The Smoking Gun Was a No-Show : Securities: Few surprises come out of Michael Milken’s pre-sentencing hearings.

After nearly four years of intensive investigation of Michael Milken, the pre-sentencing hearings that ended Thursday were to have been the prosecutors’ moment in the sun.

The hearings would at last give them an opportunity to show highlights of their investigation--to prove that the most massive securities fraud probe ever was worth the effort. They would show that Milken was guilty of many crimes beyond the six to which he pleaded guilty, that he was at least as big a crook as Ivan F. Boesky, the world-class inside trader who turned him in.

In eight days of hearings, however, the government fell somewhat short of that goal. Prosecutors probably fulfilled the formal purpose of the hearings: They unveiled evidence suggesting that Milken’s criminal activity extended beyond the narrow charges to which he pleaded guilty last April. They also produced plenty of documentation that employees supposedly under Milken’s control had run amok.

But prosecutors’ own witnesses gave contradictory evidence on the three transactions that were the focus of the hearings. They failed to directly link Milken personally to some of the wrongdoing. As a result, the hearings raise questions about whether the U.S. Attorney’s Office in New York really was prepared to go to trial on all 98 counts that Milken originally was indicted on or on the many additional counts that the government threatened to bring if Milken hadn’t pleaded guilty.

“It does not look like the government brought in the smoking gun at this hearing,” said Harry First, a New York University law professor who has written extensively on business crime.

Bruce Baird, the former head of the U.S. Attorney’s securities fraud division in New York who supervised much of the investigation, asserts that prosecutors had ample evidence for a trial and that in a trial the government would have been able to call many more witnesses to fill in gaps. He also said a smoking gun wasn’t essential. “The proof of a crime of this type is not typically a matter of smoking guns,” he said, but “accretion of detail.”

How well the government did in the hearings will be decided, of course, by the judge herself. U.S. District Judge Kimba M. Wood has said she probably will sentence Milken within two weeks. Milken, 44, faces up to 28 years in prison and already has agreed to pay $600 million in penalties. The purpose of the so-called Fatico hearings was to help the judge decide if evidence of additional crimes is strong enough to warrant giving the former Drexel Burnham Lambert junk bond king a longer sentence than she would have imposed if the six counts were merely isolated violations.

The judge so far has given no indication of which way she’s leaning.

The charges Milken pleaded guilty to involved a conspiracy with Boesky that included illegally hiding ownership of securities and aiding in the filing of false tax returns, as well as charges of securities fraud and mail fraud in transactions with Boesky and others.

In the hearings, the witnesses who didn’t testify seemed in some ways as significant as those who did. Not only did Milken not take the stand, but Boesky, his principal accuser, wasn’t called either.

The three additional transactions prosecutors chose for the hearings as paradigms of Milken’s allegedly wide-ranging criminality involved securities of Wickes Cos., Storer Communications and Caesars World. In order, they were meant to show stock market manipulation, illegal “gratuities” to employees of mutual funds and other companies that bought junk bonds from Drexel, and insider trading.

In the Wickes Cos. transaction, Boesky’s company manipulated upward the price of Wickes stock in 1986 at Drexel’s request. Milken’s lawyer, Arthur L. Liman, seemed to deflate the government’s sails by admitting from the start that an illegal manipulation occurred. He merely argued that there was no evidence that his client gave the illicit orders that were passed on to Boesky’s head trader. The government fell short of proving that Milken did.

On Wickes, two former Drexel employees, Peter Gardiner and Cary Maultasch, both prosecution witnesses, gave frankly contradictory versions of what happened. Neither of them said they heard Milken order the stock purchases. At times, prosecutors John Carroll and Jess Fardella seemed surprised by what their own witnesses said. The closest they came to showing that Milken may have been behind a manipulation was a cryptic remark he allegedly made to Gardiner, a Drexel trader in Beverly Hills, indicating the price at which he wanted the stock to close: “Peter, Wickes. Six and an eighth.”

In the Storer Communications deal, Milken allegedly misallocated valuable stock warrants generated by Storer’s leveraged buyout in 1985. He kept most of them for private partnerships he controlled, and allegedly used others as personal bribes or favors to influence employees of mutual funds and other big bond buyers. The government established that the warrants did indeed end up in the partnerships and that fund managers and others did receive the warrants personally.

Milken’s ex-boss, former Drexel Chief Executive Frederick H. Joseph, delivered a few stinging blows in testimony on Storer. He stated that Milken had violated company ethics policy and also misled him about the partnerships. But the government didn’t seem able to show that the warrants actually were used to influence fund managers’ investment decisions.

In Caesars World, Milken supposedly used advance knowledge of an exchange offering to make a personal killing on Caesars bonds. Once again, however, a government witness seemed to surprise the government: Former bond salesman James Dahl testified that Milken’s department had legitimate reasons for wanting to buy back the bonds in 1983 that had nothing to do with insider trading.

Documents in evidence show that Milken attended a meeting with Caesars officials at which the possibility of an exchange offering was discussed. Curiously, however, prosecutors didn’t call any witnesses to further buttress their claim that Milken did indeed have advance knowledge that an exchange offer was about to be made, or to refute Milken’s claim that at least some of his orders to buy bonds were placed before the meeting occurred.

“A lot of people expected that the government would have a cannon at this hearing,” said a lawyer involved in the case but who did not represent Milken or anyone else who was indicted. “The truth is nobody heard much that surprised them. Certainly there has been no showing that Michael Milken is Public Enemy No. 1.”

In mostly off-the-record conversations, people involved in the case offered several explanations for why the hearings went as they did. One former junk bond department employee who didn’t testify noted, for example, that the government witnesses for the most part were ex-Milken employees, all of whom had made fortunes while working for him. Dahl testified that from 1985 through 1989, his own annual salary varied between $5 million and $23 million.

The ex-Milken employee, who requested anonymity, suggested that witnesses merely responded to the questions they were asked and didn’t volunteer anything. “A lot of us made a lot of money because of him,” the ex-employee said. “These weren’t people who were hurt by him.”

But the same ex-employee also dismissed Liman’s argument that Milken sometimes knew nothing about what his own staff was doing. Prosecutors may not have produced a smoking gun, he said, “but ultimately she (the judge) has got to conclude that something was wrong out there, and Michael was running it.”

Lawyers point out that several of the witnesses face millions of dollars in claims in civil suits filed because of wrongdoing at Drexel. One lawyer long involved in the case said witnesses probably were loathe to give testimony that could be used against them in the civil suits.

The government, in turn, may have made a mistake early on in its investigation by not pinning down their witnesses more extensively in advance on what their testimony would be. For strategic reasons, they avoided having them testify extensively before a grand jury.

Baird said grand jury testimony was kept limited because prosecutors didn’t want the witnesses committed under oath to a particular version of events until the government had obtained all documents and was sure it knew the full story. Baird said: “You don’t want to take a chance of freezing their testimony before you know it’s right.” But other lawyers involved in the case said this strategy may have left prosecutors open to unpleasant surprises in the hearings.

How the government would have fared in a full trial now, of course, will never be known. The government is believed to have strong proof on the charges to which Milken did plead guilty, including illegal transactions with Boesky.

Prof. First notes that Milken, who earned more than $1 billion at Drexel, has a reputation for being a shrewd deal maker. “Let’s not lose sight of the fact that Milken did plead guilty,” First said. “If there is anyone in the world today who seems to know a good deal, it’s Michael Milken.”