Baird and Cartusciello had also enlisted their top investigator, Tom Doonan. The day of the Princeton-Newport raid, Doonan flew to California, then drove to a modern apartment complex north of Los Angeles, the home of Drexel’s Lisa Jones, arriving at her door just before 10 P.M.
Jones was a 1980s embodiment of a Horatio Alger hero. At the age of 14, she had run away from her New Jersey home, heading west to California and landing a $5,000-a-year job as a bank teller by lying about her age. She earned a high school degree by attending an equivalency program. Now, still only 25 years old, she was earning $117,000 a year as a trading assistant in Drexel’s Beverly Hills office, working for Bruce Newberg, just one step away from Milken himself. She arrived at work every morning at 5:30 A.M., and spent the day writing up orders for Newberg and placing them on various exchanges, sometimes working three phones at once. She worked hard, and she had realized a level of comfort and security she’d never known before. She was the kind of person Milken liked to hire and promote.
Doonan rang her doorbell, and Jones, a short, curly-haired brunette, answered the door. “Can I speak to you?” Doonan asked politely, explaining who he was and that he had a federal subpoena with him. Jones invited him into her living room, and Doonan quickly outlined the trades between Drexel and Princeton-Newport, showing that he already had considerable knowledge of the situation. The interview was promising at first, with Jones truthfully confirming various details of her relationship to Newberg and Princeton-Newport. Then Doonan got to the crux of the matter.
“Were you parking for them?” Doonan asked.
“Yes, I was,” Jones replied hesitantly.
“Was it for tax purposes?” Doonan continued. Jones suddenly seemed apprehensive.
“No, it wasn’t,” she began, but then her voice trailed off. “I want to talk to a lawyer,” she said. Doonan sighed, but didn’t press her.
“We were hoping you would be willing to cooperate with us in this investigation,” Doonan said, almost sadly. He left her with a grand jury subpoena. Jones, suddenly fearful that her phones were tapped, rushed to a pay phone to call the only lawyer she knew.
Back in New York, investigators began cataloguing the seized materials and reviewing the tapes. Much of it was routine, of no use to the government. But then Cartusciello made an extraordinary discovery: for some reason, apparently involving a client dispute, tapes covering several days in December 1984 hadn’t been destroyed. As he listened, several conversations practically jumped out at him. Cartusciello rushed to get Baird.
Soon they had organized about 20 of the conversations onto a single tape. Baird called in prosecutors from the Freeman and Drexel-Milken cases, and as the tapes played, their excitement quickly mounted. It was just like being in the Princeton-Newport offices as the scheme unfolded. Most of the significant tapes captured conversations between Newberg and Charles Zarzecki, a trader and general partner of Princeton-Newport; but an unexpected bonus was an incriminating tape of Drexel’s Cary Maultasch, apparently handling some matters in Newberg’s absence. This might be the evidence that would crack Maultasch’s stalwart resistance to any notion of cooperation with the government.
Drexel prosecutor John Carroll was home with the flu that day, but his colleagues couldn’t resist calling him repeatedly about the lucky discovery. They even put some of the tapes on the phone so he could hear.
In one of the tapes, Regan is bickering with Newberg about the cost of “carrying” the parked stock positions. “I’ve carried plenty of positions for you, in case you haven’t been realizing it,” Newberg says. “I’ve been charging you my cost to carry.”
In what seems a clear acknowledgment that Drexel stock was parked with Princeton-Newport, Regan replies: “What I carry on my books now is your position.”
It was an extraordinary find, the biggest break the prosecutors had had since the indictments were dismissed six months earlier. The tapes were irrefutable evidence of wrongdoing that went beyond what Hale had divulged. Besides the parking to create phony tax losses for Princeton-Newport, the conversations revealed that Princeton-Newport had performed illegal favors at Drexel’s behest: parking stock of toymaker Mattel Inc. in 1985, and embarking on a stock manipulation scheme. The tapes showed that Drexel had enlisted Princeton-Newport to manipulate the price of an over-the-counter stock, C.O.M.B., a Minneapolis-based merchandiser for which Drexel was handling a securities offering. The prosecutors wondered: if this was what went on at Princeton-Newport and Drexel during a random few days, what other crimes might have been committed at the firms? Baird recognized almost immediately that Drexel could probably be convicted on the strength of the taped conversations alone. Fred Joseph had said repeatedly that he wanted some evidence of wrongdoing—now he could hear it for himself.
