Den of Thieves

by James B. Stewart

  The easiest way to keep everyone “in the same tent pissing out” was to have as many potential witnesses as possible represented by members of the Milken defense team. But the lawyers’ Code of Professional Responsibility cautions against this, requiring that lawyers not represent defendants and witnesses, unless they have fully explained to each client all of the implications. Williams’s pitch to Dahl arguably crossed this line, given the strong likelihood that Dahl would be asked to testify. But Dahl hadn’t actually received a subpoena at the time, so Williams was free to go ahead, and the pitch worked. Dahl was awed by Williams and eagerly retained him and Williams & Connolly, as did Warren Trepp and another Beverly Hills official.

  Williams, however, recognized that he couldn’t represent employees already subpoenaed. These included Lowell, Maultasch, Thurnher, and Ackerman. Williams assured himself, however, that these witnesses—some potential targets—were in the hands of “friendly” counsel. The defense teams carefully went over the names of lawyers they might recommend to witnesses they couldn’t represent themselves. The lawyers’ skills and reputations were, of course, an element in the process, though hardly one that took up much time in the discussions. More important were the lawyers’ track records in government cases. Williams and company wanted lawyers whose strong philosophical preference was to fight the government rather than cooperate with it.

  Another factor played an important role: an elaborate network of dependence and obligation. Some of the lawyers ultimately approved had received so much business from Williams & Connolly, Paul, Weiss, or Cahill Gordon, that they could be counted on to share information and, within the limits of professional responsibility, cooperate with the lawyers representing Milken and Drexel. Mark Pomerantz represented one of Milken’s assistants; he had been a Supreme Court clerk with Litt. Jack Auspitz represented another Milken witness; he had been an associate at Paul, Weiss. Seymour Glanzer represented Thurnher; he’d often received referrals from Liman. There were numerous other examples.

  Finally, all of the prospective attorneys were interviewed personally by Sandler, whose fanatical loyalty to Milken further ensured the involvement of counsel likely to fight rather than counsel settlement.

  The war began with a flurry of witnesses—including Dahl—before the SEC and the grand jury. Most simply invoked the Fifth Amendment and refused to answer questions. Dahl resisted this idea at first, feeling that he had nothing to hide. Invoking the Fifth, he thought, would make the government more suspicious. But at Litt’s insistence, he exercised his right to remain silent.

  Another witness, Milken’s trader Warren Trepp, was concerned that Williams & Connolly was too close to Milken, and feared his own interests would suffer. Williams arranged for Trepp to be represented by William Hundley, a lawyer to whom he had often referred cases over the years. Trepp’s defection caused an initial ripple of concern in the Milken camp, but it died away once he was in Hundley’s hands, and after Trepp assured his colleagues he’d never turn against Milken. Over dinner at the Palm restaurant in Washington, Trepp told Hundley that he’d never testify against clients or colleagues. “I’m not the kind of guy who could ever be a fink,” he said. “I don’t have a reputation of being a fink lawyer,” Hundley replied.

  Within a matter of weeks, one of the largest and most expensive and comprehensive criminal defense teams in history had been assembled and the lines of defense were drawn. In many ways, they never changed. Henceforth, Milken was cast as the innocent victim of the despicable Boesky. He was to be portrayed as a genius, a treasure, a savior of the American economy, and a one-man engine of growth. Privately, however, Williams warned some of his colleagues leagues that this posture might need to be reconsidered as facts in the case unfolded.

  Milken was now virtually surrounded by experts of one sort or another. But he was becoming more distant from almost everyone else. Fred Joseph was upset by the intense press coverage, especially The Wall Street Journal article of November 17 saying that Milken was being named in subpoenas. He wanted to get to the bottom of the matter himself; he wanted Milken’s personal reassurance. Cahill’s Tom Curnin and Peter Fleming, however, told Joseph they would interview Milken on his behalf. When they arrived, Milken’s lawyers were already in place, and, despite all the lip service about cooperation, they refused to allow Milken to be interviewed alone by Drexel’s lawyers.

