Prosecutors Finish Milken Pre-Sentencing Case : Securities: Witnesses give cloudy and conflicting testimony about whether the ex-junk bond king engaged in insider trading.
The government case against Michael Milken in pre-sentencing hearings ended on an uncertain note Thursday as prosecution witnesses gave ambiguous and sometimes contradictory testimony on the most egregious conduct Milken is accused of: insider trading for his own benefit.
Separately, a former Drexel Burnham Lambert bond salesman testified that Drexel and Beverly Hills-based Columbia Savings & Loan Assn. had an illegal arrangement to secretly hold securities for each other, a practice known as “parking.” The salesman, James Dahl, said Milken and former Columbia Savings Chief Executive Thomas Spiegel were directly involved in the arrangement.
Defense lawyers said they were to decide by late Thursday night whether to call their own witnesses, possibly including Milken himself. If they don’t, the hearings, which began Oct. 11, are over. U.S. District Judge Kimba M. Wood hasn’t said when she will sentence Milken, who faces up to 28 years in prison. The purpose of the hearings was to establish if the former junk bond wizard committed more crimes than the six to which he pleaded guilty in April.
The alleged insider trading, which took up most of Thursday’s testimony, had to do with purchases in 1983 of Caesars World junk bonds. Dahl testified that Milken, without explaining, ordered him in early July, 1983, to contact two customers who held large quantities of the bonds. Milken, he said, ordered him to persuade the customers to sell the bonds back to Drexel.
The government contends that Milken had advance knowledge that Drexel’s corporate finance department was about to make a bonds-for-stock exchange offer for Caesars that would make the bonds significantly more valuable. Prosecutors charge that Milken had Drexel buy large quantities of the bonds and that he had the junk bond department put Caesars bonds with a face amount of $3.2 million in his personal retirement account before the exchange offer was publicly announced.
Milken, through his lawyers and spokesman, has long emphatically denied that he ever participated in insider trading. None of the six felony counts to which he pleaded guilty in April involved such illegal trading.
Although the testimony Thursday was ambiguous, one piece of evidence submitted to the judge isn’t disputed: Milken was present at a June 29, 1983, meeting between Drexel’s corporate finance staff and Caesars executives in which Drexel proposed the exchange offer. At least some, and possibly all, of the department’s efforts to buy the bonds for its own account or Milken’s took place after that meeting.
Dahl said that, after persistent calls, he did ultimately persuade two reluctant customers, high-yield mutual funds run by Prudential-Bache and the Colonial group, to sell. He said he was severely embarrassed when an exchange offer was announced just after the trades took place. He said his customers, particularly Colonial, were extremely angry.
“I looked like a jerk,” Dahl said, because he had insisted that they sell just before an announcement that made their bonds much more valuable. Colonial refused to make good on its trade.
But under cross-examination, Dahl said Milken never said anything to him about an exchange offer. After looking at records supplied by defense lawyer Arthur L. Liman, Dahl said he believed that the reason Milken wanted him to buy back the Caesars bonds was so that the customers would be able to buy new junk bonds that were just then being issued for two other companies. Dahl said persuading customers to “swap” old bonds for new issues was standard practice at Drexel.
Dahl, a government witness with immunity from prosecution, cast doubt on the government’s contention that Milken arranged to buy the bonds because he knew the exchange offer was coming. Dahl testified that it would have been out of character for Milken to get customers to sell bonds knowing that a significant event was about to be announced. He said this would have alienated important customers.
Dahl’s testimony that he attempted for two weeks to persuade Colonial to sell was contradicted by another government witness, Prescot Crocker, the Colonial executive who dealt with him. Crocker said he was contacted by Dahl about the Caesars bonds only once, on the day before the exchange offer was announced July 15, and Crocker agreed almost immediately to sell. Defense lawyers contend that this is significant because Milken had been out of the country on vacation since July 6.
Dahl also said that on a Sunday in 1986, two days after it was publicly disclosed that admitted inside trader Ivan F. Boesky was cooperating with the government, Milken summoned Dahl to the office for a talk. It was Boesky who later implicated Milken in wrongdoing. Dahl said Milken called him into the Drexel men’s room, turned on the water to thwart potential eavesdropping and said: “There haven’t been any subpoenas issued. Whatever you have to do, do it.”
Dahl said he never understood what Milken meant. He didn’t take it to be an instruction to destroy documents, he said.
The testimony on a “parking” arrangement with Columbia Savings was the first public evidence that such an arrangement existed. Spiegel, through his lawyers, has denied any illegal activity. It has long been known publicly, however, that Spiegel has been under investigation by federal prosecutors for his relations with Drexel. Columbia was one of Drexel’s largest customers for junk bonds.
