New Yorker Magazine Links Milken, Merrill Lynch Probe

Although junk bond king Michael Milken did little to win a big reduction in his 10-year prison sentence, his tips have resulted in a government probe of Merrill Lynch & Co. for alleged securities fraud, the New Yorker magazine said in Monday’s issue.

The investigative article, written by Pulitzer Prize-winning journalist James Stewart, examines negotiations that led to Milken’s historic 1990 plea agreement and what caused U.S. District Judge Kimba Wood to reduce his prison sentence drastically, to two years from 10.

A spokesman for Merrill Lynch could not be reached for comment Sunday, but the brokerage denied any wrongdoing in the article, titled “Annals of Law: Michael Milken’s Biggest Deal.”

Stewart is author of the best-seller “Den of Thieves” and a former page-one editor at the Wall Street Journal.

The article appears the week that Milken’s sentence officially ends.

Although Wood has been widely criticized for cutting the prison term, Stewart wrote that she had no choice after prosecutors characterized Milken’s cooperation as “substantial.” Wood was recently rejected as a candidate for attorney general in the Clinton administration.

Milken, who last week revealed he is suffering from prostate cancer, is living in his Encino home, after being recently released from a halfway house. Stewart said Milken still possesses a fortune believed to be worth more than $1 billion.

The former head of Drexel Burnham Lambert Inc.’s junk bond department, Milken turned the firm into a Wall Street powerhouse. But fame turned into disgrace after Drexel and Milken both pleaded guilty to six securities frauds. While Milken was in prison, Drexel went out of business due to bankruptcy.

In his article, Stewart also says that Drexel’s former chief executive, Fred Joseph, will soon settle Securities and Exchange Commission allegations that he failed to supervise Milken adequately.

Part of the New Yorker article focuses on the plea negotiation strategy employed by Milken’s lawyers. Stewart said the lawyers knew that Milken would provide little help to authorities and insisted that he not be asked to cooperate until after his sentencing, “when what he said could help reduce his sentence but could not increase it.”

Stewart said it was significant that the plea bargain included no provision to revoke the agreement if prosecutors believed that Milken lied. “Thus, the plea agreement itself was all but a license to stonewall.”

However, the “high point” of Milken’s cooperation came in discussions of the Guarantee Security Life Insurance Co., a defunct Jacksonville, Fla. firm, and its allegedly illegal transactions with Merrill Lynch.

“Milken was willing to impute wrongdoing to a competitor such as Merrill Lynch but he steadfastly denied any wrongdoing involving himself or one of his former clients,” said Stewart.

He wrote that Guarantee Security suffered big losses on its junk bond investments. To disguise its true financial condition, it sought to “park” its junk bonds with others.

Parking is when one company holds securities for another to hide the true identity of the owner.

Milken told prosecutors that he would not park bonds for Guarantee Security, but that Merrill Lynch agreed to do so.

Stewart alleges that authorities later found that Drexel had also parked securities for Guarantee Security, but said the transactions were “more cleverly disguised.”