U.S. to Allow Milken to Collect His 1988 Pay : Action Clears Way for Drexel to Enter Guilty Plea Before Judge on Monday

Federal prosecutors, as expected, formally dropped their demand that Drexel Burnham Lambert Inc. withhold more than $100 million in compensation owed to former junk bond chief Michael Milken for 1988.

Milken’s lawyer had challenged the requirement, which had been part of Drexel’s agreement with the government to plead guilty to six felony counts and pay $650 million in penalties.

By dropping the ban on paying Milken for work done last year, prosecutors cleared the way for Drexel to formally enter its guilty plea before U.S. District Judge Kimba Wood on Monday in New York. The U.S. Attorney’s Office in Manhattan notified the judge by letter that the government no longer insists that Drexel withhold the money.

As reported, sources said last month that prosecutors had decided to drop the demand.

Drexel spokesman Steven Anreder, citing the firm’s policy of keeping employee compensation matters confidential, refused to comment directly on whether Drexel will immediately pay the money to Milken. But Anreder said: “We have an extraordinary record for living up to our commitments.”

Spokesman Denies Talks

The guilty plea has been held up since December because Milken’s lawyers challenged the provision to withhold compensation. In a letter to Wood, Assistant U.S. Atty. John K. Carroll said the government decided to drop the provision after talks with Milken’s lawyers and because Milken’s resignation from the firm in June made it unnecessary.

However, a spokesman for Milken denied that there had been any talks with prosecutors on this subject. He asserted that the government’s retreat on the issue amounted to an acknowledgment that it would have been an unconstitutional deprivation of Milken’s property rights, as his lawyers had claimed in court papers.

In a written statement, Arthur L. Liman, Milken’s lead defense lawyer, said: “We are pleased that the government has reversed its position and dropped the unconstitutional provision of the settlement with Drexel. These unconstitutional provisions were a gross abuse of prosecutorial power.”

Liman also said in the statement that he hopes the government will reconsider its use of the “Draconian” racketeering law in the pending 98-count indictment of Milken. The law, known as RICO, for Racketeer Influenced and Corrupt Organizations Act, carries a lengthy prison term and could require Milken to forfeit hundreds of millions of dollars to the government if he is convicted.

The government also dropped its demand that Drexel withhold about $13 million owed to Milken’s brother, Lowell, who also worked for the junk bond, or high-yield, department.

Michael Armstrong, lawyer for Lowell Milken, asserted in an interview that prosecutors acquiesced on the issue because they had no choice. “They got caught trying to deprive people of money in violation of the Constitution,” he said.

Prosecutors also dropped a demand that Drexel fire Michael Milken. The government said the requirement was moot because Milken has already left the firm.