Ranking Milken Among the Rogues : Finance: History could judge him an economic force of nature, a J. P. Morgan or just another business sharpie.

J. P. Morgan was accused of selling defective carbines to the Army, setting up an illegal steel trust and running the financial world like a puppeteer. Today he’s largely remembered as the financier who averted a financial panic, enabled the U.S. Treasury to refinance its debts and helped build the American empire.

The passage of years may similarly polish the reputation of Michael Milken, the junk bond pioneer who pleaded guilty to federal felony charges last week. But only if he’s lucky.

Events that are still unfolding will largely determine whether Milken’s marble bust will reside in the pantheon of financial greats or be consigned to the rogues gallery along with “Robber Baron” Jay Gould, swindler Charles Ponzi and Milken co-conspirator Ivan F. Boesky.

If junk bond investments are found to be central to the collapse of many thrifts, if more junk-funded companies fold under their debts and if the Wall Street scandal widens, Milken’s name may be mud. He could go down in the record books as a symbol of a decade when financiers earned fortunes shuffling paper and raiding companies while America’s industrial core rotted.

But if those crises ease, history may remember him primarily as a man who breathed life into corporate have-nots with a new means of financing and who fell because he crossed the line in an age when many on Wall Street seemed to have done the same.

If events take this course, Milken may be able to resurface in a few years in the mantle of a senior statesman, in the manner of Richard Nixon, making occasional appearances to dispense economic wisdom and tend the flame of his own reputation.

“Milken’s reputation is still highly fluid, and what happens next will have a lot of effect on how people remember him,” says Robert Sobel, a business historian at Hofstra University in Hempstead, N.Y. “Remember, if there hadn’t been a Great Depression, Herbert Hoover might be considered a statesman of stature.”

Whether he ends up a hero or a bum, Milken has cinched a place in the history texts. As is often pointed out, he became the most important financier of the 1980s by pioneering the high-yield, low-rated bonds that helped fuel a takeover boom, forced companies to restructure and, in some cases, gave them the funds to grow.

The securities investigation that brought him down was the most far-reaching in history. His $600-million settlement set a record; his 1987 earnings of $550 million alone guarantee him a place in the popular imagination.

What’s more, the Wall Street corruption scandal that humbled him was like few in U.S. history in the way it alleged corruption at the very heart of the financial world. Most of the celebrated financial rogues are fringe operators like Charles Ponzi, who became eponymous with a certain kind of swindle by bilking Boston immigrants of their savings, or like Bernard Cornfeld, whose mutual fund empire, Investors Overseas Services, promised the unwary big tax-free returns and delivered losses.

Richard F. Whitney was a former president of the New York Stock Exchange when he was escorted to a Sing Sing cell in 1938, but his “borrowing” of securities and cash from the accounts of customers, his firm, the exchange and his yacht club said nothing at all about the integrity of the financial system.

Some of the government officials who have pursued Milken believe that, as the center of a huge financial conspiracy, he ranks among the worst violators of securities laws in U.S. history. This judgment suggests that the current Wall Street investigation is in the league of Credit Mobilier, the scandal that surrounded the building of the Union Pacific Railroad in the 1860s.

In that affair, the railroad’s shareholders, who included some of the most powerful financiers and politicians of the day, padded the railroad’s construction budget to enrich themselves from government subsidies, and sold shares in the company’s stock to select congressmen to guarantee their political leverage. The scandal came to symbolize the bottomless corruption that attended the building of the railroads, then the country’s most vibrant industry.

The government has another chance to make its case when it files a sentencing memorandum with U.S. District Judge Kimba Wood in the next few months. Prosecutors are expected to try to substantiate their claims that in trading junk bonds, Milken and a wide circle of financiers were conspiring to manipulate markets, force takeovers and cheat customers, investors and the Internal Revenue Service.

But since Milken pleaded guilty to just six counts, reduced from the 98 included in the March, 1989, indictment, the government may never be able to persuade the world that his crimes were nearly that extensive.

Far more important to the world’s judgment of him may be what emerges from further investigation of Wall Street and the savings and loan business. Though Milken can’t be prosecuted for the information he provides, if he implicates others he could help persuade the world that the government’s far-reaching conspiracy did exist and, in so doing, further blemish his own name.

