Regulators Suing for $6 Billion From Milken, 27 Others
Federal bank regulators filed a lawsuit Friday seeking $6 billion in damages from former Drexel Burnham Lambert junk bond chief Michael Milken and others, charging that they bilked savings and loans by manipulating the junk bond market and distorting the true value of bonds they sold to thrifts.
The suit was filed in U.S. District Court in Manhattan by the Federal Deposit Insurance Corp. and the Resolution Trust Corp. on behalf of 44 failed savings and loans. The suit was expected. Many of the allegations parallel a $6.8-billion suit filed by the same agencies Nov. 14 against Drexel itself, which is in bankruptcy proceedings.
The new suit goes after the personal assets of Milken and 27 other individuals, including his brother, Lowell; Thomas Spiegel, the former chief executive of Beverly Hills-based Columbia Savings & Loan; former Drexel Chief Executive Frederick H. Joseph, and other former associates of Milken at Drexel. It also names accountants used by the Milkens and scores of private partnerships set up by the Milkens for the benefit of themselves, family members and Drexel employees.
The suit charges that Milken received more than $1 billion in distributions from the partnerships, in addition to the hundreds of millions of dollars in direct compensation he was paid by Drexel.
The agencies contend in the court papers that the Milken group “willfully, deliberately and systematically plundered certain S&Ls.;” The suit alleges that they did so by making inflated claims about the value of junk bonds and using “market manipulation, threats, bribes, coercion (and) extortion” to get thrifts to buy junk bonds.
In a sharply worded, three-page response, a Milken spokesman said: “This suit is replete with false accusations and is without merit. The blame-it-all-on-Milken scapegoating has become a perceived path of riches for law firms and an attempt to deflect blame for those who are responsible.”
Milken’s spokesman said the government itself was to blame for permitting savings and loans to invest heavily in junk bonds. He said the government also contributed to the collapse of the junk bond market by imposing new regulations that required thrifts to rapidly sell off their junk holdings.
Milken was sentenced in November to 10 years in prison on six felony counts to which he pleaded guilty. He remains out of prison and is appealing the sentence.
The suit’s allegations concerning Spiegel charge that the former Columbia executive essentially fell under the domination of Milken and his associates and was improperly induced to buy more than $9.8 billion of Drexel-underwritten junk bonds for the thrift.
In exchange, Milken allegedly provided Spiegel with opportunities to make highly profitable personal investments and raised capital to finance Columbia’s expansion. Columbia has reported losses of more than $1.4 billion because of the declining value of its large portfolio of high-yield, high-risk bonds.
Spiegel has also been the target of a criminal investigation for some time. In response to the lawsuit, Dennis M. Perluss, one of Spiegel’s lawyers, denied that Spiegel had been improperly influenced by Milken. “Columbia made entirely appropriate investments based on its own analysis and the attractiveness of the particular offering.”
The defendants named in the suit also include two former S&L; executives whose names have figured prominently in the recent thrift debacle. They are Charles H. Keating Jr., former head of the parent firm that owned Lincoln Savings, and David Paul, former head of Florida-based CenTrust.
The suit maintains that the illegal activities of Milken and the others cost the thrifts somewhat over $2 billion. The remainder of the $6 billion in damages the federal regulators seek is punitive damages that are allowed under federal antitrust and racketeering laws.
