“Is Milken innocent or guilty?” she demanded.
“Innocent, of course,” Gilman promptly replied. Robinson didn’t look satisfied, so he repeated with even more conviction, “He is innocent.”
“Right,” Robinson answered.
The 1988 Predators’ Ball, at the Beverly Hilton in April, had largely been a public-relations showcase for Milken. At Robinson, Lake’s behest, the press had been invited to hear Milken’s thoughts on Third World debt and public education. There were frequent testimonials to Milken from devoted clients like Steve Ross and Nelson Peltz.
But less than two weeks later, Milken confronted his first hostile audience: the U.S. Congress. Representative John Dingell, the Michigan Democrat known for his intrepid investigative staff, convened a session of the House Oversight and Investigations subcommittee, which he chaired, to probe Drexel’s private partnerships, such as Otter Creek, the vehicle for Drexel’s investments in National Can. The subcommittee issued congressional subpoenas to both Milken and Fred Joseph.
It was Milken’s first direct confrontation with the government he had come to disdain, and it was deeply unsettling. The reclusive financier who had so prized anonymity was all but mobbed as he, Williams, and the ubiquitous Richard Sandler made their way up the steps of the Capitol building and into the high-ceilinged hearing chamber. Milken managed a wan smile as flashbulbs popped continuously during the half-hour wait for the proceedings to begin.
Williams’s first official pronouncement was to invoke a rarely used congressional rule to demand that the room be cleared of all cameras and recording devices. Dingell, showing deference to the visibly ailing Williams, obliged, banishing all film crews and photographers.
The mood changed quickly when Dingell began by asking Milken if he had a financial interest in Otter Creek. Milken invoked the Fifth Amendment. A second question met with the same response. “He doesn’t intend to answer any of your questions if he follows my advice,” Williams stated.
Dingell adjourned, then held a press conference unveiling the committee’s suspicions: that the Drexel partnerships engaged in widespread self-enrichment at the expense of Drexel’s clients. “There have been questions raised about whether . . . this complies with, among other things, the law relating to insider trading, front-running and . . . what might be defined as market manipulation,” Dingell said.
Drexel quickly issued a statement. “Mike Milken has our full support,” the firm said. “He is a colleague, a friend and an individual who has made an enormous contribution to financing this country.” But nothing Drexel could say could undo the damage of Milken’s invoking the Fifth Amendment. It was his constitutional right, of course, just as it was the public’s impulse to wonder why Milken would invoke it if he were as innocent as he claimed.
That night, the Milken team fixed its attention on Joseph, who was scheduled to testify the next day. Joseph wouldn’t be invoking the Fifth Amendment. He didn’t believe he had any risk of prosecution, and wanted to avoid any further loss of public confidence in Drexel. Unfortunately, Joseph was functioning under a severe handicap: he knew virtually nothing about the operations of the Milken-led partnerships. In some cases, he didn’t even know they existed. In his preparations for testimony, the Milken representatives kept him up past 2 A.M., badgering him with hypothetical questions and feeding him canned answers. Joseph was even asked to submit a statement to the committee containing information he believed to be false.
While Milken had looked fresh for his appearance, Joseph looked haggard and tense as the hearing convened the next morning. Dingell quickly took command of the questioning, and made mincemeat of Joseph. Focusing in part on the Beatrice deal, Dingell and his colleagues charged that Drexel had favored its own employee partnerships over Drexel clients and engaged in self-dealing by having clients buy bonds from the partnerships at inflated prices. At one point Joseph had to admit, “I think I am confused,” about the applicability of various securities laws. One congressman summed up the day by saying to Joseph, “The public perception is that what you have done doesn’t pass the smell test.”
Joseph felt humiliated, and was furious with his lawyers. Looking back on the events leading up to the hearings, he began wondering about the advice he’d been given. Had he been set up? Whose interests were the Milken lawyers really serving? And what had gone on in the Milken-led partnerships? For the first time, Joseph felt the beginnings of doubt about Milken and his motives. Alone among Joseph’s advisors, Ira Millstein, his personal lawyer, had been warning him that Milken might be convicted. Millstein had been so angry over Joseph’s refusal to heed his advice that he had threatened to quit. Perhaps, Joseph now thought, Millstein had been right.
