Milken Charity Groups Cleared in State Inquiry

The California attorney general’s office said Wednesday that a nine-month inquiry found no basis for action against four charitable foundations created by Michael Milken and his family.

The decision was the first good news from a government agency in recent months for the embattled Beverly Hills financier, who is under federal criminal indictment on stock fraud and racketeering charges.

Last March, a federal grand jury in New York indicted Milken, his brother, Lowell, and a former associate on 98 criminal counts. The Securities and Exchange Commission had filed a massive civil lawsuit against the Milkens several months earlier.

The Milkens have pleaded not guilty to the criminal charges and are to go on trial next spring. The civil lawsuit is not expected to proceed until the criminal matters are resolved.

The criminal and SEC charges stem from a widely publicized, lengthy investigation into Michael Milken’s activities as head of the high-yield, or junk bond, department of Drexel Burnham Lambert Inc., the New York investment bank. He recently resigned that post and started his own business.

During the investigation, questions were raised about the role played by four charitable foundations created by Milken and his family. The basic allegation was that Milken and others involved in the tax-exempt organizations benefited illegally from stock and bond transactions by the foundations.

Last November, the state attorney general’s office said it was starting an audit of the foundations, which are headquartered in Encino.

H. Chester Horn, deputy attorney general, said in an interview Wednesday that the inquiry turned up no basis for action against the foundations at this time.

“There was no evidence that the foundations were injured by any alleged illegal activities on behalf of the Milkens,” Horn said.

If Milken or his brother is convicted in the criminal trial, Horn said, their roles in the foundations would be re-examined and they could be removed from the boards.

Daniel R. Murdock, a New York lawyer who represents the foundations, was notified of the decision by letter Wednesday.

“We are extremely pleased and gratified by the results of the attorney general’s investigation,” Murdock said in an interview. “Frankly, we had hoped and anticipated that this would be the result.”

The Internal Revenue Service recently started an audit of the largest foundation, the Capital Fund, but Murdock said it is a routine examination.

The Milkens have donated $350 million to the charities since 1982, including $196.4 million by Milken and his wife in 1987, when he made $550 million at Drexel Burnham.

The organizations, grouped as the Foundations of the Milken Families, have assets of $380 million and rank among the nation’s 45 largest charitable organizations and as the 10th largest in California.

The foundations have donated $44 million to dozens of organizations since 1982. Their best-known program involves cash awards to outstanding educators in California and three other states.

Associates of the family said that the allegations raised last year concerning the foundations were particularly painful to the Milkens and that they were pleased by the attorney general’s findings.

“This is a positive result from a governmental agency, and there haven’t been too many of those lately,” said a Milken lawyer, who spoke on the condition that his name not be used.

The state’s inquiry focused primarily on six securities transactions at the foundations between 1982 and 1988 that involved Milken and other parties related to the organizations. One such transaction was the 1986 sale of $1.45 million in bonds by the Capital Fund to a company owned by Michael and Lowell Milken.

California law permits such so-called related party dealings, so long as the charitable foundation is not damaged. The attorney general’s inquiry found that the foundations made substantial profits from all six transactions and that they were conducted at fair market prices.

The state examined also the role of the Capital Fund Foundation in a stock transaction that the SEC charged constituted illegal scheming among Milken, Drexel and Ivan F. Boesky, the convicted stock speculator.

Horn said that the inquiry established that the foundation was not damaged by the transaction, but he said determining the legality of the stock deal or whether the foundations played any role in Milken’s alleged crimes will be up to the courts.

Asset Seizure Feared

The attorney general’s office, which oversees charitable organizations, had been concerned that the assets of the foundations might be subject to seizure by the federal government if Milken is convicted on the racketeering charges.

The racketeering statute allows the government to seize a wide range of assets. As part of their bonds in the criminal case, the Milkens posted assets worth $600 million. The assets could be forfeited if they are convicted.

However, the $600 million did not include any assets from the foundations, and Horn said the state is now relatively sure that investments of the foundations are protected.