  Milken’s lawyers told Curnin and Fleming that it was “common” in criminal investigations not to permit a company to interview an employee who might be a target of the investigation. Nonetheless, they assured the Drexel lawyers, Drexel had nothing to worry about. The Drexel lawyers passed the word back to Joseph. He didn’t realize it, but this was a decisive moment in his leadership of the firm. Milken’s lawyers were hardly telling the whole story when they insisted it was “common” to isolate an employee in Milken’s position. On the contrary, many companies insist on immediately getting to the bottom of an employee’s alleged unlawful conduct. If the employee refuses to be interviewed, or doesn’t answer questions satisfactorily, he or she could be fired. Milken’s lawyers took a calculated risk in refusing to permit Milken to be interviewed by Joseph or Drexel’s lawyers. But they knew Milken’s importance to the firm. Joseph believed Milken when he said he was innocent, and he also had to contend with other top Drexel officials who were even more dedicated to Milken. To suspend or dismiss Milken could have caused a civil war at the firm.

  It was clear both from the subpoenas Drexel received on November 14, and from a set of grand jury subpoenas that followed in December, that Milken’s relationship with Boesky was at the center of the investigation. The subpoenas were unusually lengthy and detailed, with appendices running to numerous pages. Almost all the deals in the Boesky/Milken conspiracy were identified, including Fischbach, Pacific Lumber, and Wickes. The $5.3 million payment figured prominently. The subpoenas called for the production of a vast quantity of documents, and gave Drexel only 30 days to respond.

  Lawyers from Cahill launched an internal investigation immediately after the Boesky news, and spent the weekend of November 15 and 16 interviewing Drexel officials who had had any involvement with Boesky or the transactions in question. Without access to either Boesky or Milken, it wasn’t surprising that they couldn’t find any immediate evidence of wrongdoing. When it came to the $5.3 million fee, there were plenty of witnesses, including David Kay, who could testify that Drexel had, in fact, done research for Boesky. Kay, in particular, liked to call Boesky a “tire kicker,” someone who put Drexel through the motions but didn’t follow through with a bid.

  The Drexel executives eagerly embraced Milken’s claim that the payment was for research. It was troublesome that Drexel ordinarily didn’t bill clients for research. The events of March 21, the day of the payment, were also highly unorthodox. However much research had actually been done, the argument could be made that Drexel had been amply rewarded by the enormous fee it collected from Boesky in the Hudson Funding transaction. Still, none of that, however suspicious, necessarily made the payment a crime, the Drexel lawyers thought.

  Drexel executives and lawyers pinned their hopes on a document Milken’s lawyers showed them. It was a copy of handwritten notes by Thurnher dated “3-21-86,” purporting to be contemporaneous notes for the Boesky junk-bond closing. It read:

  Corporate finance $1,800,000.

  Equity Research NY $2,000,000.

  HY Dept. Research: $1,000,000.

  This purported to be an allocation of most of the fee to departments that had done the Boesky research, and it “proved,” the Milken lawyers insisted, that the $5.3 million was in fact an investment banking fee, as described in the letter signed by Lowell and Donald Balser and provided at the time of the Boesky closing. The notes were meant to be an allocation of the fee to various parts of Drexel, for use in calculating credit for bonuses.

  Curnin felt it was time to initiate contact with the SEC. He scheduled a meeting with Sturc at the SEC for the week of Thanks
giving, and offered to produce Joseph the following Saturday. Curnin didn’t want to prolong the investigation if it could quickly be brought to a satisfactory resolution. Having represented the ill-fated E. F. Hutton in its massive check-kiting scheme, he had seen firsthand how bad publicity can hurt the operations of a respectable securities firm.

  In Washington, Lynch, too, was hoping for a quick resolution. After the battering he’d taken in the press over the Boesky settlement, he was eager to show some results of the Boesky deal. If Milken and Drexel came right in and cooperated, he felt the commission could really blow the lid off the securities industry. He assumed Milken would be under considerable pressure. Lynch expected that Drexel would, at the very least, place Milken on a leave of absence and begin active cooperation. He didn’t see that Drexel had much choice.

