Den of Thieves

by James B. Stewart

  Now Joseph developed a nagging cough that he couldn’t seem to shake. At summer’s end, he seemed pale and haggard. He was having trouble sleeping. Even at his farm in northwestern New Jersey, far from Wall Street, he couldn’t seem to escape a mounting sense of doom. His lawyer, Ira Millstein, had again recommended that he resign from Drexel. Joseph no longer rejected the suggestion out of hand. But now he could think of no one else to take the helm in his absence. His fate and that of the firm now seemed inseparable.

  On September 7, 1988, the SEC filed its long-expected lawsuit against Drexel. The 184-page complaint named Drexel, Milken and Lowell Milken, Maultasch, and another high-yield employee, Pamela Monzert, as well as the Posners, Milken’s clients in Fischbach. In addition to the expected array of Boesky-related charges, including the alleged Fischbach conspiracy, the complaint cited two other instances of insider trading, including the Viacom trading Gardiner had been involved in.

  Drexel did its best to prepare its employees and clients, outwardly welcoming the development as the firm’s chance to get its day in court. Speaking for Milken, Paul, Weiss’s Martin Flumenbaum issued a statement saying, “The complaint is based almost entirely on the false accusations of Ivan Boesky. It is obvious that Mr. Boesky was motivated to lie and make false accusations.” Increasingly, however, this seemed obvious only to Flumenbaum and others in the immediate Milken circle. What was clear was that the government had not been dissuaded by Drexel’s concerted efforts to persuade the SEC that the charges had no merit. Such a case, with so much at stake, wouldn’t be undertaken lightly.

  Drexel’s day in court quickly degenerated into a petty exercise by the Drexel-Milken lawyers to disqualify federal district court judge Milton Pollack, who was already presiding over some private civil suits against Boesky and was therefore familiar with many of the underlying issues. The 81-year-old judge summarily rejected their requests, at one point characterizing Liman’s arguments as “nonsensical”; Judge Pollack later said he was “thunderstruck” by the behavior of the lawyers for Milken and Drexel.

  The strategy not only angered the judge (his decision was upheld on appeal), but the tactics enraged the SEC lawyers and, more important, the SEC commissioners who would ultimately have to approve any Drexel settlement. Many observers wondered: If Milken and Drexel were innocent and eager for their day in court, why weren’t they contesting the merits of the allegations instead of attacking the integrity of an elderly, respected judge?

  Giuliani’s office still hadn’t acted, and Joseph and his lawyers stepped up their efforts to dissuade the prosecutors from pursuing criminal charges against the firm. One evening, about 8:30 P.M., after a strenuous session in which Joseph and Curnin tried to convince Baird that the SEC charges didn’t make sense, Baird interrupted. “You asked to see some evidence of wrongdoing,” Baird said. “I think we’re prepared to show you something.”

  Joseph and Curnin, not knowing what to expect, followed Baird, Carroll, and Fardella into the courthouse and into one of the judge’s chambers equipped with audio equipment. They were offered headphones. The prosecutors played about 15 minutes of excerpts from the Princeton-Newport tapes, leaving Curnin and Joseph with the phrase “Welcome to the world of sleaze” reverberating in their ears.

  “What do you think?” Baird asked Joseph. “Aren’t you disturbed?”

  Curnin ordered Joseph not to respond. “Do you have others?” Curnin asked. “Do they involve other Drexel people?”

  “Yes,” Baird replied.

  “Lisa Jones?” Curnin asked. The prosecutors didn’t reply.

  Joseph was badly shaken. He and Curnin discussed the development into the night. There was no arguing with the tapes. Joseph knew now exactly what had been going on, and he knew it was a crime. He told Curnin, “Newberg wouldn’t go to the bathroom without Milken knowing about it.” It was clear to him that Milken had to be behind the scheme.

  The tapes also raised new doubts about Milken’s candor. Through his lawyers at Paul, Weiss, Milken had insisted that his only accuser was Boesky, and that in any contest of credibility, Milken won over Boesky hands down. Yet the Princeton-Newport arrangement had nothing to do with Boesky.