Government officials are believed to be particularly interested in finding out what he knows about Lincoln Savings of Irvine, CenTrust Savings Bank of Miami and Columbia Savings of Beverly Hills.

Milken’s name could be more closely associated with the S&L; crisis in the public’s mind if authorities uncover more securities violations there, or if it appears that junk bond investments played a larger role in the S&L; failures than has so far been understood. About 7% of junk bonds have been sold to the savings and loan industry.

“It will make him look more like a sharpie and less like a force of nature,” said Daniel Raff, an assistant professor of business history at Harvard Business School.

Milken’s reputation could also be harmed if more insurance companies with big junk portfolios develop financial problems, or if industrial companies built with junk funding are forced to reorganize because of a recession or other reasons. If a series of junk-funded companies continue the pattern of bankruptcies set by Federated Department Stores, Allied Stores, Revco and others, they may obscure the public’s memory of the junk successes, such as MCI Communications and Turner Broadcasting.

“His good name could be hurt by all sort of things that don’t really have to do with what he created,” said Hofstra’s Sobel, who has spoken at one of Milken’s junk bond conferences and is among those who believes that the financier’s crimes are “pretty minor stuff.”

Milken’s reputation is also at risk in the raft of civil suits that already have been brought against him. One, for example, contends that Milken hurt Unocal Corp. shareholders by conspiring with raiders T. Boone Pickens Jr., Paul A. Bilzerian, Carl C. Icahn and Ronald O. Perelman to manipulate the oil company’s stock during Pickens’ 1985 raid on Unocal.

Another suit contends that Milken and others at Drexel Burnham Lambert artificially propped up the junk bond market before his departure and other events brought a collapse that harmed many investors. The suits may be settled long before trial, but they could dredge up more damaging information before they are resolved.

In the battle for his good name, Milken has the sympathy of many in the financial world and industry and some in academia. He may have more to overcome to win the sympathies of average citizens because there are signs that the Wall Street scandals have damaged the popular view of the investment world.

A poll taken yearly by the Gallup Organization to gauge the public’s esteem for various professions shows an increasing distrust of people who sell stocks and bonds since the Wall Street scandal began.

Stockbrokers now rank 21st among 25 professions in their perceived honesty, according to this poll. The profession has slid seven rankings in the past seven years. Only members of Congress, insurance salesmen, advertising people and used car salesmen are considered less trustworthy, Gallup found.

Milken does have some things going for his reputation.

While it was Boesky who led the government to Milken, in one way Boesky’s villainy will benefit the junk bond king. Because of Boesky, it’s unlikely that the public will ever consider Milken the worst scoundrel to emerge from the insider trading scandal.

While Boesky pleaded guilty to only one felony count of filing false documents, compared to Milken’s six, Boesky acknowledged a pattern of bribing others in the markets, once with a valise stuffed with cash. And, in the minds of some at least, Boesky compounded his sins by ratting on his old allies.

“No one ever accused Boesky of doing anything socially productive,” said Alan Bromberg, securities law professor at Southern Methodist University in Dallas.

If Milken does preserve his good name, he will join a long list of financiers who have survived the most ferocious broadsides from the government.

J. P. Morgan was attacked by a congressional committee headed by Rep. Arsene Pujo, which in 1912 contended that Morgan was “one of a few financial leaders who had achieved an unhealthy control of the nation’s money and credit.” The investigation inflicted no lasting damage on Morgan, however.

Likewise, a Senate committee’s investigation of Wall Street after the 1929 crash, directed by committee counsel Ferdinand Pecora, unearthed allegations that insiders rigged the market and caused the collapse. But only one person, a banker, was indicted.

In 1947, the Justice Department brought a vast antitrust case in which it contended that the 17 top investment banks divided up the nation’s underwriting by a sort of corrupt conspiracy. But in 1954, a judge found no merit to the government’s claims.

With the benefit of hindsight, it now appears to some that Milken’s legal and public relations tactics made him his own worst enemy in his effort to preserve his reputation.

By all indications, Milken could have gotten off with a far lighter punishment if he had settled charges when they were brought; many say Drexel might have survived and prospered if it had pursued a similar course.

The late Edward Bennett Williams, the Washington lawyer who was one member of Milken’s highly paid legal team, reportedly urged him to settle but got nowhere.