  Rarely had the expectations of the SEC and a securities firm under its jurisdiction been so far apart. The discussions fell apart as soon as Curnin offered the opinion that the $5.3 million payment was an innocent payment for past services. The assertion seemed to enrage Sturc; it was, indeed, preposterous to anyone who’d heard Boesky’s far more persuasive explanation. Curnin wanted to know what were the SEC’s “concerns.”

  Sturc had no interest in helping Drexel if it was going to stonewall. The commission, he said coldly, “isn’t yet prepared to share those concerns with you.” When Curnin asked the SEC to “prioritize” what he deemed its unreasonably long list of documents to be produced, Sturc also refused. And when Curnin again offered to have Joseph come down to Washington, he was rebuffed. It was clear to Sturc that despite its claims to the contrary, Drexel was not in the least prepared to cooperate. For his part, Curnin was baffled by how upset the SEC had become over Drexel’s explanation of the $5.3 million.

  Finally, Curnin persuaded Lynch to meet with Joseph in Washington. If anything, the meeting was even more of a disaster. Lynch told Joseph that the case against Milken was “overwhelming,” that the commission had contemporaneous documents and witnesses backing Boesky’s version of events, and that Drexel “had to start cooperating immediately in its own interest.” Lynch didn’t know how much more strongly he could put it. Yet Joseph seemed to become indignant. “We’ve made our own inquiries,” he said. “What you’re alleging simply isn’t true. Boesky is a liar and a convicted felon.” Lynch was contemptuous of Drexel’s so-called investigation. Joseph had acknowledged that Milken wouldn’t talk to him or to Drexel’s lawyers. That was an investigation? Then Joseph reiterated the theory of the $5.3 million fee, further angering Lynch. “Give us the evidence of violations,” Joseph insisted. “We just want to know what we’ve done wrong.”

  Lynch interpreted this as a blatant attempt to fish for information from the SEC without offering anything in return. This was more than the normally unflappable enforcement chief could take, and he was furious. “You know what you did wrong,” Lynch said, and the meeting broke up in recriminations.

  “I can’t believe they’re doing this,” Lynch told Sturc after the Drexel group left. “What they’re saying is, ‘We’ll go down to protect Milken.’” Sturc nodded in baffled agreement. They’d known that Milken was the real power in the firm, but not that it had gone to these lengths.

  Given the magnitude of Boesky’s allegations, and without even a pretense of cooperation from Drexel or Milken, Lynch and Sturc concluded that they were likely to face litigation comparable in scope to that of the government’s antitrust case that had led to the breakup of American Telephone & Telegraph. They quickly increased staffing on the case from 6 to 20 lawyers. It was the SEC’s turn to prepare for war.

  At the U.S. attorney’s office, Carberry was hard at work to make sure that the case against Drexel would not depend solely on Boesky. He put two promising young assistant U.S. attorneys on the case: John Carroll, 31, a New York University law school grad who had clerked for New York federal district court judge Richard Owen; and Jess Fardella, 35, a Harvard Law graduate and former associate at a Boston law firm, Ropes & Gray.

  Since his first interviews with Boesky, one of the things Carberry had found appealing about the case was the likelihood of corroboration. Boesky’s and Milken’s style had kept the full extent of their dealings to themselves, but they had relied on underlings to handle what they deemed the mundane tasks and recordkeeping functions. Carberry targeted several of Boesky’s employees, especially Davidoff, the head trader, and Mooradian.

  The Boesky employees quickly fell into the government’s net. Davidoff, the highest-ranking of the Boesky employees implicated in wrongdoing, agreed to cooperate and plead guilty to one felony count of evading net capital requirements. He brought prosecutors a full arsenal of evidence on Boesky’s dealings with Mulheren: the parking arrangements, the payback schemes, the details of conversations he had directly with Mulheren. Davidoff single-handedly fueled the Mulheren investigation. (Mulheren hadn’t been one of the five targets cited in Boesky’s proffer. Boesky had always soft-pedaled the value of his information about Mulheren. To the limited extent Boesky had real friends on Wall Street, Mulheren was his best friend.) Davidoff was of little use on the Drexel-Milken front, since he knew nothing about the secret arrangements beyond some of the trading he oversaw.

