Den of Thieves

by James B. Stewart

  In the wake of the informal takeover bid, and sudden buying in its stock, Harris Graphics had to scrap its secondary stock offering. The first prong of Milken’s master plan had been achieved. But the takeover bid Harris management had learned about was illusory. A real buyer had to be found, and Milken ordered his most persuasive salesmen into action. They focused on AM International, another Drexel client with interests in the printing business. Meanwhile, at Milken’s behest, Boesky kept the pressure on, increasing his stake to over 8%. Pressure also came from Steinberg, who began amassing a position that would grow to more than 5%. He, too, filed SEC disclosure documents. Now Harris Graphics had not one but two potential raiders breathing down its neck.

  Not surprisingly, when AM finally made a “friendly” bid of $22 a share, Harris Graphics management all but rushed to embrace it. For Milken, the profits rolled in: the Milken/Drexel partnerships could now be cashed out at profits of more than $30 million. Boesky earned $5.6 million on the Milken-directed stock accumulation, and Drexel earned $6.3 million. Harris Graphics was destroyed as an independent company, becoming just another cog in the much larger AM.

  By now, Milken and Boesky were deeply intertwined in what was a sweeping criminal conspiracy. Taken together, the ventures were practically a catalogue of securities crimes, starting with insider trading, and including false public disclosures, tax fraud, and market manipulation, as well as a slew of more technical crimes. What was breathtaking about the scheme, however, was not just the variety of crimes, or their frequency. It was how the crimes meshed to achieve ends more ambitious than anything even contemplated by the drafters of the securities laws. The crimes were mere way stations toward outcomes, such as hostile takeovers, that were, on their face, perfectly legal.

  That was the exquisite beauty of the scheme. It was a far more valuable relationship than anything Boesky had forged with Siegel or Levine, and it seemed even more foolproof. No outsider could possibly grasp its dimensions. There hadn’t been so much as a hint of regulatory concern. And within the scheme, no one knew but Boesky and Milken. Milken could never betray Boesky, because Boesky could quickly implicate him. Though they often argued, sometimes yelling at each other, Boesky was comforted by their mutual dependence.

  Another aspect of the relationship was becoming clear to Boesky, however. Milken was the engine of their profits. He, after all, was the one privy to the deal flow and the confidential plans of Drexel’s clients. Boesky, increasingly, was little more than an order taker, a source of additional capital, and a front for Milken’s larger designs.

  Sometimes Milken told Boesky to take positions in particular securities, and sometimes Boesky extended his leverage by having Milken take positions for him. They traded at an ever-increasing pace, in Greentree Acceptance, Ensearch, National Health Care, Hospital Corporation of America, Centrust, Mapco, ABC, and CBS. Milken remained the dominant force.

  The mounting number of stocks was causing headaches for Boesky’s chief accountant in New York, Set Mooradian. He was constantly having to update the ledgers in his red-tie “special projects” folder. Boesky kept giving him more positions to enter or change, and he demanded regular updates on the net positions. “This is just between you and me,” Boesky would frequently emphasize in his phone calls from the palatial new midtown office to the downtown quarters where Mooradian and the rest of the operations staff had stayed. “Don’t tell anyone else about it.”

  After the flurry of activity in Pacific Lumber and Harris Graphics, Boesky had told Mooradian to finish the update of the file. “We’ve got to settle up with Drexel.” Mooradian’s ears perked up. It was the first time he’d ever heard Drexel connected to the “special projects” file. But he didn’t attach any significance to the information.

  In May Mooradian left for a long-awaited vacation, staying at his brother’s condominium in Pompano Beach, Florida. He groaned when the phone rang and he was told Boesky was calling. Boesky always called him while he was on vacation, and he hated it. He never got a day’s peace. “Is that schedule I asked for finished?” Boesky demanded without any preliminary civilities.

  “Ivan, I’m on vacation,” Mooradian pleaded.

  “I don’t care. We’ve got to get this done.”

