Milken Used Secret Information From Viacom, Lorimar, Prosecutors Say

In the labyrinth of criminal activity alleged by federal prosecutors, “junk bond” king Michael Milken nearly always dealt with a third party such as speculator Ivan F. Boesky or the investment firm Princeton/Newport Partners to manipulate stock markets or to profit from inside trades.

The government identified only two instances of straight insider trading, in which Milken and other unidentified employees of Drexel Burnham Lambert Inc. allegedly misappropriated confidential information from clients to trade for the firm’s benefit.

Only the bare bones of the transactions were outlined in the criminal indictment; no motive--other than the implicit profit motive--was alleged. Both incidents involved large entertainment companies--Lorimar Inc. and Viacom International Inc.--whose chief executives considered Milken a friend.

According to the government allegations, Drexel happened to have a “short” position in the common stock of both Lorimar and Viacom (betting the stock prices would fall) when those companies came to Drexel with proposals that seemed certain to drive the price up. Milken allegedly prompted Drexel to make certain trades that netted a profit of $4.3 million from Lorimar trades and $1.78 million from Viacom trades.

If the allegations are proven, said one veteran securities lawyer, “I’m very, very surprised at that kind of blatant (activity).” In these two instances, he noted, Milken’s defense team won’t be able to accuse Boesky--the government’s star witness--of lying.

Short Position Covered

Drexel policy, as well as federal securities law, prohibited Drexel employees from trading for the firm’s benefit when they possessed confidential information, according to the indictment.

In the case of Lorimar, Milken was retained to advise the Culver City-based entertainment firm on a proposed merger with Telepictures. Milken was initially contacted about the deal around Sept. 10, 1985. For the next several weeks, until Oct. 2, 1985, Milken “caused the Drexel Enterprise to buy a total of approximately 189,700 shares of Lorimar common stock . . . (which) not only covered Drexel’s existing short position in Lorimar common stock, but also resulted in a long position of approximately 54,300 shares,” the indictment said.

Few other details can be gleaned from the criminal indictment, but a civil complaint filed last September by the Securities and Exchange Commission contended that Drexel’s trading accounted for 85% of Lorimar’s volume on Sept. 30, 1985, and 46.7% of the volume of Lorimar shares traded on Oct. 2, 1985. The SEC suit charged Drexel, Milken and Cary J. Maultasch with insider trading rule violations in the Lorimar affair.

Maultasch, who was a senior equity trader in Drexel’s New York office and a member of the firm’s high-yield and convertible bond department headed by Milken, settled his case with the SEC late last year and began cooperating with federal prosecutors.

Interestingly, the civil and criminal charges calculated different sums for Drexel’s alleged profits from the trading in Lorimar stock. The SEC found that “Drexel avoided a loss of approximately $568,000 by covering its pre-existing short position . . . and obtained a profit of approximately $1.23 million on the Lorimar shares it purchased in excess of those needed to cover its short position.”

The criminal indictment, on the other hand, said “the Drexel Enterprise (the government’s term for Milken’s allegedly illegal operations) earned approximately $4.33 million in profits and avoided losses on the Lorimar securities it bought during the period.”

Despite the charges of abusing confidential information from his company, Lorimar co-founder and Chairman Merv Adelson joined other supporters in taking out full-page ads on Milken’s behalf this week.

Adelson--whose company was recently acquired by Warner Communications--said in a telephone interview: “Michael is, in my opinion, a man of integrity. He is a friend. I think he’ll be OK here.”

Former Viacom Chief Executive Terrence Elkes said: “Michael and I got along on a personal basis very very well. I find a lot of this difficult to believe, but I don’t have all the facts.”