Sitting in the front row of the congressional hearings, just a few feet from Milken, wearing a bright yellow dress, was Connie Bruck, the reporter who’d written the Boesky profile in the Atlantic. She was now working on a book about Drexel Burnham and Milken. In February 1986, Bruck had told Milken her plans, and asked for his cooperation. “I do not want it to be done,” Milken had replied before proposing to buy out her book contract. “Why don’t we pay you the commitment fee that your publisher would have paid you, except we’ll pay it to you to not write the book. Or, why don’t we pay you for all the copies you would have sold if you had written it?”
By the summer of 1988, Bruck’s manuscript was completed. Under an earlier agreement with Bruck, Joseph was allowed to read it and comment on the facts, but not make copies. He knew immediately that there would be trouble. Titled The Predators’ Ball: The Junk Bond Raiders and the Man Who Staked Them, the book was a thorough, sober study of Drexel, Milken, and several of their clients, a groundbreaking examination of Milken’s junk-bond empire.
The book reported that Drexel had hired prostitutes for the Predators’ Ball, that in his early days at Drexel Milken had worn a miner’s helmet on the commuter bus so he could read prospectuses in the dark, and that the junk-bond king himself had tried to buy Bruck out of writing the book. Worse, the book left the strong impression that Boesky’s allegations were entirely consistent with the values and culture spawned by Milken.
Despite security precautions at Simon & Schuster, Bruck’s publisher, Liman soon managed to obtain a copy of the manuscript, and had it quickly reproduced on Paul, Weiss copy machines. The Milken defense machine began planning an all-out counterattack. Finally, it seemed, the enormous defense apparatus had something concrete to attack, even if it was a book rather than a grand jury indictment.
A high-level meeting was convened at Paul, Weiss. Present were Robinson, Lerer, and several others from Robinson, Lake, as well as Liman, Flumenbaum, Sandler, and Milken himself. Liman and Milken arrived late, and while the others waited, they perused copies of the manuscript. Sandler was quickly incensed. “There was no miner’s cap,” he exclaimed, then quickly modified his denial. “It was a gift. It was an eye doctor’s thing. He never wore it; he only wore it once.”
When Liman and Milken arrived, Milken sat down and started reading. He began shaking his head, glowering. “This book is turning me into a geek,” he said angrily. Complaining that the book made him seem self-centered and obsessed, that no one ever called him “the king,” he concluded angrily, “I want this stopped.”
Some advisors warned him that anything they did would generate publicity and attention for the book, and that no one would probably read it anyway. (“Americans aren’t readers,” Lerer assured him.) They also reminded him that he’d refused to talk to Bruck, so he couldn’t really blame her if his views weren’t represented. Milken would hear none of this. He wanted the book stopped, preferably before it was published. Despite private doubts, Liman and Robinson were supportive. Liman had had success in the past attacking books, notably biographies of client William Paley, chairman of CBS. And an attack strategy was consistent with Robinson’s view of publicity. The team plunged into a massive campaign to discredit Bruck and her book, ignoring the likely positive impact on bo
ok sales.
At Liman’s and Robinson’s direction, the Robinson, Lake staff dutifully began compiling a line-by-line analysis of the book, citing certain facts as “misstatement,” “mischaracterization,” or one of two lesser categories of transgressions. The plan was to send a list of “errata” to every book reviewer in the country, hoping to destroy the book’s credibility. “The errata will be longer than the book itself,” Lerer exclaimed. “That’s great!”
Several Robinson, Lake staff members spent a full month trying to discredit the book. Unfortunately, the “truth squad,” as it came to be dubbed, found it increasingly difficult to disprove many of Bruck’s assertions. For example, despite Milken’s insistence, some of his own clients did refer to him as “the king,” even in conversations with the Robinson, Lake employees trying to disprove that very fact. But the staff was afraid to bring that to Milken’s attention. The list of errata had to be padded with alleged inaccuracies that were patently trivial.
