Jim Dahl could hear the phone ringing as he fumbled with his keys and luggage at his front door in Beverly Hills. It was the beginning of September 1988, and Dahl was even more tan and blond than usual, feeling reinvigorated after his annual vacation at the beach near Jacksonville, Florida, close to his hometown. The phone kept ringing as Dahl got into the house, and he managed to answer it.
It was his lawyer at Williams & Connolly, Bob Litt, and the call dashed Dahl’s good spirits. “I don’t know how to tell you this,” Litt said, “but you got a target letter. I’m shocked.”
Dahl was more than shocked. Litt and the Williams & Connolly lawyers had reviewed every trade Dahl had done and had concluded he had nothing to worry about. Dahl had been assured repeatedly that Milken was the target, not him. Litt and Williams had warned him early on that the day would come when the government would try to squeeze him, but he’d never expected to face an indictment.
The prospect was frightening. Dahl did have something to worry about. At the end of each year, at Milken’s direction, Dahl would execute parking arrangements with Milken’s friend and client Tom Spiegel at Columbia Savings, generating phony tax losses for the giant thrift, one of Milken’s biggest captive clients and purchasers of junk bonds. Dahl had given the matter little thought, and had made no effort to conceal the trades within the office. He had kept a ledger on his desk to keep track of the positions parked with Columbia. The ledger now covered a five-year span of possibly illegal trading, written corroboration of any alleged wrongdoing. In all likelihood, others in the Beverly Hills office knew what he had been doing.
For the first time since the investigation began, Dahl wondered whose interests his lawyers really represented: his or Milken’s. Would Milken protect Dahl the way Dahl, so far, had been willing to protect Milken? He wasn’t so sure.
As soon as he hung up, Dahl called a close friend in Florida, a lawyer named Steve Andrews. The son of a judge, Andrews had been Dahl’s fraternity brother at Florida State and now practiced law in Tallahassee. While Andrews wasn’t really a securities lawyer, he knew the field. He had a tax degree from New York University and he’d once been a principal in a small Florida securities firm. Most important, the six-foot-three, heavyset lawyer had the common sense of someone far outside the Manhattan/Washington/Beverly Hills triangle and the world of Milken. Dahl felt he could trust him.
Andrews needed to hear only two facts: that Dahl had received a target letter in the Milken investigation, and that he had the same lawyers as Milken himself. “Get yourself a new lawyer,” Andrews ordered. “Now.” Dahl wanted to hire Andrews. Andrews agreed, but insisted that Dahl also retain a lawyer in New York.
Dahl called Litt back to break the news: He wanted another lawyer, someone who wasn’t also representing Milken. Litt immediately recognized the potential significance of a Dahl defection. He insisted that Dahl didn’t need another lawyer, that they were all better off sticking together. This time, especially without Williams to back up the message, Dahl wasn’t persuaded. That strategy hadn’t kept him from getting a target letter.
Litt stalled, saying he’d put together a list of counsel Dahl might consider. But no list was forthcoming; it was almost as if Litt hoped Dahl might change his mind. So Dahl called one of his major bond customers, Carl Lindner. Lindner recommended his own lawyer, Peter Fishbein at Kaye, Scholer in New York, the same firm that was representing Freeman. Only when Dahl told Litt that he was going to talk to Fishbein did Litt’s list of potential new lawyers for Dahl appear. Not surprisingly, it consisted only of defense lawyers securely in the Paul, Weiss, and Williams & Connolly fold, including lawyers already representing Don Engel and Milken client Fred Carr. Dahl interviewed them, and came away with heightened suspicions that their loyalties might be compromised. He decided to retain Fishbein.
Fishbein and Andrews flew to California immediately to meet with Dahl. Both lawyers were worried about their client’s potential exposure. They assumed that Spiegel at Columbia Savings was also under investigation, given his close ties to Milken, and they worried that Spiegel would turn on Dahl, implicating him as part of a plea bargain, before Dahl could reach any agreement with the government. Dahl didn’t trust Spiegel to protect him.
