A Drexel Lawyer Accuses Milken’s Brother of Deceit
A lawyer who advised the Drexel Burnham Lambert junk bond department on the legality of transactions testified Monday that information about improper or illegal activity was withheld from him.
The lawyer, Craig Cogut, said however that the information was withheld by Michael Milken’s brother, Lowell. Cogut said he never discussed the questionable transactions, involving Storer Communications warrants, with Milken.
As Michael Milken’s pre-sentencing hearing continued in federal court in New York, prosecutors also disclosed that Richard Grassgreen, chairman of Enstar Group Inc. until last week, agreed to plead guilty to two felony counts. He will testify today against Milken. Assistant U.S. Atty. Jess Fardella said in court that Grassgreen personally received and kept commitment fees from Drexel for financing that his company had put up. He said Grassgreen never told the company’s board about the fees.
Grassgreen is expected to testify about highly valuable Storer warrants he received personally at the same time Enstar’s predecessor company, Kinder-Care, bought risky Storer preferred stock. Handling of the Storer warrants, generated as part of the leveraged buyout of the company in 1985, is currently the main focus of the hearings. Grassgreen’s lawyer, William Schwartz, didn’t return a phone call seeking comment Monday.
The hearings are being held to help U.S. District Judge Kimba M. Wood determine if Milken committed more than the six felonies he pleaded guilty to in April. The judge will take the evidence into account when she decides Milken’s sentence, which could be up to 28 years in prison.
Frederick H. Joseph, Drexel’s former chief executive, had been scheduled to testify Monday, but his appearance was delayed for a day.
Prosecutors contend that Milken improperly failed to disclose that he had kept 80% of the lucrative warrants in partnerships he controlled. They also allege that Milken used the warrants to bribe mutual fund managers and corporate executives personally to get their funds or companies to buy the risky, hard-to-sell preferred stock.
Cogut disclosed for the first time that Ray R. Irani, president of Occidental Petroleum, was permitted to buy for himself some of the Storer warrants. The warrants weren’t available to public investors. They were sold for about 9 cents each to fund managers and others with close ties to the junk bond department. The lucky investors later received $4.88 per warrant, a profit of more than 5,000%.
Occidental was an important Drexel client and sold several bond issues through Drexel. However, sources said that Occidental wasn’t among the companies that bought Storer preferred. Neither prosecutors nor Cogut indicated that there was anything improper about Irani’s investment. But they also didn’t make clear why Irani was permitted to buy the warrants. An Occidental spokesman said he couldn’t immediately determine if Irani had told Occidental about the purchase. The spokesman said Irani was traveling Monday and wasn’t available to comment.
A Drexel filing with the Securities and Exchange Commission falsely said the warrants would only be sold as part of a package to buyers of other Storer securities.
Cogut also disclosed that Thomas Spiegel, the former chief executive of troubled Beverly Hills-based Columbia Savings & Loan, was allowed to buy some of the warrants through a personal partnership. Testimony indicated that Columbia did buy some of the preferred. Spiegel, long a close business associate of Milken, has been the subject of a federal criminal investigation for some time. Sources familiar with the investigation said the Storer warrants are a key aspect of that investigation.
Reached by phone, Spiegel declined to comment. Sources have said that Spiegel returned his profits from the warrants to Columbia after the government began investigating his ties to Drexel.
Asked about the handling of the Storer warrants by Drexel, Cogut said he would have intervened to change the SEC filings or stop the transactions involving the warrants if he had known what was actually going on. But he said Lowell Milken deceived him by telling him that the warrants were being used as stated in the SEC filing. Cogut also said he asked whether the warrants had been offered directly to the funds or corporations that bought Storer preferred stock, rather than to executives personally. He said Lowell told him that they had been offered to both. Cogut said he later learned that this wasn’t true.
Cogut himself was a member of the Drexel partnerships that received the warrants.
