U.S. Prosecutors Fail to Gain Ground at Milken Hearing

Federal prosecutors got off to a shaky start Thursday in their attempt to pin additional crimes on Michael Milken beyond the six to which the former junk bond king has pleaded guilty.

The government called two witnesses in the opening day of hearings to help U.S. District Judge Kimba M. Wood decide Milken’s sentence.

But as prosecutors focused on a manipulation of Wickes Cos.’ stock in 1986, neither witness definitively implicated Milken in the illegal transaction.

One of the witnesses, Cary J. Maultasch, a former Drexel Burnham Lambert trader who prosecutors alleged directed the illegal bidding up of Wickes’ stock on Milken’s orders, told the judge he had “no factual basis” to believe that Milken was behind the decision to buy huge quantities of Wickes stock near the close of trading on April 23, 1986.

Maultasch’s memory seemed foggy on many questions asked by prosecutors, and he seemingly failed to back up some of their main points. Maultasch last week was granted immunity from prosecution in exchange for his testimony.

The hearings are Milken’s first chance to face directly some of the witnesses who for years have given secret testimony against him to grand juries and prosecutors. Milken, 44, the former head of Drexel’s Beverly Hills-based junk bond department, was escorted into the jammed courtroom flanked by his wife Lori, his brother, Lowell, and a coterie of other relatives, friends and business associates.

Dressed in a gray suit, white shirt and red-and-blue patterned tie, Milken sat at the defense table. At time he appeared pensive. At other times he rolled his eyes in response to testimony or scowled at Assistant U.S. Atty. John Carroll. Milken frequently passed notes to his lead defense lawyer, Arthur L. Liman. Defense lawyers haven’t said whether Milken himself will testify, although some lawyers involved in the case say they think it’s unlikely.

The hearings are to last at least two weeks. Milken faces a maximum of 28 years in prison on the counts of conspiracy, securities fraud and mail fraud he pleaded guilty to in April. He already has agreed to pay $600 million in penalties. The hearings are to help Wood decide if there is enough evidence of additional crimes to justify a longer prison sentence than she might otherwise impose.

Because the judge has limited each side to only 20 hours of direct examination of witnesses, prosecutors have chosen to focus mainly on only three transactions in which they claim that Milken broke the law.

In the Wickes case, Drexel was the investment banker for the Los Angeles-based company. With Drexel’s help, Wickes raised capital in 1985, in part by selling two issues of preferred stock.

The stock paid a big cash dividend, which was costly to Wickes. So as Wickes formulated plans to expand in 1986 and raise even more capital, it sought Drexel’s help in reducing the burden of dividend payments. Under the terms of one of the preferred stock offerings, Wickes had the right to redeem the dividend-paying preferred in exchange for plain common stock, which paid no dividend--but only on the condition that Wickes common traded above $6 per share for 20 out of 30 consecutive days.

The government charges that as Wickes stock neared that goal, Drexel and Milken secretly arranged with the firm of former stock speculator and admitted inside trader Ivan F. Boesky to manipulate the stock market so that condition could be met.

At Drexel’s request, Boesky’s head trader, Michael Davidoff, bought 1.9 million shares of Wickes stock on the American Stock Exchange just before the close of trading on April 23, 1986. As a result, the stock closed at $6.125 that day, clinching the chance for Wickes to force the exchange of preferred stock for common.

Prosecutors said the victims were investors who lost approximately $15 million per year they would have received in dividend payments.

“The evidence is clear that there was a manipulation,” Carroll told the judge as hearings started, adding later: “And we contend that Michael Milken was behind that manipulation.”

Liman’s strategy, however, was not to dispute that a manipulation had occurred. He simply argued that there is no evidence linking Milken to it. Liman asserted that Milken wasn’t responsible for all of the activities of his employees.

“It’s easy to say that anything that ever happened at Drexel was his (Milken’s) fault,” Liman said. “We do not dispute that there was a manipulation of Wickes (stock). . . . What happened from our point of view is that he was not responsible for what happened in Wickes.”

Davidoff, who was the first of the two witnesses called by the government on Thursday, testified that Maultasch had ordered him to buy the stock. Davidoff said he had no conversations with Milken about the transaction and had no reason to believe that Milken had directed Maultasch to place the order.

Maultasch, then based in Drexel’s New York office, said he placed the order with Boesky’s firm on orders from a Drexel trader in Beverly Hills, Peter Gardiner. (Gardiner is due to testify when the hearings resume on Monday. Prosecutors have said they don’t plan to call Boesky as a witness.)

Maultasch did testify, however, that he had advised Milken not to meet with Boesky in October, 1986, a few months after Drexel had made an illegal $5.3-million payment to the Boesky organization and shortly before it was known that Boesky was cooperating with federal prosecutors.

He said he told Milken on the phone that he thought there was a risk that Boesky had become a government witness, adding: “I thought it was a horrible idea that he attend that meeting.”

Maultasch said Milken replied to the effect that, “Don’t worry, I assume I’m speaking for the record.” In fact, the meeting was secretly taped by the government. When Maultasch a short time later asked Milken if he had been careful in the conversation, he said Milken answered “that he was careful but didn’t know if he was careful enough.”

Maultasch said that after he received a subpoena from the Securities and Exchange Commission in November, 1986, he immediately flew to Beverly Hills in a near panic to meet with Milken. He said the two met alone at 4 a.m. in a Drexel conference room, with the door shut and a guard posted outside. He said Milken was so concerned about the possibility of government eavesdropping that they spoke in hushed tones. He said Milken frequently didn’t speak at all but wrotes notes to him on a yellow pad, which Milken then erased.

Maultasch said that as he left Drexel after the dawn meeting, a guard in the lobby tore up the slip of paper Maultasch had filled out to gain entry to the building. He said the guard told him not to worry and said “You weren’t here.”

Maultasch said he didn’t remember what was in the notes Milken wrote and then erased. Prosecutors have contended that the meeting was part of an obstruction of justice. But the impact of Maultasch’s testimony about the meeting wasn’t clear. He said Milken never told him to lie to the government or destroy documents.

The two other transactions that the government has said it will address in the hearings involve alleged insider trading in the stock of Caesars World, and alleged violation of securities laws by having Boesky secretly buy stock for Drexel in Storer Communications, a takeover target.

MILKEN ON TRIAL Before sentencing Michael Milken for six felonies to which he has pleaded guilty, U.S. District Judge Kimba Wood in New York has ordered two weeks of hearings on accusations that the former Drexel Burnham Lambert junk bond financier engaged in a broad pattern of wrongdoing. The hearings will focus on government claims that Milken manipulated the price of Wickes Cos. stock, engaged in illegal insider trading of Caesars World stock and misused the securities of Storer Communications. Milken denies all of the accusations.

WHO’S TO BLAME?Prosecutor John Carroll, on manipulation of Wickes stock:

‘The evidence is clear that there was a manipulation. If you look at the evidence, we contend there is no other conclusion you can reach. And we contend that Michael Milken was behind that manipulation.’

Defense attorney Arthur L. Liman:

‘It’s easy to say that anything that ever happened at Drexel was his (Milken’s) fault. . . . We do not dispute that there was a manipulation of Wickes (stock). . . . What happened from our point of view is that he was not responsible for what happened in Wickes.’

ONE EXCHANGE Defense Attorney Arthur L. Liman: ‘Did he (Milken) ever ask you to close a stock at a particular price?’ Government witness and former Drexel trader Gary J. Maultasch: ‘Not to my recollection.’ Liman: ‘Or to manipulate a stock?’ Maultasch: ‘No, sir.’