U.S. Says Drexel May Pay Milkens Over $100 Million

Federal prosecutors have decided to drop their demand that Drexel Burnham Lambert withhold more than $100 million in compensation owed to former junk bond chief Michael Milken and his brother, Lowell, for their work in 1988, sources close to the case said.

The government’s demand had become the subject of a legal battle and was holding up Drexel’s plans, announced months ago, to plead guilty to six felony counts and pay $650 million in penalties. Under a plea agreement signed with prosecutors last December, the investment firm had agreed to withhold all of Michael Milken’s compensation for 1988, believed to total at least $100 million, and half of the $26 million owed to his brother for that year.

Lawyers for the Milkens challenged that part of the agreement as an unconstitutional deprivation of property, asserting that there was no legal precedent for it. They also noted that the 1988 salary and bonuses were for work done well after the allegedly illegal activity that the Milkens are accused of in a pending 98-count indictment.

U.S. District Judge Kimba Wood was to have held a hearing on the dispute Sept. 6. The hearing is still scheduled.

Jess Fardella, an assistant U.S. attorney involved in the Drexel case, refused to comment Wednesday. But a source close to the case said at least one defense attorney had been informed that the government will allow Drexel to pay the full compensation owed to the Milkens for 1988.

Steven Anreder, Drexel’s spokesman, also refused to comment.

As the mastermind of Drexel’s fabulously successful high-yield, or junk bond, operation in Beverly Hills, Milken had earned astronomical bonuses under his compensation agreement with the firm. In 1987, his peak year, he earned a total of $550 million, according to court documents. His total direct earnings from Drexel from 1983 through 1987 are believed to have totaled more than $1 billion, most of it in bonuses.

The government is seeking to require the Milkens and the other defendant in the case, former Drexel trader Bruce L. Newberg, to forfeit $1.8 billion under federal racketeering laws. Milken in April was required to pledge assets worth $700 million as security for the government’s claim. The Milkens resigned from their positions at Drexel in June. All three defendants strongly deny the charges.

Prosecutors have never formally explained why they wanted Drexel to withhold the Milkens’ 1988 compensation. But it is understood that the government felt it was improper for Drexel to pay many millions of dollars to the man who prosecutors contend was the main cause of Drexel’s criminal activity.

A number of legal scholars termed the government’s request unusual and said it probably violated contract law as well as constitutional provisions safeguarding property. Helen Toor, an assistant U.S. attorney in Manhattan, said Wednesday that the request was analogous to the many instances when companies have pleaded guilty to charges and agreed to fire the employees who were primarily responsible. But she said the issue “has not been litigated a lot,” and she said there were few, if any, direct legal precedents for the demand that the government made in the Drexel case.

Prosecutors are expected to bring a superseding indictment in the Milken case this fall, possibly in October, adding additional charges and naming more defendants. A trial is scheduled for March.