This didn’t give Milken any pause. Not content with the plan to discredit the book’s accuracy and fairness, he still wanted it blocked. Liman called Drexel’s chief lawyer, Tom Curnin, saying the book was “extremely damaging” to Milken, who wouldn’t be able to get a fair trial if it were published. “Take steps to prevent its publication,” Liman ordered, “either through contacts” at Simon & Schuster, “or in court.” Curnin was startled by the request; surely Liman knew that prior restraint of the press is granted only in exceedingly rare and compelling circumstances.
Cahill Gordon partners and noted First Amendment lawyer Floyd Abrams joined Curnin in advising Liman that they could never persuade a judge to enjoin the book. Liman seemed furious, threatening to tell Joseph that Cahill “isn’t supportive of Milken and Drexel.” Still, they held their ground. “If we want this, we should get it,” Liman said, arguing again that Milken’s desires should come first.
Curnin advised Joseph that he thought such a suit would harm Drexel. Joseph agreed. He thought it a preposterous idea, another example of Liman’s putting Milken’s interests ahead of Drexel’s. It was revealing, Joseph thought, that when all was said and done, Milken and his lawyers weren’t willing to file the suit on their own. Liman was too smart for that.
Ultimately the campaign had little effect. The Predators’ Ball was published on schedule. Reviewers were baffled; they aren’t fact-checkers. On the face of things, few of the Milken allegations were persuasive. The campaign led to immense prepublication publicity for the book, including a front-page article in The Wall Street Journal.
When Edward Bennett Williams warned the prosecutors that he wouldn’t live to see the end of their investigation of Milken, he had known that he was probably beginning his last bouts with cancer. Robert Litt had known Williams was gravely ill when, just before an SEC appearance together, Williams turned to Litt and said, “You’d better be prepared to talk.” Litt was taken aback. Williams always did the talking. When the day arrived, Williams could barely walk down the SEC hallway.
In early 1988, Williams had asked Vincent Fuller, a prominent Williams & Connolly partner, to begin getting involved in the Milken case. But Fuller and Milken never seemed to reach a rapport. Milken revered Williams, and felt that no one could take his place. With the onset of Williams’s illness, Liman, Flumenbaum, and Paul, Weiss lawyers quickly shouldered aside their colleagues at Williams & Connolly. Whatever influence Williams’s thinking might have had on Milken was lost.
Williams rallied somewhat for the Milken congressional hearings, even though he looked pale and drawn. But it was his last public appearance on Milken’s behalf. He died four months later, on August 13. Milken flew to Washington. During the funeral, he covered his face with his hands and wept.
During the first week in August 1988, Bruce Baird and his prosecutors invited Lisa Jones and her new lawyer, Brian O’Neill, to their offices. Wasting no time, they turned on a tape machine and watched as Jones and her lawyer listened, for the first time, to the young woman’s voice arranging illegal trades with Hale at Princeton-Newport. Jones blanched.
After the meeting, O’Neill quickly drafted a letter to the government; hearing the tape had “refreshed” Jones’s memory. Under her grant of immunity, she was now willing to admit that she had engaged in the trades and had conversed about them with Hale. The prosecutors were unimpressed. Amazingly, Jones was still refusing to admit anything other than what had appeared on the tape. She had lied before, and was obviously still lying, they believed. Prosecutors rightly view perjury as a serious crime that undermines the judicial process. A message had to be sent. Despite her youth, her hard early life, and her low-level status at Drexel, Jones’s immunity was revoked.
At the same time, prosecutors stepped up the pressure on Princeton-Newport. Baird revealed that the government was prepared to ask the grand jury for an indictment under RICO. It was the first time the statute would have been used against officials of a securities firm.