  So Mooradian called his office, saying someone had to fly down to Florida with the red tie folder. Maria Termine, a young employee, volunteered, and she and Mooradian spent a day with the profit and loss statements on all the Boesky/Milken stocks spread out on the kitchen table. Boesky told Mooradian to work out any discrepancies with someone named “Thurman” in Drexel’s Beverly Hills office. When Mooradian called, he learned there was no Thurman, but there was a Charles Thurnher. Boesky never got his name right. Thurnher, who kept similar records for Milken, would relay Drexel’s calculations, and they tried to reconcile disagreements, which were numerous. They were far from having finished by the end of Mooradian’s vacation.

  Both Mooradian and Thurnher found themselves frequently confused. Mooradian would ask Boesky, who’d say only, “It’s fifty percent mine and fifty percent theirs. Talk to Davidoff.” But Davidoff knew even less. Did Boesky mean 50% ownership for the entire period, or only some of the time? When trouble developed on the Beverly Hills end, Thurnher told Mooradian, “I’ve got to talk to Mike.”

  By the end of the year, the statements still couldn’t be reconciled, and Boesky was continuing to pressure Mooradian to come up with a bottom line. Mooradian told Boesky he couldn’t make any more progress with Thurnher over the phone. He’d have to meet with him. Boesky was about to leave for Beverly Hills himself, so he suggested that Mooradian join him.

  Mooradian was thrilled at the chance for a trip to California. He took his wife, Rusty, and stayed over a weekend. They reveled in the glamorous surroundings of the Beverly Hills Hotel, even though they couldn’t get a table in the hotel’s Polo Lounge. They languished in the dining room while the celebrities and movie moguls and agents in the Polo Lounge had the staff scurrying to satisfy their every whim. That changed dramatically after Boesky stopped by their table one evening. From then on, the Mooradians were treated like royalty. Mooradian later told friends that the visit was “the high point of my life.” He didn’t mind the fact that Boesky ignored them for the rest of their stay, traveling to Drexel’s Wilshire Boulevard offices in a limousine while Mooradian took a cab.

  Mooradian never met Milken, the man he thought of as the “junk-bond king.” But he liked Thurnher and his secretary, and they settled down in a conference room to try to make sense of the increasingly complex series of transactions and records. “That fuckin’ Ivan,” Mooradian said at one point, “he kept me in the dark on this.”

  “I know how you feel,” Thurnher replied. “Mike does the same thing to me.”

  As Thurnher produced copies of various trading records, they realized that some of the cost calculations were different. Drexel, which could borrow money at low brokers’ call rates of 7% to 8%, had figured a much lower cost of carrying the large positions. Boesky’s costs were higher, in part because of the high interest rates on the Drexel-issued debentures that were an important source of Boesky’s capital, more in a range of 13% to 14%. They realized that by harmonizing the cost of carry calculations, most of the differences could be worked out. Whatever minor differences remained, one thing was clear: given the big gains on the jointly owned positions that Boesky took at Milken’s behest, Boesky owed Milken millions of dollars—and Milken wanted every penny of it repaid.

  The debt was a pittance in the context of the growing magnitude of Milken’s business. The year 1985 was a watershed in the history of corporate control, when Drexel’s “highly confident” letters and junk-bond prowess made the transition from novel but untested weapons into the most potent forces Wall Street had ever witnessed. The 1985 Predators’ Ball had been the prelude to a series of hostile corporate attacks that left investors reeling: Pickens’s bid first for Phillips Petroleum, then for mighty Unocal; KKR’s assaults on St
orer, then Beatrice; Ronald Perelman’s conquest of venerable Revlon; Rupert Murdoch’s acquisition of Metromedia; and, at the end of the year, a lightning-fast, $6 billion bid by GAF chairman Samuel Heyman for one of America’s blue-chip industrial companies, a component of the Dow Jones average, Union Carbide. For that bid, Milken raised $5 billion in financing in a matter of days.

  The juggernaut was moving so fast that even the U.S. Congress took notice, floating proposals to curb the tax deductibility of junk financing and holding public hearings on the threat to Unocal. Drexel, relatively naïve to the world of politics, hastily began courting support from legislators and put together its own political action committee. But despite all the bluster and rhetoric, Drexel and Milken had little to fear from Washington in the heyday of the Reagan administration’s free-market, antigovernment intervention policies.