  The next morning, when Drexel’s lawyers asked Milken’s for an explanation of the tapes, Paul, Weiss insisted that Milken knew nothing about Newberg’s activities. Newberg, under indictment in the Princeton-Newport case, wasn’t talking. Milken’s lawyers also assured Joseph that the documents the government believed backed up Boesky’s version of the $5.3 million payment were “reconstructions” that would be easily discredited in court. But when the government invited him to look at the documents. Joseph was staggered to find copies of original documents, Mooradian’s records. Worse, the documents plainly showed calculations that made sense only in the context of a parking arrangement.

  Curnin called Flumenbaum with these latest revelations. “It’s what we thought it was,” Flumenbaum responded smugly, showing no concern.

  “What about the carrying charges? What about the fact that these are originals?”

  “It’s what we expected,” Flumenbaum repeated.

  If so, Curnin thought angrily, Milken’s lawyers had known more than they ever shared with Drexel and had breached their joint defense agreement. Curnin and Fleming insisted on a meeting with Liman and Flumenbaum. Every damaging point Curnin raised was airily dismissed as “meaningless,” “not harmful,” “benign,” “as we expected,” or something Milken knew nothing about. As for the cost-of-carry, Flumenbaum insisted, “That’s just part of the accounting mechanism here.” Curnin cut off the meeting before he lost his temper.

  That fall, in the offices he shared with Richard Sandler in Beverly Hills, Craig Cogut was growing uneasy about some of the Milken-led partnership payouts he was expected to make. In particular, he was concerned about MacPherson Partners. Milken had created the partnership to hold warrants to buy Storer stock as part of the LBO deal that had figured so prominently in the fortunes of Siegel, Freeman, KKR, Milken, and Drexel.

  KKR had given the warrants to Drexel, in care of Milken, as an additional inducement for Drexel’s clients to buy the Storer junk bonds. Yet Cogut could see that the warrants hadn’t ended up in the hands of Drexel’s clients. The MacPherson participants seemed to be Milken himself, his family members, and, even more worrisome, various mutual-fund managers who bought junk bonds from Milken. Now that KKR had sold Storer’s cable television stations at a big profit, the warrants were supposed to be cashed in and the proceeds distributed to the participants. Cogut felt queasy. The MacPherson payments looked like they might be examples of Milken self-dealing, or worse, bribes to the fund managers.

  Cogut had joined Milken’s in-house law firm in 1984, and it was rechristened Victor, Cogut & Sandler. He had never been under any illusions that this was a law firm in the true sense; Drexel, Milken, and his family were the principal clients, and the firm’s offices were on the third floor of the Drexel office building owned by the Milken brothers. Cogut had hoped that he’d end up working on Drexel venture capital and tax deals, but he’d ended up doing much of his work for Lowell Milken, who oversaw all the partnership activity.

  After news of the Boesky agreement, Cogut had agreed to be represented by New York criminal lawyer Michael Armstrong, Lowell’s lawyer. But like Maultasch and Dahl, Cogut had become uneasy about the differing interests of his attorney’s several clients. Lowell’s interests were too close to Mike Milken’s for Cogut’s comfort. Cogut’s concern had increased when, earlier in 1988, Armstrong came to him with an affidavit he had prepared for Cogut to sign. Its intent had been to exonerate Lowell, based on assertions of fact by Cogut. Cogut read it over and had only one problem: the facts weren’t true. He angrily refused to sign, and began looking for new lawyers, eventually hiring Los Angeles lawyers Tom Pollack and Ted Miller. In September 1988 Cogut submitted an affidavit.

  In early November, in Drexel’s offices in New York, Cogut ran into Joseph as Joseph was hurry
ing into the men’s room. Cogut said he wanted to talk to him and Joseph motioned for him to follow.

  “There’s a partnership I don’t think you know about,” Cogut said in hushed tones. Joseph looked at him, puzzled. “You’re not going to like it,” Cogut added.

  “Why?” Joseph asked.

  “Fund managers were given warrants,” Cogut replied. “Mike’s kids got warrants.”

  “Did the fund managers buy the deal?” Joseph asked.

  “Yes.”

  “We’d better get the lawyers,” Joseph said, recognizing with alarm that bribery might be involved. At the very least, the partnership violated Drexel’s own internal regulations.

  For years, Milken had come to Joseph for advice and guidance about whether certain trades were ethical. They usually were. Such exchanges had given Joseph confidence that Milken himself was scrupulously careful. Suddenly Joseph sensed that it might have all been a carefully crafted illusion; that Milken might have come to him on the close calls to camouflage any blatant wrongdoing.