RICO was the most serious weaponry the government could throw into the case. Passed in 1970 to combat organized crime and drug operations, the law provides that any person or organization that commits two or more related felonies as part of a “pattern” of criminality can be charged with racketeering. The law carries severe penalties, including prison terms of up to 20 years and the confiscation of property and earnings. RICO has a civil legislative counterpart that allows private plaintiffs to sue for triple damages.
Though potentially ruinous to Princeton-Newport, the threat of a RICO indictment had little effect on the potential defendants. The company was a shell, one of numerous interlocking entities; its assets could simply be shifted out of the partnership, allowing Princeton-Newport to collapse. James Regan remained defiant; his lawyer, Theodore Wells, attacked the potential use of RICO as “frightening,” but insisted on his client’s innocence and determination to fight the government. “It seems clear that Mr. Regan is being used as a pawn in a chess game being played on a much larger board,” he observed.
In that regard, Wells was correct. Though its immediate intent was to pressure Regan and Princeton-Newport, the real message of the potential RICO charge was aimed at Drexel. If a small firm like Princeton-Newport faced RICO charges for its trading, then Drexel, with many more transactions under suspicion, was even more vulnerable.
Final attempts to reach settlement agreements proved fruitless. On August 4, the grand jury indicted Lisa Jones on charges of perjury, and charged Regan, Zarzecki, other Princeton-Newport principals, and Drexel’s Newberg, with racketeering. The first indictments of the government’s two-and-a-half-year investigation had finally been issued, the opening shots fired in what promised to be a long war.
To alert observers inside the Milken inner circle that August, there was a conspicuous and alarming omission in the defendants named in the Princeton-Newport suit: Cary Maultasch.
Like Newberg, Maultasch had been captured on the tapes. He had protested vigorously that it wasn’t fair to target him, since he’d only been filling in for Newberg the day the calls were recorded—but no one thought prosecutors would find that persuasive. Indeed, just the day before the indictment, Maultasch had been notified he would be included in the charges.
That meant he faced the possibility of two indictments: one for the Princeton-Newport dealings, and another for his dealings with Milken and Boesky. Maultasch, rightly perceived by prosecutors as one of the weakest members of the Milken entourage, was already wavering. He’d shown up one afternoon earlier that year in the office of a Washington defense lawyer, Reid Weingarten, and said he wanted Weingarten to replace Charles Stillman, the lawyer he’d hired at the suggestion of the Milken camp. Maultasch said he worried that Stillman was too close to Milken. Weingarten discouraged him, saying he knew Stillman to be an outstanding lawyer, but Maultasch persisted. “I want independent counsel.”
Weingarten took the case, and was struck almost immediately by the arrogance of the Milken defense team. He soon began talks with th
e U.S. attorney’s office, but made little progress. Giuliani wanted a guilty plea to two felonies from Maultasch. But the dialogue was constructive. On the eve of the Princeton-Newport indictment, Weingarten had managed to persuade the government to hold off naming Maultasch. Maultasch would cooperate. Then the government could evaluate his assistance and decide whether they needed a guilty plea. It was similar to the arrangement that had been reached with Mooradian’s lawyer. In part because the prosecutors trusted Weingarten, they decided to permit the arrangement.
Though he was never an enthusiastic witness, Maultasch began in August talking to the government, describing his role in the $5.3 million payment, corroborating Boesky’s version of the payment, and describing his summons to Beverly Hills and his meeting with Milken after news of Boesky’s fall. He gave also them valuable information about Thurnher, the accountant who’d also worked on Milken’s records of the $5.3 million payment, enabling the government to pry more testimony from that reluctant witness.
At Weingarten’s insistence, Maultasch decided to resign quietly from Drexel. He complained bitterly that he was forgoing at least $2 million in bonuses, but he did meet with Joseph to announce his decision to leave. He was vague about his reasons, saying nothing about any agreement with the government. Instead, he spoke of his obligations to his family, his wife. . . . Joseph barely listened. It all sounded so familiar after similar testimonials from Levine and Siegel. He called Curnin at Cahill Gordon as soon as Maultasch left. “Maultasch is cutting a deal,” he said.
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