And some public relations practitioners wonder whether Milken was well advised to dig in with a public relations campaign that cast him as the target of a government witch hunt. Some also contend that, whether or not Milken was sincere, the orchestrated publicity for some of Milken’s charitable events now looks like hypocrisy.

Len Kessler, who runs a financial public relations firm in New York, says events such as Milken’s appearance with disadvantaged children at a New York Mets game “looked pretty silly before (the plea) and now looks even worse.”

And what public relations strategy should Milken take in the future?

Some believe that Milken may need to write his own book to counter what others are even now busily scribbling about him. Random House has an author under contract to write about the case, and industry officials say at least two others are in the works elsewhere.

“Demand for a book by Milken would be huge,” predicts Roger Straus Jr. of the Farrar, Straus & Giroux publishing house. The financier could certainly afford the best ghostwriter.

It’s beginning to be clear how Milken plans to explain his crimes.

The comments of his attorneys suggest that he will stress the economic contributions of high-risk bonds as he makes his case to Judge Kimba Wood for a lenient sentence. His guilty plea leaves room for Milken to argue that these crimes weren’t intended to line his own pockets and that his junk bond network was fundamentally honest.

In his statement in court last week, Milken insisted: “Our business was in no way dependent on (illegal) practices. Nor did they comprise a fundamental part of our business.”

But some believe that if Milken takes the approach of a redeemed sinner, he may best be able to put his crimes behind him and preserve the world’s memories of his contributions. Some say insider trading figures such as Boyd L. Jefferies, founder of Jefferies & Co., and former takeover lawyer Ilan K. Reich have fared better in the court of public opinion by following such an approach.

“Americans love the repentant,” says Kirk O. Hanson, who teaches business ethics to MBA candidates at Stanford University. “We’d be delighted to have him appear in our classes.”

Jay Gould

With his allies Daniel Drew and James Fisk, this speculator gained notoriety for issuing millions of phony shares in Erie Railroad stock to earn untold profits in 1867. In 1869, he led an abortive attempt to corner the gold market, setting off the “Black Friday” panic that deepened popular hostility toward a group that came to be known as the Robber Barons.

Charles Ponzi

A one-time vegetable peddler, Ponzi persuaded newly arrived immigrants that he could earn them 40% on their money with a scheme to exploit a quirk in international postal conventions. The scheme made Ponzi rich for a while, but in 1920 a Boston paper pointed out that Ponzi’s returns came entirely from new suckers’ investments. The company collapsed. Ponzi went to jail, then fled to Italy and joined the Fascist party.

Bernard Cornfeld

Declaring his desire to “convert the proletariat to the leisured classes painlessly,” one-time socialist Cornfeld built Investors Overseas Services into a multibillion-dollar mutual fund empire. But IOS, which squeezed clients for ruinous commissions, was posting “profits” largely from accounting legerdemain. The empire crashed in 1970, and Cornfeld was forced to give up his several homes, jets and coterie of women.

Refer line:

A rogues’ gallery of financial schemers, DX

William Duer

An assistant Treasury secretary, the well-bred Devonshire, England, native established himself as an American patriot at the Continental Congress and as a swindler in New York’s fledgling financial markets. He speculated heavily in land and stocks, but when he was sued for irregularities in Treasury Department accounts in 1791, the collapse of his business touched off the country’s first financial panic.

Oakes Ames

This Massachusetts congressman assumed a central role in the most celebrated scandal of the post-Civil War Era when he became president of Credit Mobilier, the holding company for the Union Pacific Railroad. The company grossly padded construction expenses to profit from heavy government subsidies, and distributed stock to dozens in Congress to guarantee favorable treatment.

Richard F. Whitney

Whitney became Wall Street’s hero by buying stocks as others sold during the Crash of ‘29, but in 1938 it was revealed that the one-time New York Stock Exchange president was secretly dipping into a Big Board gratuity fund, his firm’s capital and customers’ accounts. He was expelled from the exchange, forced into bankruptcy and compelled to move from stylish East 73rd Street to Sing-Sing.