  Mooradian, on the other hand, proved invaluable. On the Monday after the Boesky announcement, he had shown up for work at 11 Broadway as usual. The office had been swarming with SEC investigators, pulling documents out of filing cabinets, putting them in cartons, stamping them and sealing them. Mooradian had been clinging to a small hope that the firm would somehow survive. But now he saw it being literally torn apart. “We’re history,” he told his colleagues.

  Later that morning, Mooradian got a call from Pitt. “Do you have a lawyer?” Pitt asked him. The question upset Mooradian, as did the fact that someone as important as Pitt was calling him. To him, that had to mean bad news.

  “No,” Mooradian said. “Why the hell would I want one? I don’t know anything.” Earlier, Pitt had spoken to Bob Romano, the Merrill Lynch official and former SEC enforcement lawyer who’d been involved with the anonymous letter from Caracas. Since then, Romano had left Merrill Lynch and gone into private practice. Pitt had told him he’d recommend him to Mooradian, one of four of Boesky’s employees who Pitt believed would need their own counsel. “You’d better get a lawyer,” Pitt told Mooradian, and recommended that he call Romano. Mooradian did, and then called his wife.

  “This won’t even take an hour,” he predicted. “I don’t know a thing about any insider trading.”

  Romano arrived at the Boesky office that afternoon. “What do you think the government wants to talk to you about?” Romano began. Mooradian, despite his claims that he knew nothing, started talking a mile a minute.

  “You should know I’ve been in trouble before,” he started, explaining his earlier suspension by the SEC. Now, he said, “I’m involved in the Drexel thing.” He described the recordkeeping he did for Boesky, the efforts to reconcile the balances and his trip to Beverly Hills. And he told Romano all about the $5.3 million payment, the events of March 21, when Boesky had yelled at him for nearly upsetting the Drexel financing, and Boesky’s subsequent orders to destroy the documents used to calculate the payment.

  “Did you destroy them?” Romano asked.

  “Yes,” Mooradian said, and Romano saw a promising area of documentary corroboration vanish.

  The next day Romano met with Carberry, who, as usual, went straight to the point, noting that Mooradian was implicated by Boesky in the falsification of records related to the Drexel scheme. Romano saw that he had little room to maneuver; Carberry already knew, from Boesky himself, most of what Mooradian had told him the day before. “How can Mooradian help you?” Romano asked.

  Carberry ticked off a list: Drexel; Kidder, Peabody; Seligman Harris (Boesky’s London broker); and Mulheren.

  Romano returned to Mooradian’s office and they did their best. Mooradian racked his memory, remembering details of how B
oesky ordered documents destroyed. They combed through Mooradian’s files, and Mooradian showed Romano the reconstruction of the Drexel reconciliation he’d done at Boesky’s behest. But he had nothing to offer on Carberry’s other targets.

  When they met, and Mooradian said he’d come up empty-handed, Carberry told him that the U.S. attorney wanted him to plead to a felony. Mooradian was enraged.

  “I am not a felon,” he insisted vehemently. “I made no money on this.” In his view, he had simply carried out Boesky’s orders; everything he had done was routine on Wall Street.

  Mooradian didn’t want to be, as he put it, a “squealer,” but Romano struck a deal with Carberry to the effect that the U.S. attorney would defer charging Mooradian or demanding a plea until after he had cooperated. Then they could evaluate Mooradian’s effort. If they still felt he deserved a felony, so be it.

  Mooradian was nervous at his first meeting as a cooperating witness with Carberry and other government lawyers. When he casually referred to Carberry as “Charlie,” Carberry cut him off. “We use last names here, Mr. Mooradian,” Carberry said. The audience seemed huge to Mooradian: five lawyers from the U.S. attorney’s office and eight SEC lawyers. Gradually, however, he warmed to the task, leading them through the arrangement with Drexel and his role in it. When he got to the events of March 21, he hesitated, and then stopped altogether when asked what Boesky had said to him after he had nearly ruined the deal with his disclosure about the $5.3 million payment.