Pact Leaving Milken With Millions Rejected by FDIC
The Federal Deposit Insurance Corp. on Thursday rejected a proposed settlement of civil lawsuits that would have left imprisoned financier Michael Milken with a personal fortune of $125 million and his family and former associates with hundreds of millions of dollars more.
In a letter to senior U.S. District Judge Milton Pollack, the 85-year-old jurist who spearheaded the settlement, the agency said its board decided to reject the plan because members lacked “adequate or sufficient information upon which (to) base an informed judgment.”
The FDIC’s rejection was a severe blow to settlement efforts. If the plan ultimately fails, it could lead to at least a decade of litigation, although those who favor a settlement observed that the rejection was not absolute and final.
The agency expressed hopes Thursday that its “concerns can be addressed,” suggesting that it might eventually approve the settlement of more than 150 lawsuits involving the 1990 failure of Drexel Burnham Lambert Inc. and other financial institutions which invested in Drexel-issued high-risk, high-yield securities, or junk bonds.
The proposed settlement, under which taxpayers would have recovered about $500 million for losses incurred in the savings and loan fiasco, had drawn fire from many inside and outside the financial world, including former FDIC chairman L. William Seidman and Rep. John D. Dingell (D-Mich.), the chairman of the House Energy and Commerce Committee, which oversees the regulation of financial markets.
The objections were based on the fact that Milken would remain as one of the wealthiest men in America and that U.S. taxpayers would only recover a tiny fraction of the $500 billion the S&L; crisis is ultimately expected to cost them.
The FDIC’s decision provoked anger and confusion among the attorneys for parties in the settlement: “The FDIC has obviously reneged on the settlement reached by its attorneys,” said one prominent attorney in the case. “I think it’s plainly political.”
Milken and many of his former associates at Drexel were sued by the FDIC and the Resolution Trust Corp., which is charged with cleaning up the S&L; mess, because many of the S&Ls; that failed spectacularly had invested heavily in junk bonds peddled by Milken and his high-yield bond department at Drexel.
The FDIC complained that the proposed agreement “did not provide for adequate or sufficient information” to make an “informed judgment.”
The agency said the settlement was deficient because it failed to:
--Disclose detailed financial information about the defendants and their contributions to the settlement.
--Give the FDIC a chance to determine if the defendants were making an appropriate payment “considering their alleged civil responsibility.”
--Give the FDIC and the RTC the right to refuse to participate in the deal if they were unhappy with it.
Milken, as reported, had agreed to pay $500 million, or 80% of his current net worth of $625 million, into the $1.3-billion settlement pool. Milken has already paid $400 million into a Securities and Exchange Commission-administered settlement fund, bringing his total contribution to the settlement to $900 million.
Of the balance of the settlement, $100 million would have come from various insurance companies and $300 million from about 200 former Milken associates at Drexel. The Milken associates would not have had to put up cash; instead, they would have contributed interests in partnerships that own junk bonds.
The FDIC made its decision to reject the settlement behind closed doors. Speculation that the agency might oppose the plan arose last Friday, when the five-member board postponed a vote after a 2 1/2-hour meeting. The judge was advised that the board had rejected the settlement on Tuesday, but the rejection was not publicly announced until Thursday.
The FDIC, said one attorney familiar with its objections, was especially concerned that the 200 former Drexel officials, who include Michael Milken’s brother, Lowell, did not have to disclose their net worth to the agency.
“Everybody understands that public agencies have a responsibility to exercise due diligence and care,” said one attorney involved in the settlement talks. “But it is extremely frustrating to negotiate with somebody who changes signals at the end of a negotiation.”
“The man on the street may want blood from Milken,” the attorney continued. “But you could end up litigating forever, and Michael Milken could go bankrupt, and the taxpayer could end up with even less.”
Pollack, who is holding a hearing today in what has suddenly become a dramatic attempt to rescue the settlement rather than the pro forma affair that many had expected, could not be reached for comment Thursday.
But last week, in an interview with The Times, the jurist called it “a very fair settlement,” adding “and I’m not easy.”
Still, the judge’s assurances apparently did not satisfy Dingell, who, upon hearing that Milken would retain $125 million, told the Washington Post: “It looks like crime does pay.” And Seidman told the Post: “I was hoping Mr. Milken would be left with lunch money.”
Milken, who popularized the use of junk bonds, pleaded guilty to six felonies in 1990 and was sentenced to 10 years in prison, though he is only expected to serve 40 months at a minimum security facility in Pleasanton, Calif.
Drexel, which made a fortune masterminding corporate takeovers, filed for bankruptcy protection in February, 1990, leaving in its wake a trail of financial wreckage that includes ruined savings and loans, insurance companies and debt-burdened companies.
Times staff writer Robert A. Rosenblatt in Washington contributed to this story.