  As Milken careened from triumph to triumph that year, he seemed, to those around him, a changed man. He had always eaten his lunches off of paper plates with his traders and salesmen. Now he instructed the caterers to serve him his lunch on china, and he often ate alone or with Lowell in Lowell’s sumptuous office. Milken’s appearance changed, too. He obtained an expensive new toupee, so skillfully done that it was imperceptible to all but knowledgeable observers. It looked like natural curls, and gave him a more stylish, youthful look. Milken had often shown up for work wearing mismatched socks; now he wore well-tailored suits and French cuffs. With Thomas Spiegel, his close friend and client at Columbia Savings, Milken bought a Gulfstream IV state-of-the-art private jet. He and Spiegel also began frequenting trendy, celebrity-filled restaurants, like Bistro Garden and Morton’s. Milken hired a bodyguard and started coming to work in a chauffeured limousine.

  The hiring process also changed. Before, Milken would bring candidates out to Beverly Hills, where they’d meet just about everyone in the office. Anyone could veto the applicant. This system helped maintain a sense of collegiality among the employees. Now, however, only one opinion mattered: Milken’s. People complained that they didn’t see the point of spending an hour or two with job applicants, only to have Milken dismiss their objections. One of Milken’s most controversial hirees was his own brother-in-law, Allen Flans, a dentist who had married Lori Milken’s sister. Flans knew little about the securities industry. Milken assigned Flans to Dahl, and told Dahl to train him.

  Dahl quickly realized the assignment was hopeless. As far as he could tell, Flans contributed almost nothing to the operation. Flans would typically order two of the free lunches, eat one, wrap the other up, and take it down to his car. He wouldn’t return for several hours, and colleagues occasionally saw him napping in the car. Flans earned more than $5 million in one two-year period.

  Then there were Milken’s boyhood friends, such as Harry Horowitz, who’d grown up with Milken in Encino. First Horowitz worked as a computer expert, spending millions on equipment that had to be replaced when it turned out to be the wrong kind. Then Horowitz got assigned to the junk-bond conferences, and later dabbled in lobbying and Milken charitable activities.

  More worrisome, in the eyes of some, was Richard Sandler, who’d played with Milken at Sandler’s mother’s backyard camp. Sandler was a lawyer who installed his office right inside Drexel’s, and appeared to work exclusively for Milken and the Milken family. His chief qualification seemed to be blind devotion to Milken. Some referred to him contemptuously as “the real estate lawyer,” though they took care not to alienate him. Sandler was frequently closeted with Lowell.

  The partnerships were also a source of discontent. Gary Winnick, in particular, had become suspicious of Milken’s insistence that everyone was being taken care of even as he refused to reveal details of what the partnerships owned and what people’s shares of them were. One day Winnick called Dahl into his office and said, “I’m going to show you something that will make you sick.” Somehow Winnick had gotten a copy of a master partnership list, and it showed more than 40 accounts in the names of Milken, his wife, his children, and other relatives.

  Winnick confronted Milken, who was affronted that anyone in the department would dare complain. Soon after, Winnick told Milken he was leaving. Milken accepted his resignation, and graciously offered to help finance a new fund for Winnick to run. “We’ll put a fund together like KKR and you’ll run it,” Milken offered. They raised $1 billion, and Winnick launched Pacific Asset Holdings.

  Winnick was soon disabused of the illusion that he’d escaped Milken. When Bear, Stearns brought him a potential LBO that interested him, Ackerman called from Drexel to tell him to forget about doing any deal that didn’t come from Milken. “It’s our fund,” Ackerman said arrogantly. “We won’t let you invest” in the Bear, Stearns deal. Winnick’s capital simply became another pool for Milken to manipulate for his own ends.

  Others also complained after warrants from the Beatrice deal were cashed in. The proceeds turned out to be far less than expected, and some of the employees summoned the courage to complain at a department meeting. Milken said he was “outraged” that anyone would complain, but he promised he’d have Lowell provide an explanation. None ever appeared. The truth was far worse than Milken dared admit.