Dahl’s confidence in Milken was also severely shaken. When Dahl and his new lawyers finally reviewed the government’s target letter, they were surprised to discover that it did not cover Dahl’s Columbia Savings trading. Rather, it covered a series of equity trades with Boesky that appeared in Dahl’s records—trades that had been part of the reimbursement scheme that had culminated in the $5.3 million payment. Dahl had no memory of any such trades, and he thought they seemed peculiar, because Dahl handled only bond trading for Boesky, never equity trading. That was handled by Milken himself.
Further investigation showed that none of the handwriting on the targeted trading tickets was actually Dahl’s. On the dates shown on two of them, Dahl hadn’t even been in Beverly Hills. One of the tickets had the initials “M.M.” at the bottom. When he saw the tickets, Dahl was sure what had happened: Milken had simply had Dahl’s trading assistant enter the trades in Dahl’s records. Dahl concluded that the government was focusing on the wrong person, that he could prove he wasn’t involved. He felt sure Milken would back him up.
Dahl went immediately to Litt. “I didn’t do the trades—Mike did,” Dahl told him. He expected Litt to be excited at the news that Dahl should be exonerated. “There’s nothing wrong with those trades,” Litt insisted. “There’s nothing to worry about.” Dahl pressed on, suggesting that Milken simply sign an affidavit that he had done the trades. Once the government saw that, Dahl felt sure, they would drop their investigation of him. If the trades were innocent, as everyone said, then Milken had nothing to lose. Litt seemed less than enthusiastic about Dahl’s line of reasoning, but he said he’d talk to Milken. Andrews pressed the case with Richard Sandler, who also insisted the trades were harmless. “If that’s the case,” Andrews countered, “why can’t Mike just say he did them?”
A week later, Litt returned with Milken’s response: Milken had refused to sign any affidavit or to acknowledge that he had done the trades. Moreover, Dahl’s trading assistant had had a memory lapse; she didn’t remember anything about the trades, so she couldn’t back him up either. Dahl was stunned. “Mike knows he did those trades,” he exclaimed. “Boesky knows Mike did those trades. Tell the government to ask Boesky who did those trades.”
Litt replied that it wasn’t his place to tell the government what to ask its witnesses. “If you keep quiet and hang tough, the problem will go away,” Litt insisted again, urging that Dahl and his new lawyers say nothing to the government about whether Dahl did or did not handle the suspicious trading.
With Dahl clearly wavering, the Milken camp stepped up the pressure on him. Milken called Dahl aside one day and told him he was getting bad advice from Andrews, that he really ought to get another lawyer. Dahl said he wouldn’t, that he trusted Andrews and wanted to keep him. Then Milken and Sandler tried another tack, suggesting that Andrews move his practice to Beverly Hills and open up an office with Sandler in Drexel’s building, implying that the arrangement would be far more lucrative for him. Andrews saw that tactic as a thinly disguised effort to buy his loyalty, and rebuffed the approach.
Unclouded by any loyalty to Milken’s interests, Andrews and Fishbein recommended that Dahl approach the U.S. attorney’s office—fast. The decision was a difficult one for Dahl, even though he felt Milken had betrayed him by refusing to acknowledge his part in the Boesky trades. He didn’t want to hurt Milken, who, after all, had made him a millionaire many times over. But Dahl didn’t want to go to jail or be indicted for something he hadn’t done. And, much as Boesky had beaten Milken to a plea bargain, Dahl didn’t want Spiegel getting there first. He authorized his new lawyers to approach the government.
At about the same time, in September 1988, Fred Joseph arrived in Beverly Hills for an annual dinner with top offi
cials of the firm. The guests included Milken and nearly everyone in the Beverly Hills office. In a tribute to the high-yield department, Joseph read the names of every trader whose performance had strengthened the firm during a difficult year. Joseph had never liked Dahl, and the lawyers had warned him that Dahl was wavering. Joseph couldn’t bring himself to praise him. Dahl’s name was omitted from Joseph’s citation.
It was a tactical mistake. Dahl was angry and hurt. He had been the office’s top performer, and he’d given everything he had to the firm. Drexel’s official position had been that he should tell the truth, and that’s all he was contemplating. He concluded that Joseph didn’t deserve his loyalty.
