much was earned from the allegedly illegal activities.

As reported, Michael Milken’s lawyers some months ago held brief exploratory talks with prosecutors over the possibility of a settlement. But Milken’s lawyers terminated the talks because they felt that the government’s demands were unreasonable.

One defense lawyer, who asked not to be identified, said prosecutors continued right up until days before the indictment was returned to try to persuade the Milkens, Newberg and several individuals who in the end weren’t charged to negotiate a deal. “They were putting tremendous pressure on everybody,” the lawyer said.

He said an effort to use the massive potential penalties in the indictment to pressure the Milkens to cooperate is “certainly consistent with everything they’ve been doing.”

If the Milkens were to agree to plead guilty to reduced charges and become government witnesses, they would still almost certainly face prison time and fines. But the penalties probably would be far less than they face now. For example, Ivan F. Boesky, the former stock speculator suspected of widespread insider trading, was allowed to plead guilty to a single criminal count and was sentenced to three years in jail. He also was required to pay $100 million in financial penalties.

Last-Minute Pressure

Two individuals who weren’t named in the indictment Wednesday but who reportedly had received “target” letters from prosecutors, warning them that they were likely to be indicted, were Pamela Monzert, a trader in the junk bond department, and Warren Trepp, a Drexel executive vice president who sat two seats away from Milken in the Beverly Hills trading room.

The defense lawyer said prosecutors continued to pressure Monzert and didn’t let her know that she wouldn’t be named in the indictment until “right up till the last minute.”

It wasn’t clear Thursday why prosecutors had threatened but not indicted the two. Prosecutors have refused to comment. Lawyers for Monzert and Trepp failed to return telephone calls to their offices Thursday.

But it is widely expected that the government will eventually file a superseding indictment in the case, which may contain additional charges and name additional defendants.

Sources close to the case said the severity of the charges and the massive penalties in the indictment also seemed clearly designed to serve as a warning and to apply additional pressure on other Drexel employees who prosecutors hope will cooperate.