  Milken had extracted the Beatrice warrants (the right to buy Beatrice stock at a low price) from KKR by arguing that he needed to offer them to clients as an inducement to buy the Beatrice junk bonds. Instead, Milken had kept almost all the warrants for Drexel, lodging the bulk of them in his and his family’s partnerships. Those warrants, originally purchased for 25¢ each, now represented the right to acquire over 22% of Beatrice—an interest worth $26 a share, for a staggering total of over $650 million. The explanation for the small payouts to employees was that Milken had kept most of the proceeds for himself and his family. Had the employees known, there probably would have been open rebellion.

  In addition to preliminary calculations of bonuses and partnership shares, the end of the year always brought a flurry of Milken-directed trading designed for tax purposes. With clients like Columbia Savings, the trades looked suspiciously like “parking” to create phony tax losses.

  One day Alan Rosenthal, one of the original salespeople who’d accompanied Milken to California, came up to his boss at the trading desk and, laughing, showed him a copy of a parody of The Wall Street Journal, called The Bawl Street Journal. “Listen to this,” he said, reading one of the paper’s headlines out loud as others in the office gathered. “Drexel Burnham’s Michael Milken is the latest figure to be indicted in New York City’s Parking Violations scandal. Although Milken has not been to Manhattan in years, his violative parking practices leave no doubt as to his involvement.”

  Everyone laughed, until they noticed that Milken wasn’t smiling. “Alan,” he said curtly, “get that piece of crap out of my sight.”

  Reid Nagle, a young, clean-cut savings and loan official from New Jersey, glanced impatiently around the gloomy interior of the Harvard Club, then looked at his watch. It was almost 3 P.M. on a late summer day in 1985. Ivan Boesky had promised to meet him at 2.

  Nagle had been approached nearly a year before by Stephen Conway, Boesky’s chief operating officer, for advice on the possible acquisition of a savings and loan. Now Boesky had called and said he was interested in talking to Nagle about a job. Boesky had been vague, but referred to developing a financial services business within his Northview corporation.

  The club was practically empty. Suddenly the double doors swung open and Boesky came hurrying toward Nagle. “I’m sorry I’m late,” Boesky said. “I’ve only got ten minutes.”

  The two moved to out-of-the-way seats. Nagle was still trying to figure how someone with his credentials might fit into an arbitrage operation, so he asked Boesky why he was interested in him. Boesky quickly dismissed talk of arbitrage, saying arbitrage no longer offered the challenges he was seeking. “Then what is your objective?” Nagle asked, puzzled.

  “Where have the great fortunes been made?” Boesky asked in reply, and the
n answered his own question. “Real estate, oil, financial services.” Then Boesky gazed past Nagle, toward the wall bearing oil portraits of distinguished Harvard graduates. “I want to be a latter-day Rothschild.” By the time Boesky finished his discourse, the 10 minutes had stretched into an hour.

  Nagle was suitably awed by his encounter with Boesky, who had never been so celebrated as he was that summer. Profiles in magazines and newspapers had made him well known nationally, but his quest for fame and, even more fundamentally, respectability, had led him to publish a book and embark on a national publicity tour. At the same time, his scheme with Milken was running at full tilt.

  The title of Boesky’s book, Merger Mania (the subtitle was Arbitrage: Wall Street’s Best-Kept Money Making Secret), was arguably the most intriguing line in the volume. “I considered whether to talk about the behind-the-scenes maneuverings and smoke-filled rooms, but I decided I wanted to do a serious book on arbitrage,” Boesky told The Wall Street Journal. Merger Mania was a dry-as-dust treatise on technical aspects of arbitrage. The 242-page book, which Boesky said he’d been working on for three years, presented arbitrageurs as models of skill, foresight, and industry. “Undue profits are not made; there are no esoteric tricks that enable arbitrageurs to outwit the system,” Boesky concluded piously.

  The book received mostly respectful reviews, and helped Boesky polish his image as an academic: he was appointed to the faculty of the New York University business school and he became a lecturer at Columbia University; these were credentials he would mention with increasing frequency. Boesky received so many speaking invitations that he had to turn many down. It wasn’t unusual, when he did appear, for him to be greeted with a standing ovation.