Henry S. Morgan

The son of J. P. Morgan was a principal figure in a marathon 1947 antitrust suit in which the U.S. Justice Department alleged that 17 investment banks were colluding to carve up 69% of the underwriting business between them. A judge ruled against the government in 1954, and the case seemed to do little lingering damage to a group that included Morgan Stanley & Co., Goldman, Sachs & Co., First Boston & Co., Kidder, Peabody & Co. and a second-tier firm called Drexel & Co.

Robert Vesco

A small-time New Jersey industrialist, Vesco seized control of Bernard Cornfeld’s failing IOS for a small investment of his own money, then plundered the mutual fund company of $224 million. In 1973 he fled to the Bahamas, then later sought sanctuary in Cuba, where he is more recently believed to have turned his attention to drug trafficking.

C. Arnholt Smith

The dapper yachtsman and friend of Richard M. Nixon enriched himself by using his Westgate California Corp. and other private companies to siphon money out the publicly traded U.S. National Bank in San Diego, which he ran. Smith spent eight months in jail, and the federal deposit insurance fund was stuck with $390 million in bad loans.

Nelson Bunker Hunt,

W. Herbert Hunt

and Lamar Hunt

The three sons of Texas oil billionaire H. L. Hunt tried to corner the silver market in late 1979 with a buying spree that drove the metal’s price from $9 an ounce to $50 an ounce. When prices collapsed, investors were battered; the Hunts lost over $1 billion and became the target of federal conspiracy charges.

Stanley Goldblum

The ingenious Goldblum gave up the mundane meat business to build the Equity Funding Corp. and live in Beverly Hills, but soon investors wished he hadn’t. The Los Angeles insurance company’s assets and earnings were based on nonexistent insurance policies, and in 1973 Equity folded, leaving reinsurers with $1.8 billion in losses and sending Goldblum to jail.

Marc Rich

Once the world’s biggest independent trader in crude oil, Rich fled New York in 1984 when he and a partner were indicted on 84 counts of tax evasion, evasion of existing oil price controls, and unlawful purchase of Iranian oil during the hostage crisis. Rich, whose case remains the biggest tax fraud prosecution ever, lives lavishly in Zug, Switzerland, and occasionally tweaks U.S. authorities in news interviews.

EARLY JUDGMENTS ON MICHAEL MILKEN Here are excerpts from editorials about Milken in the wake of his guilty plea:

“At one level, the likely punishment for these few admitted crimes will be light compared with that of criminals who steal money the old-fashioned way. At another level, the plea bargain is unsatisfying because it masks more than it uncovers. It masks the nature of Mr. Milken’s personal crimes. And it masks the relationship between the market for the high-risk junk bonds he created and the crime he committed.” --New York Times “The felonies Mr. Milken has confessed are a far cry from a sinister conspiracy at the heart of the junk bond market, as overheated imaginations once had it. Nor are Mr. Milken’s crimes the suitcases-of-cash bribes of the (Ivan F.) Boesky case. But they are not nothing. The confession included counts that . . . both clearly were premeditated and clearly wrong.”

--Wall Street Journal “By his own tearful confession and apology, Milken became so wrapped up in his power and wealth that he quit playing by the rules that help ensure the integrity and orderly operation of the nation’s capital markets. . . . Unfortunately, because of the government’s bargain with Milken, we’ll never know for sure whether he was truly a financial wizard or simply a criminal genius.”--Chicago Tribune “The charges to which Michael R. Milken pleaded guilty were not minor or merely technical offenses. In one case, he stole from the clients of another firm for the benefit of his own. In another, he set up a series of fake deals to enable a client to evade income taxes. He violated the rules governing the takeover of a company. He rigged the prices of stocks. These are all crimes that fundamentally threaten the integrity of the financial markets through which they were carried out.”--The Washington Post “Plea-bargaining of the kind indulged in by Mr. Milken and the federal authorities is alien to the English legal tradition and is regarded with some distaste. On this occasion, it seems to have worked rather well and avoided a prolonged, costly, technical and unpredictable trial.”--The Independent, London “The plea bargain . . . telegraphs two disturbing messages: White-collar crime pays, and the risk ($600 million in fines and restitution, plus jail) is worth the reward (he’d still be a billionaire). So where’s the deterrent value in all this?”--Newsday, New York “Milken was no entrepreneurial genius--he lied, cheated and stole.”--The Seattle Times