Michael Milken, the man who created the market for junk bonds, abandoned a longstanding claim that he is not guilty of financial fraud and agreed Friday to plead guilty to six felony counts, sources said.
In a settlement that will end all other criminal prosecution of him, the former head of Drexel Burnham Lambert's junk bond operations in Beverly Hills also agreed to pay $600 million in financial penalties, people involved in the case said. The amount is believed to be by far the largest financial settlement ever by an individual in a criminal case. The settlement also resolves civil charges filed by the Securities and Exchange Commission.
The decision by Milken, 43, to settle was heavily influenced by a concession made in recent days by prosecutors: They agreed to drop all charges against his brother, Lowell, a former top aide to Milken at Drexel, sources said. Michael, Lowell and former Drexel trader Bruce L. Newberg were named in a 98-count racketeering and securities fraud indictment pending sinceMarch, 1989. It was not clear how the agreement will affect Newberg.
The settlement, which apparently will bring to an end the largest criminal securities fraud investigation ever undertaken by the federal government, is not expected to be announced officially until early next week. Lawyers were said to be still resolving minor details. Officials at both the U.S. Attorney's Office in Manhattan and the SEC refused to comment on the agreement, which will not go into effect until Milken enters his plea.
A Milken spokesman also declined to comment.
Before committing himself to the settlement, Milken waited until virtually the last minute under a deadline set by prosecutors. Sources said he was told that he had to agree by Friday afternoon. Otherwise, a grand jury immediately would return a long-threatened "superseding" indictment that would have contained many additional felony charges and named additional defendants. Milken finally sent word that he would go along at mid-afternoon, the sources said.
"Today was the drop-dead date," a lawyer involved in the case said Friday.
Prosecutors had prepared to make good their threat by ordering the grand jury hearing the case into court on Friday, sources said. The grand jury normally meets only on Tuesdays and Thursdays.
It was not clear how much prison time, if any, Milken will have to serve, although legal experts said it is very likely that he will be incarcerated. In the federal court system, prosecutors are not allowed to plea bargain on prison sentences, which are always left up to the judge. But the settlement is understood to include a promise that prosecutors will recommend that any prison sentences on the six counts be served concurrently. Legal experts said that the probable upper limit of a prison sentence would be five years.
The agreement enables both sides to avoid what would have been an extremely lengthy and complicated trial. Sources close to Milken declined to comment immediately on his state of mind or the final chain of events that led to the agreement. The accord caps months of on-again, off-again negotiations behind the scenes between Milken's lawyers, the U.S. Attorney's Office and the SEC. The superseding indictment originally was to have been filed last fall.
Former prosecutors said the government's actions in the case, in which they allowed months to pass even though all evidence had been gathered for the superseding indictment, suggested that the government was unusually eager to settle the case. Jess Fardella, one of the lead prosecutors in the case, refused to comment Friday.
Milken, however, was extremely reluctant to admit guilt and accept legal responsibility for a chain of events that included, among other things, the collapse of Drexel in February, when the firm's parent company filed bankruptcy proceedings. Drexel itself had agreed to plead guilty to six felony counts in December, 1988, and pay $650 million in penalties. That accord set the firm on a decline from which it never recovered.
Milken's own legal advisers were said to have been divided on whether he should settle.
Other criminal defense lawyers in New York said, however, that Milken's chances of winning in a trial were doubtful. About a dozen of his closest former colleagues and customers had agreed to testify against him in exchange for immunity from prosecution. Nearly all of the criminal securities fraud cases that had gone to juries in New York in the last two years ended with guilty verdicts. And Milken's defense lawyers were known to have been afraid that his wealth might have prejudiced jurors against him. He is said to have earned more than $1 billion at Drexel between 1983 and 1987, including $550 million in a single year.
According to the sources, the six counts to which Milken has agreed to plead guilty will not include any racketeering or insider trading charges. They declined to specify, however, what the six counts are.
In addition to ending the criminal case against him in federal court in New York, sources said the accord gives him immunity from other possible prosecution, such as in the current pending investigations of possible fraud at Lincoln Savings & Loan and CenTrust Savings Bank. Milken resigned from Drexel last June, after his indictment, and founded a new company to advise companies and minority groups on raising capital.
Sources did not specify how the $600 million that Milken has agreed to forfeit will be broken down, between criminal fines and civil penalties. But they said the amount includes a provision for a special fund to pay successful claims in the many private civil lawsuits filed against Milken for his alleged illegal activities at Drexel. The $650-million penalty that Drexel paid also included such a fund.
The government had pressured Milken to agree to pay a total of $650 million, as Drexel itself had. But Milken's lawyers countered that he already had been financially penalized as a result of the investigation and Drexel's collapse. Drexel never paid him the bonus and salary he was owed for 1988 and 1989, and he was never paid for the Drexel stock he was required to turn in when he was forced to resign from the company last June after his indictment. In all, he was said to have been owed about $200 million by Drexel.
It was not immediately clear if Milken will have to cooperate at all in any continuing investigations by the government. The issue of cooperation had been a major stumbling block in the negotiations. Prosecutors and SEC Chairman Richard C. Breeden were said to have insisted, at least until recently, that Milken share what he knows about several other figures currently under investigation. "I know Breeden really wanted him to cooperate," one lawyer involved in the case said.
Word of the settlement was considered encouraging news by lawyers for several individuals who would have been named as defendants in the new indictment. It was expected that a settlement by Milken would remove the threat that their clients would be indicted, although their lawyers said they had not received any official word on that from the government. One of those expected to have been indicted was Warren Trepp, Drexel's head junk bond trader. His lawyer, William Hundley, declined to comment Friday. Trepp has denied any wrongdoing.
It also was not clear what impact the settlement would have on Newberg, the former Drexel trader named in the original indictment. Fred Hafetz, one of his attorneys, said: "We'll just have to wait and see."
The investigation of Drexel and Milken began in 1986 when Ivan F. Boesky, a former stock speculator, reached a plea agreement with the government--requiring him to plead guilty to one felony count and pay $100 million in penalties--and began turning over incriminating information.
The original indictment of Milken included counts of racketeering, racketeering conspiracy, insider trading, stock market manipulation and filing false statements with the SEC. That indictment rested heavily on information obtained from Boesky, a convicted felon, who prosecutors feared might not be thoroughly persuasive to a jury.
But in the months after the indictment, the government brought intense pressure to bear on former Milken clients and co-workers. They are said to have given evidence of a wide variety of schemes unrelated to Boesky, including additional instances of insider trading, giving improper inducements to mutual fund managers to persuade them to invest in Drexel-issued junk bonds, tax fraud and obstruction of justice.
One lawyer in the case said that, at least until earlier this week, the government was said to have insisted that Milken's brother plead guilty to at least one misdemeanor count. But Milken held firm that he would not consent to an agreement unless his brother was exempted from all prosecution. Lowell is said to have reached a settlement as well of the separate SEC charges pending against him. But it is believed that he will be able to retain most of the millions he earned while at Drexel.
Another lawyer involved in the case said it was not clear yet whether the agreement means that the Drexel investigation will completely end or whether the government will continue to pursue leads against others, including several big former Drexel clients. "I'd be reluctant to say this would be the end of the investigation," the lawyer said. "There are a lot of imponderables, and I just don't know where this (Milken's plea) could lead."
Staff writer Robert L. Jackson in Washington contributed to this story.
PROSECUTION CASE--Milken yields as U.S. gathers strong evidence. D1
Reaction to the settlement. D1