  Joseph went straight into Drexel chairman Robert Linton’s office, telling him what he’d just learned from Cogut. “Oh shit,” Linton replied. Joseph immediately called the lawyers at Cahill Gordon.

  “Get on this this second,” he ordered.

  Cogut and his new lawyers also explained to Liman and Flumenbaum that they planned to volunteer the MacPherson information to the government. “No!” Flumenbaum all but exploded. “You can’t do this. They’d never find out about this.” But Liman restrained him. “Let them do what they feel they have to do,” he said to Flumenbaum with a tone of resignation.

  Joseph’s belief in Milken’s innocence, and the elaborate defense he’d built on that foundation, collapsed one rainy night in late November. Curnin had called late that afternoon, saying it was important that they talk privately. Joseph was due at a formal dinner in midtown, so he suggested he pick Curnin up in a Drexel radio cab, and the two could ride uptown together. Joseph, clad in black tie and tuxedo, rode the few blocks to Cahill Gordon’s offices and picked up Curnin as the rain turned into a torrent. They were soon mired in traffic.

  “It looks like the guys on the coast did some things they shouldn’t have done,” Curnin said. He ticked off the recent troubling developments, culminating in his review of trading records that corroborated the Solomon allegations. He wanted Joseph to recognize that there was evidence of wrongdoing, that it was mounting, that it was material, and that it was not related to Boesky. Now that the wall of silence among Drexel employees had been broken, there would likely be more defections. And Drexel didn’t even yet have the whole story—nor would it get it from its erstwhile allies in the Milken camp.

  Joseph asked some questions, and thanked Curnin for his analysis. When he reached his destination, the Marriott Marquis hotel in Times Square, he stepped out into the pouring rain. He was now convinced that Drexel and its 10,000 employees had been betrayed by Milken, the man on whom he’d built the firm he’d always dreamed of. He had been willing to do anything for Milken as long as he believed him to be innocent. But he couldn’t say he believed that anymore.

  Joseph wasn’t the only one who’d lost faith in Milken. In Los Angeles, Dahl had a meeting with Litt at the Four Seasons Hotel. “Mike’s gonna have to plead guilty,” Dahl told him, mentioning his own damaging evidence. “Somebody’s got to tell him.” Litt didn’t insist, as usual, that Milken was innocent.

  “I’m not going to be the one to do it,” Litt said.

  Nor, apparently, was anyone else. Litt’s position on the Milken defense team was precarious. So was Williams & Connolly’s. After Williams’s death, Paul, Weiss had assumed the dominant role, pushing Williams & Connolly aside. Vincent Fuller, who’d been brought in to replace Williams, hadn’t had a chance to establish any rapport with Milken or Sandler, who relied instead on Liman.

  But Fuller decided someone had to undertake the unpopular option of plea negotiations. Someone had to at least sound out the government on what it would demand. In discussions involving Carroll, Fardella, Baird, and eventually even Giuliani, Fuller found the prosecutors to be surprisingly reasonable, given the resources that had been expended on the case and the attendant publicity. They tossed out the idea of a joint settlement between Milken and Drexel for a total of $1 billion—a large number, to be sure, but one that would be easily paid by Milken, especially if at least half were paid by Drexel, as it surely would be. But money had never been the real issue. The plea was the real issue. Fuller argued first for a plea of nolo contendere, then offered a plea to a single felony. The prosecutors indicated that they could probably live with a relatively modest plea to two felonies.

  Cautious optimism set in at St. Andrews Plaza. Finally there was hope that a deal would be worked out. Milken, it was believed, would plead, and cooperate—taking the investigation onto another plane entirely. There was only one problem: the prosecutors couldn’t tell whether Fuller had the backing of the other Milken lawyers, let alone Milken himself. There was certainly nothing in Milken’s public posture that suggested any willingness to compromise or admit guilt. And the public-relations campaign was continuing, infuriating prosecutors working on the case; there had never before been anything comparable undertaken on behalf of a potential defendant.