Later that month, a courier arrived at St. Andrews Plaza with a five-volume submission prepared by Fishbein and his staff, containing documentary proof that Dahl hadn’t performed the trades being questioned by the government. Dahl and his lawyers waited anxiously for the government’s reaction, but heard nothing for a week. Finally, John Carroll called Fishbein. “I’m persuaded,” he said; he now believed Dahl hadn’t done the trades. But the conversation didn’t stop there. Fishbein was still concerned about Dahl’s exposure for his savings and loan dealings, such as the Columbia trades. Fishbein suggested, without making any explicit promises, that Dahl could be valuable to the government in other ways, if he received a sufficient inducement to cooperate.
Carroll took the bait. As Milken’s top salesman, Dahl could provide the government with immensely valuable information about the workings of the Milken operation. Dahl was intimately familiar with how Milken worked. He was even more important to the government for psychological reasons; the prosecutors knew that the wall of silence around Milken, once breached, would likely collapse.
The prosecutors also realized that immunizing Dahl carried large risks. If it turned out that Dahl was guilty of significant crimes, and that he’d be able to keep the many millions of dollars he’d earned, the public reaction against the government could be severe; this would undoubtedly be heightened by the Milken publicity machine. Yet the government had found no convincing evidence that Dahl was guilty of any crime. Prosecutors had looked closely at the Staley Continental situation, when Dahl had tried to force the company into a leveraged buyout. They had found Dahl’s threats distasteful but not necessarily criminal. Fortunately for Dahl, the prosecutors as yet knew nothing about the Columbia transactions; and in any case, they had to focus on their ultimate objective. Dahl was a major stepping stone toward Milken, and this outweighed all other risks. In October, Dahl received his grant of immunity; shortly thereafter, he arrived at St. Andrews Plaza for the first of his many debriefings.
The Milken “tent,” so carefully erected and sealed by Williams & Connolly and Paul, Weiss, had blown open.
News of the Dahl defection sent tremors through the Milken and Drexel defense camps. Officials and lawyers were caught between insisting that Dahl had nothing to tell the government (because Milken, of course, had never done anything wrong) and trying to intimidate Dahl. Dahl, perhaps naïvely, had planned to keep trading at Drexel. But he was moved off the fifth-floor trading room in Beverly Hills and banished to the second floor. Drexel justified the move by saying it couldn’t guarantee Dahl’s safety from the wrath of fellow traders. Later, Drexel sharply reduced Dahl’s pay, from the $23 million he received for 1988 to $5 million for 1989. Lowell Milken stopped speaking to him.
Such countermeasures proved fruitless: Dahl became the first truly cooperative Drexel witness the government had. Ever the master salesman, he quickly charmed the prosecutors as he had countless bond buyers. He was even more useful than the government had hoped, giving an eyewitness account of the insider trading in the Diamond Shamrock/Occidental Petroleum deal, and describing the running-water-in-the-bathroom scene. His detailed knowledge of Milken’s dealings with savings and loans opened up an entirely new dimension in the case. Dahl held nothing back, patiently guiding Carroll and Jess Fardella through the mysterious, little-understood world of junk-bond trading.
As the government had hoped, Dahl’s defection triggered a stampede of other witnesses now eager to cooperate. Prosecutors shrewdly issued another half dozen subpoenas and target letters in the wake of Dahl’s agreement to cooperate. Recipients included Milken aides Terren Peizer and Warren Trepp.
Targeting Peizer proved to be one of the government’s luckiest maneuvers. Positioned as he was at the center of the illegal arrangement with David Solomon, Peizer had been the custodian of the incriminating blue binders turned over to Lorraine Spurge. He was an even more important potential witness than Dahl, though the government had no way of knowing this. Peizer was also singularly susceptible to government pressure. He was relatively new to the firm, having been hired in 1985. As the salesman with the least seniority, he feared he would be the first person implicated if Milken ever decided to talk. Despite the “high fives” he gave Milken and his other efforts to curry favor with him, Peizer had to think of his own interests first.
As soon as he received his subpoena, Peizer hired a Washington lawyer, Plato Cacheris, a former partner of William Hundley, Trepp’s lawyer; Cacheris had recently represented Fawn Hall in the Iran-Contra scandal. Peizer met with Cacheris in Washington, bringing with him a cache of documents from Drexel’s Beverly Hills office. “I have these documents that are really damaging and I want to make a deal,” Peizer said, displaying an unusual conviction and sense of purpose. “Why?” Cacheris wanted to know. Peizer said he was convinced that if he didn’t turn on Milken first, Milken would turn on him.