But of all the taped conversations, two made a deep impression on the prosecutors. They stood out not just because of their value as evidence—neither, standing alone, was proof of any crime—but because of what they revealed about the state of mind that prevailed on Wall Street in the mid-eighties.
In the first of these, Freeman is talking with Zarzecki. In an almost wistful tone, Freeman tells Zarzecki that he’d recently been to Atlantic City and that when he was younger, he loved to go to Las Vegas and gamble. But now, he says, he doesn’t like casino odds. “It’s not fun anymore. I guess I’ve been in this business too long,” he says. “I’m used to having an edge.” In the second conversation, Zarzecki is talking to Newberg in Beverly Hills. After arranging one of their sham sales, Newberg tells Zarzecki, “You’re a sleaze bag.”
“You taught me man,” Zarzecki responds. “Hey listen, turkey . . . ”
Newberg interrupts with a sardonic chuckle. “Welcome to the world of being a sleaze.”
Despite the unfolding scandal, the great bull stock market of the eighties had rolled on. On May 12, 1986, the day Levine was arrested, the Dow Jones Industrial Average had topped 1800. Few had seen any portent in the arrest of an obscure investment banker. By November, when Boesky agreed to plead guilty, the Dow stood at nearly 1900. After some initial tremors, mostly in deal stocks and arbitrage plays, the stock market resumed its ascent. If anything, the resistance of Freeman and Milken, Goldman, Sachs and Drexel, had reassured investors that the engine of the takeover boom would continue.
Drexel had done everything it could to shore up that impression. Despite the shadow of the government’s investigation, the firm was able to draw on the loyalty of its clients to sustain its business and market share at near-record levels. Drexel may have been uniquely positioned on Wall Street to withstand attacks on the legality of its business. After all, it had stood by many of its largest clients, like Posner, when they were in trouble and no one else wanted to be associated with them. Now it was Drexel’s turn.
And the clients responded. Despite the possibility that Drexel might be charged or indicted at any time, the firm completed an impressive series of massive junk-bond deals. The government could not count on client pressure to encourage Drexel to cooperate. On the contrary, the clients were, in many cases, as defiant as Milken. Given his continuing power over many of them, they had little option.
New business suffered, however. The firm lost its incredible momentum. It had to abandon plans for its own skyscraper at 7 World Trade Center; Drexel’s hated rival Salomon Brothers took the tower instead. And the Drexel-backed hostile tender offer lost its psychological power. Perelman’s withdrawal from his Gillette bid and Icahn’s failure to take over USX were perceived as Drexel failures. But Drexel was eager to distance itself from its controversial role in hostile takeovers. It didn’t back any during most of 1987.
Soon after the Boesky revelations, Joseph had hired Ira Millstein, a senior partner at Weil, Gotshal & Manges, a large and prominent New York firm, to serve as his personal lawyer. Millstein had quickly concluded that Joseph had no personal exposure to criminal liability. On a personal rather than a legal level, however, he warned Joseph that he believed Milken mi
ght be in serious trouble, and that the best course for Joseph would be to resign from Drexel. Joseph had been startled by the suggestion. The prospect was unthinkable. He insisted to Millstein that it was nonsensical to think that a man of Milken’s vast wealth would stoop to crime.
In the weeks that followed, Joseph seemed determined to tie his and the firm’s fate even more closely to Milken. Even before the Boesky scandal broke, Joseph had hoped that G. Christian “Chris” Andersen’s New York-based investment banking group might develop into an East Coast client-getting group comparable to Milken’s. It hadn’t happened. So Milken insisted on bringing back Don Engel, the Milken loyalist Joseph had fired for what he considered ethical lapses, to rejuvenate Drexel’s client-getting capability.
