Milken Sought to Protect Brother and Avoid a Trial

Michael Milken expects to go to prison and gave up his fight against securities charges to obtain dismissal of the counts against his brother and avoid the ordeal of a trial that he had come to doubt he could win, one of his closest friends and others said Saturday.

Milken is scheduled to appear in federal court here Tuesday or Wednesday to plead guilty to six felony charges and agree to pay $600 million in penalties. The momentous actions will mark the end of the government’s sweeping investigation of the Beverly Hills-based financier and former head of junk bonds for Drexel Burnham Lambert.

But it remains uncertain whether the Milken deal signals the end of the government’s probe into corruption on Wall Street or the start of a new phase.

Sources close to Milken acknowledged Saturday that he has agreed to be questioned by federal prosecutors and attorneys for the Securities and Exchange Commission. But the sources said that Milken has not promised to provide information against specific individuals, a departure from most plea agreements.

Milken had maintained his innocence since his indictment 13 months ago. He began to seriously consider a plea bargain two weeks ago after prosecutors vowed to file an expanded list of charges if he did not agree to plead guilty by Friday.

“The deadline had been set and he agonized over it every day, all the time,” said Harry R. Horowitz, one of Milken’s closest friends since their boyhood days in Encino and also a former executive at Drexel. “Certainly the No. 1 factor was the dismissal of the charges against Lowell. He didn’t make the decision until the very end. He is resigned to going to jail. He knows he has to serve time. But I think Michael made a choice for the future and not for the past.”

Horowitz and others close to Milken said Saturday that the financial wizard had come to doubt that he could be acquitted in a trial, although he still believed he was not guilty. Horowitz said the government was prepared to add another 100 counts to the list of charges against him, a claim that could not be confirmed with prosecutors, who have refused to discuss the case.

Horowitz said that Milken overruled his wife, Lori, and other family members and friends in deciding to plead guilty.

“I still do believe, as his wife believes, that he could fight and win and be vindicated,” Horowitz said. “But unfortunately the damage that would be done on all sides in a long court case means everyone would end up a loser.”

Milken, 43, was indicted in March, 1989, on 98 charges of racketeering and criminal securities fraud, ranging from insider trading and market manipulation to concealing the true ownership of stocks. His brother and former aide, Lowell, 41, and former Drexel trader Bruce L. Newberg, were charged along with him. It is unclear how the agreement will affect Newberg.

While sources have said the agreement grants Milken immunity from any future criminal prosecution, one source said his brother could face later charges if the government uncovers wrongdoing in the future.

When sources close to Milken first disclosed Friday that he had agreed to plead guilty, they said the six counts will not include racketeering, which carries a 20-year prison term, or insider trading. The sources said the pleas will come to charges with maximum terms of five years each and that prosecutors will recommend that he serve the sentences concurrently.

If the judge agrees, Milken would probably face a maximum of five years in prison and could be eligible for parole after completing one-third of the time.

The $600 million in penalties, the largest ever assessed against an individual, would not leave Milken broke. He posted $700 million in cash and assets when he was indicted and is said to be worth at least $1 billion.

The issue of cooperation was said to have been one of the most difficult in the negotiations, with Milken holding out against any cooperation at all. But several government officials, including SEC Chairman Richard C. Breeden, were said to have been equally adamant that Milken be required to share what he knows.

Although details remained unclear Saturday, sources indicated that the agreement will allow both sides to claim victory on the cooperation issue. Milken has agreed to be questioned extensively by the government, although interviews will not take place immediately.

One source said that it was understood that Milken “would not sit down and go through a debriefing and turn over everyone (on whom) he had knowledge of criminal conduct.” But the source said Milken could be used to corroborate information the government had obtained elsewhere. He said government interviews with Milken would not be under oath.

Convicted stock speculator Ivan F. Boesky first implicated Milken as part of his deal with the government, and Boesky’s allegations formed the basis for the initial charges. But in recent months prosecutors had secured the cooperation of other people close to Milken and the threatened second indictment was expected to be much stronger.

The issue of Milken’s cooperation is of no small concern to many powerful people who were his clients and may still be subjects of government investigations.

“You’re talking about a lot of the leading lights in American industry,” said one lawyer involved in the case. “If Mike did cooperate, there would be a lot of concerned people.”

Milken was involved in many of the largest corporate takeover fights of the 1980s. And prosecutors and the SEC are known to have been interested in his involvement with big buyers of junk bonds, including First Executive Corp., the big Los Angeles life insurance concern headed by Fred Carr, and Beverly Hills-based Columbia Savings & Loan.

The extent of Milken’s cooperation will not be known until full details of the deal are made public. But Milken’s agreement to be interviewed leaves room for the government to claim that it is getting his cooperation.

Beyond the issue of what Milken agreed to, however, a perhaps more fundamental question is how enthusiastic the government is to continue the whole series of inquiries that grew out of the investigation of Drexel Burnham, which paid $650 million last year after pleading guilty to six felonies and is closing its operations.

Federal prosecutors in New York refused to discuss any aspect of the case. But other lawyers in the case or related investigations said the U.S. attorney’s office in Manhattan appears to have little enthusiasm to bring new indictments.

However, they said the SEC apparently intends to forge ahead with Drexel-related investigations. Breeden is said to be particularly eager to pursue cases related to the savings and loan industry.

The criminal cases were begun in New York, when Rudolph W. Giuliani was the U.S. attorney in Manhattan. Giuliani appeared to have a particular lust for Wall Street cases that attracted great publicity. Some of his critics have suggested that his zeal may have been related to his later, unsuccessful run for mayor of New York.

Giuliani’s successor, Otto G. Obermaier, seems far less concerned about bringing cases that are likely to attract attention from the press. In any event, Obermaier has had to disqualify himself from supervising anything related to the Drexel investigation because his former law firm represented potential defendants.

In the years since the Drexel investigation began, the U.S. attorney’s office has had significant turnover. And the two assistant prosecutors assigned to the Milken case, John Carroll and Jess Fardella, are said to be eager to move on, probably to private practice.

A lawyer who knows the two prosecutors well said he thinks further criminal prosecution in New York is unlikely. “My sense is that it’s over,” he said.

Alan R. Bromberg, a securities law professor at Southern Methodist University in Dallas, also sees the Milken deal as the end of the line for the Wall Street cases.

“It’s the capstone for the government’s campaign against the securities industry,” he said. “It now has the biggest scalp.”

CREDIT CRISIS

The collapse of the junk-bond market that Milken helped create has left some companies squeezed for credit. D1.