As Cacheris examined Peizer’s papers, he realized they were a treasure trove for the government. Among them were papers with what Peizer said was Lowell Milken’s handwriting reconciling accounts between Solomon and Drexel. According to Peizer, the whole Solomon arrangement—including the Finsbury scheme—had been overseen by Lowell. And Peizer could link Milken to the scheme as well. When Peizer had questioned Milken about the arrangement, Milken had said, “Go ask Lowell, he’ll explain it to you.” Peizer had met with Lowell two or three times—and had kept notes of the conversations. Peizer had nodded in agreement when Milken asked him if the blue notebook had all the Solomon transactions. But he had shrewdly kept some of the most damaging evidence.
Peizer also recalled an incriminating conversation with Milken. “What are you doing?” Milken had asked one afternoon as Peizer went through his file drawers. “Complying with document subpoenas,” Peizer had replied. As Peizer watched, Milken opened his own file drawers. They were empty. “If you don’t have any documents, you can’t comply,” Milken said. Peizer hadn’t turned over the most damaging material to Drexel’s lawyers, but neither had he destroyed it. He could now offer it to the government.
Cacheris immediately contacted the U.S. attorney’s office, unveiling Peizer’s documents. Peizer was in a position to testify to the entire scheme between Milken and Solomon—a criminal scheme that was wholly independent of anything Boesky had revealed. For the prosecutors, Peizer was almost too good to be true. He got immunity almost instantly.
Peizer, too, was now removed from his seat near Milken and exiled to another floor. Like Dahl, he was stripped of all his client responsibilities. While Dahl gradually stopped showing up for work, however, Peizer was more dogged, refusing to accept his fate. Every morning he showed up on time and called Trepp. “Do you have anything for me today?” he’d ask.
In contrast to Peizer, Trepp, one of Milken’s earliest lieutenants, continued to resist government pressure, and maintained his early loyalty to Milken. Yet he had his limits; he wouldn’t commit perjury on Milken’s behalf, and had invoked the Fifth Amendment when questioned by the government under oath in early 1988. “I don’t understand why Warren wouldn’t testify,” Sandler had complained to Hundley, Trepp’s lawyer. For his part, Hundley tried to get the Milken camp to face up to the mounting evidence of parking, knowing that if Milken capitulated, the pressure on Trepp would probably vanish.
“Well
, Bill, Michael just doesn’t see the parks the way the government does,” was Sandler’s reply.
As his employees defected, Milken seethed with bitterness and a sense of betrayal. His mood darkened. While he made no direct mention of Dahl’s or Peizer’s cooperation, he faulted nearly everyone else he dealt with. In late September 1988, Dahl was in New York planning to fly back to Los Angeles when Milken called him at his hotel room. Milken told Dahl that he was in Washington; if Dahl flew down, he suggested, they could ride back to Los Angeles on Milken’s plane. Thinking some kind of reconciliation might be at hand, Dahl accepted.
When Dahl arrived at the airport, he and Milken went to the hangar and boarded Milken’s Gulfstream IV jet, equipped with butler service and a large movie screen. Milken said virtually nothing to Dahl, who became uneasy. After takeoff, Milken selected a movie, Raiders of the Lost Ark, and turned the volume so high that Dahl’s ears hurt. “Mike, if we’re not going to talk, would you at least turn that thing down?” Dahl asked. Milken ignored him and continued to watch the film at an ear-splitting decibel level. For the rest of the flight, Milken said nothing to Dahl. He didn’t even look at him. It dawned on Dahl that the trip had been staged to make one point: As far as Milken was concerned, Dahl had ceased to exist.
14.
By August 1988, Joseph had listened to Milken’s lawyers and all their reassurances for nearly two years. He’d listened to Peter Fleming, the criminal lawyer he’d brought in to advise Drexel. He’d listened to Sandler, to Linda Robinson. Everyone had assured him that Milken was innocent, that Boesky was a liar, that Drexel had nothing to worry about except overzealous prosecutors envious of Milken’s success. And Joseph had believed. He’d told his top people—Leon Black, Peter Ackerman, John Kissick, the board—that he’d never allow Drexel to turn against Milken as long as he believed Milken to be innocent.
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