Wall Street speculator Ivan F. Boesky and Drexel Burnham Lambert financier Michael Milken met in July, 1986, to discuss how to "conceal the true nature" of a $5.3-million payment from Boesky to Drexel that was part of a secret stock trading arrangement between the two men, according to a confidential Securities and Exchange Commission memorandum prepared in May, 1988.
In charges filed against Drexel, Milken and others last year, the SEC alleged that the stock trading scheme involved insider trading, stock price manipulation, rigging of corporate takeovers, tax fraud and other violations.
At the heart of the SEC charges was a $5.3-million payment made by Boesky to Drexel in March, 1986, to reconcile accounts under the alleged arrangement--the payment was made about two months before the fall of investment banker Dennis B. Levine touched off the Wall Street insider trading scandal. Drexel has said the payment was for consulting services it provided Boesky, while the SEC charged it was part of the illegal trading arrangement.
"Boesky and Milken met in July, 1986, to discuss how they could substantiate the 'consulting services' gloss which they had used to conceal the true nature of the $5.3-million payment," the SEC memorandum said. "In this meeting, Milken cautioned Boesky that they needed to be more careful because of the 'new environment,' which Boesky understood to be a reference to the Levine case and its progeny."
In addition, a Milken aide told government investigators that he "fabricated" trading losses in transactions with Boesky because he didn't trust the calculations of a Boesky assistant, according to the memorandum.
Boesky's chief bookkeeper, Setrag Mooradian, flew to Los Angeles just before the $5.3-million payment was made and met with Milken aide Charles Thurnher in an attempt to determine the balance owed as part of the alleged arrangement, the memorandum said.
The meeting took place, the memorandum said, because Milken and Boesky had agreed to settle the balance owed under the arrangement before Drexel helped Boesky raise nearly $1 billion to use in speculating on corporate takeovers and other transactions.
"Thurnher did not trust Mooradian, believing that he sometimes claimed Boesky had purchased amounts of Fischbach stock in excess of reported daily volume or at prices beyond reported daily high and low prices," the SEC memorandum said. "Thurnher thought Mooradian's calculations of Boesky's losses from Fischbach to be inflated. He has admitted that he, in turn, fabricated a loss figure for a position in Unocal common stock that Boesky had asked Milken to take for him."
The memorandum also said Drexel's underwriting committee objected to raising funds for Boesky in 1986. But Drexel Chief Executive Fred Joseph intervened after discussions with Milken and approved the Boesky transaction, the memorandum said. The SEC memorandum said Drexel's underwriting assistance committee raised serious questions about Milken's request that the firm help Boesky raise nearly $1 billion in March, 1986. The committee was concerned about the excessive leverage involved, the memo said.
"Milken was significantly involved in the underwriting of the new Boesky arbitrage fund," the memorandum said. "Indeed, he was the person who persuaded Fred Joseph to allow the Boesky offering to proceed over the objections of Drexel's underwriting assistance committee." The memorandum also said employees of Drexel and Boesky destroyed documents describing the trading arrangement.
The memorandum was prepared by the SEC's division of enforcement and then submitted to the agency's commissioners in support of a recommendation that charges be filed against Drexel, Milken and others. After reviewing the document, the agency's commissioners voted unanimously in the summer of 1988 to file charges.
While Boesky is serving a three-year prison term and cooperating with the government's prosecution of Milken, Milken repeatedly has asserted his innocence and vowed to fight SEC and criminal charges.
"Any such suggestion of wrongdoing by Michael Milken is totally untrue," Milken attorney Martin Flumenbaum said. "These continuing leaks by the government are deplorable and are designed to deny Mike Milken his right to a fair trial."
Milken, who was the target of a 98-count criminal racketeering and securities fraud indictment earlier this year, is expected to be charged with additional violations this fall, according to the Manhattan U.S. attorney.