  Liman was kept informed, but Robinson, Lake wasn’t told about Fuller’s negotiations, and continued to deny emphatically that such a course was even under consideration. Since the Predators’ Ball fiasco, the campaign had broadened its objectives, focusing on Milken’s charitable activities (including production of an expensive calendar highlighting the Milken foundation’s beneficiaries) and attacking the use of RICO against Drexel. A spate of anti-RICO letters and op-ed pieces drafted by Robinson, Lake began appearing in publications around the country. They were shrewdly drafted to generate sympathy for Milken, arguing that RICO deprives a defendant of assets before any trial. Robinson, Lake also drafted speeches for Milken to deliver to business groups, and continued to make him available for trusted members of the press—as long as no questions were asked about matters under investigation. Milken was with a Time reporter when he heard that he and Drexel had been officially charged by the SEC.

  Any Manhattan jury would likely have a large contingent of black jurors, and Milken began to recruit black support. His public-relations effort began to focus more on the local newspapers, the New York Post, the Daily News, and the Amsterdam News, papers more likely to be read by blacks than The Wall Street Journal or The New York Times. Los Angeles mayor Tom Bradley; Reginald Lewis, the head of Beatrice International and a Milken junk-bond client; and Percy Sutton, former Manhattan borough president, were Milken’s key links to black organizations. They helped make sure Milken gained an introduction to Jesse Jackson. Bradley (who, according to the Los Angeles Times, had received over $70,000 in Milken campaign contributions) had praised Milken as “that man of genius, that man of courage, that man of vision, that man of conviction” soon after Milken was implicated in the scandal by Boesky.

  Though Milken had shown scant interest in civil rights issues in the past, he held a party for a group of black junior high school students in Los Angeles. “I’d like to introduce you to a close friend of mine,” Milken said, and in walked Jesse Jackson. At a conference in New York, Jackson and Warner chairman (and Liman client) Steve Ross both praised Milken. Photo opportunities were arranged with handicapped and underprivileged children, most of them black and Hispanic. Robinson even hired a black public-relations specialist, Mary Helen Thompson, a former press secretary for Representative Louis Stokes of Ohio. Thompson focused pro-Milken efforts on the congressional black caucus. Milken was honored by the One Hundred Black Men Society, a national organization of successful black men, including Sutton. Milken and Robinson, Lake each bought tables at the event.

  In what became Milken’s most celebrated foray into image remaking, he took 1,700 underprivileged, largely minority children to an afternoon Mets game at Shea Stad
ium in September 1988. Though the Milken forces later insisted that the event wasn’t meant to be publicized, Drexel chairman Linton just happened to mention it at luncheon with members of the press present (some invited by Robinson, Lake). At the game, television cameras rolled as the junk-bond financier, sporting a jaunty baseball cap, did his best to look relaxed. “We haven’t added a single public event to his calendar, not one thing,” Lerer told The Wall Street Journal after the event.

  Soon, the Milken public-relations forces had a fresh target: Giuliani himself, who announced plans to leave office and run for mayor of New York. A political campaign, with the media hungry for Giuliani stories, would be an ideal opportunity to stir up criticism of his handling of the Milken investigation. It also meant a new and uncertain regime at the U.S. attorney’s office.

  The time was propitious for a settlement. Giuliani recognized the obvious political benefits to wrapping up his tenure with the conviction of the most powerful financier in America. The Freeman arrest was a cloud on his record, but a Milken guilty plea, in all likelihood, would eclipse that mistake. Giuliani, Baird, Carroll, and Fardella began seriously to contemplate accepting Fuller’s proposition of a guilty plea to a single felony.

  Many details of the agreement—such as how Milken’s brother Lowell would fare, and whether Milken would cooperate—still hadn’t been worked out. They could have been, had Milken and his lawyers moved quickly; but they didn’t. Fuller had obviously never gained the backing of his client, and his co-counsel at Paul, Weiss didn’t support the notion of settlement. As Fuller disclosed the negotiations to a wider circle within the Milken camp, he was all but branded a heretic. Paul, Weiss lawyers opposed any plea, as did Sandler.

  Soon the opportunity for a plea to a single felony vanished. As the fruits of Dahl’s and Peizer’s cooperation were gathered and the case against Milken grew proportionately stronger, the prosecutors dropped the idea as too favorable to Milken. Baird felt that a single-felony plea would rightly be criticized as a victory for Milken, and would fail to deter others in the securities industry. To Giuliani’s credit, his duty as a prosecutor took precedence over his ambitions as a politician. If he had to resign with the Milken and Freeman cases both still pending, so be it.