Joseph initially resisted. There was strong opposition from the Bachelor-Andersen faction. Milken emphasized, however, that in tough times, “relationships” were what counted. Milken said his own relationships were keeping the firm afloat, and—in an obvious slap at corporate finance officials Bachelor, Andersen, and their East Coast allies—he added that Engel seemed to be the only other person at Drexel who understood how to cultivate client loyalty.
In this as in other respects, Joseph cast his lot with the Milken camp. “Mike wants you to do this,” Joseph told Engel. “We need you.” Engel agreed to come back in January 1987 as co-head of the investment banking group. He also managed to keep his compensation agreement, and insisted that he report directly to Joseph—not to Bachelor or Andersen, his nominal equals.
No sooner had Engel made his triumphal return than he rechristened the investment banking group the “relationships group”—without consulting Andersen. Andersen barged into Joseph’s office and threatened to resign. Stephen Weinroth, who had opposed Engel’s return from the outset, also threatened to leave, and other members of the East Coast faction followed suit.
Less than a month after Engel’s return to the firm, Joseph persuaded him to withdraw and resume his status as a consultant. After all, Engel was still in charge of the Predators’ Ball, which had now assumed unprecedented importance as a show of strength in the wake of the government’s investigation.
As the 1987 conference got underway, the first week in April, there was fear in the air. There were daily rumors of a massive government raid, a prospect made all the more plausible by the Freeman, Wigton, and Tabor arrests. Engel, however, was undaunted, rising to the challenge. The 1987 high-yield conference was the biggest ever, a display of client loyalty that drew more than 2,500 participants.
Plainly, the real audience for the conference wasn’t in Beverly Hills, but in Congress and the nation at large. The tone of this year’s event changed dramatically. The freewheeling, muscle-flexing sense that anything was possible was gone—along with the exhilaration. Engel’s bungalow party, again a stag affair, and the ensuing dinner at Chasen’s, were staid in comparison to prior years. The glitzy rock-backed videos were replaced by a quasidocumentary entitled “Drexel Helps America,” featuring emotional testimonials in praise of junk bonds from employees of big Drexel clients.
The film was propaganda. When a Stone Container employee said he’d like to “shake the hand” of whoever had championed junk bonds for his company, a cynic in the audience blurted out, “How much did we pay that guy?” At the end of the film, the narrator sounded Drexel’s new investigation-inspired theme: “High-yield financing and Drexel Burnham Lambert—they help America work!” The audience burst into thunderous applause.
Milken sounded similar themes, and began to promote his new image as a “national treasure.” In his opening remarks, he made no mention of hostile takeovers, concentrating instead on how junk bonds had promoted the growth of midsize companies and kept America competitive. Boone Pickens had planned a rousing defense of takeovers and shareholder democracy for his keynote address. After Drexel reviewed his proposed remarks, he substituted a numbingly dull talk on economic conditions in the oil and gas industry.
The tone of the conference was meant to suggest that the government’s investigation was of no concern to Drexel and Milken. Yet clearly, combined with the bad publicity, it was exacting a toll. Joseph looked haggard; Maultasch looked even worse. In contrast, everything about Milken—his energy, his demeanor, his constant presence—conveyed reassurance. Milken “hasn’t been hampered by any guilty conscience that I can see,” one participant told The Washington Post. “I figure that means he’s either not guilty or he doesn’t have a conscience.”
As usual, the press was barred from the conference sessions, but many showed up at the Beverly Hilton anyway. The reporters weren’t ejected, but were followed closely and barred from entering rooms where meetings were scheduled. Only designated participants, such as client William Farley, head of Fruit-of-the-Loom, were allowed to make comments to the press, and those were carefully scripted by Drexel to underline the conference’s themes.
This was just one component of the biggest media offensive ever mounted by a private defendant in a criminal investigation. Much of it was intended to deflect attention from Milken’s alleged misdeeds and shore up his national stature. It would be an unprecedented test of the degree to which public opinion could be used to shape the outcome of a criminal investigation.
Soon after the junk-bond conference, Drexel launched a two-week-long, firm-wide celebration of junk bonds, including sporting events, lectures, and films touting the glories of junk bonds and their contributions to America. In a policy shift first announced at the conference, Drexel abandoned its long-standing efforts to replace the word “junk” with “high-yield” in popular parlance. Instead, it decided to embrace “junk.” Employees were given pins with the message, JUNK BONDS KEEP AMERICA FIT. One of the videos featured Joseph and firm chairman Robert Linton lip-synching the lyrics, “When the going gets tough, Drexel gets going.”
Full-page newspaper ads showed alleged beneficiaries of junk-bond largesse: not, of course, people like Milken himself, or Milken satellites like Carr or Spiegel, but a wholesome young man, his pregnant wife and their child standing in front of a soon-to-be-completed new home. What linked this scene of happy domesticity to junk bonds? Hovanian, the home’s builder, was a Drexel client that, with junk bonds, had been able to “provide 50,000 people with a living room and 20,000 people with a living,” the ad claimed. A $4 million network television campaign was similarly sentimental, showing an energy plant in Vidalia, Louisiana, built with Drexel junk bonds, that had supposedly lowered unemployment in the impoverished Louisiana town. Many at Drexel were furious when Wall Street Journal reporter Laurie Cohen pointed out that the television commercial wasn’t even filmed in Vidalia, that most of the plant’s workers lived elsewhere, and that the Louisiana Department of Labor disputed the ad’s claim that the plant had lowered unemployment.
The television campaign was only one part of the media blitz. Richard Sandler and other Milken allies at Drexel began to assert control over every aspect of Milken’s portrayal in the media. Every journalist covering the story was “analyzed,” and reporters were “graded” on how favorably disposed they seemed to be toward Milken and how easily manipulated they might be. The Milken camp placed reporters in two broad categories: the ideologues, who could be counted on to support the Milken line because they held similar political views, and the pragmatists, who needed help from the Milken camp because they were failing to break any stories on their own.
The Milken team’s favorite ideologue was Edward J. Epstein, a Manhattan inc. columnist, who had been among the first to write that Milken was being unfairly hounded by prosecutors. Epstein sounded themes that resonated powerfully with supporters of Reagan-era deregulation and supply-side economics. After passing muster with Williams, Epstein was granted the first personal interview with Milken. He wasn’t allowed to ask about the investigation.
The Wall Street Journal’s editorial-page writers became the most potent exponents of the pro-Milken line. This camp seemed to favor the antiestablishment “creati
ve destruction” that they believed Milken had spawned, and showed a barely disguised contempt for the securities laws as needless government limitations on innovation and entrepreneurship.
As the hot summer of 1987 wore on, an uneasy calm descended on Wall Street. The period of cooperation, which culminated in the Boesky and Siegel plea agreements, was obviously over. New indictments of Freeman, Wigton, and Tabor seemed ever more remote. Except for those immediately caught up in the continuing investigation, the scandal seemed to recede into recent history.
Arbitrageurs were once again celebrating. Most had more than recouped their losses from the brief plunge in stocks that followed the announcement of the Boesky plea. They were leveraged more than ever, throwing money at real and contemplated takeover stocks. The market surged ever higher, topping 2,700 in early August. There was talk of a 3,000 Dow Jones Industrial Average by the end of the year.
Joseph tried to caution Drexel officials about the rising euphoria, especially the incredibly high prices shareholders were being offered in takeovers and leveraged buyouts. That fall, he met with Milken and his Beverly Hills contingent and told them that Drexel had to be prepared to let its enormous junk-bond market share shrink. “Let others do these deals,” Joseph urged. “You’ve got to be able to let a real order, a real client, go somewhere else.” Everyone seemed to nod in agreement, including Milken, though the notion of “letting” a client go was anathema to him.
The stock market soon imposed its own discipline. The first tremors came on October 14, with rumors from Washington of pending legislation designed to limit the deductibility of interest incurred in financing hostile takeovers. The prices of a host of stocks had been driven to exorbitant levels on expectations of takeover bids; these now seemed in jeopardy. A sell-off began, slowly at first, as some arbitrageurs stepped in to buy stocks at lower prices, but then more rapidly as institutions began to sell swiftly in order to lock in unrealized profits. On Thursday and Friday, October 15 and 16, the market dropped more than 100 points each day.
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