Den of Thieves

by James B. Stewart

  As for Fuller, he largely washed his hands of the case, leaving his partner Litt to deal with Williams & Connolly’s co-counsel duties. Sandler and Liman had seized full control of the Milken defense. There was little risk now that Milken would hear anything but an echo of his own increasingly isolated view of reality.

  Even as the secret plea negotiations foundered, Wall Street’s attention was diverted by the biggest, most tumultuous leveraged buyout battle of the decade: the $25 billion conquest of giant RJR Nabisco by Kravis and KKR. With a cornucopia of multimillion-dollar fees at stake, practically every major firm on Wall Street entered the fray as a three-way battle emerged between groups advised by Shearson Lehman Brothers (with Linda Robinson busily maneuvering behind the scenes) and Salomon Brothers; Goldman, Sachs and First Boston; and, for KKR, Wasserstein Perella & Co., Morgan Stanley, and Drexel.

  For Drexel, RJR was not just the deal of the decade. It was a life-or-death struggle to prove to the world that the firm would survive the government’s investigation. KKR was a traditional Drexel client, and a huge piece of business. If Drexel lost the financing assignment, its market share in junk bonds would plunge for the year, and its franchise would be destroyed in the eyes of Wall Street.

  For Joseph, RJR would also be a crucial test of Drexel’s ability to survive the loss of Milken—which Joseph now recognized as inevitable. Already, the dynamics of Drexel’s high-yield operation in Beverly Hills had changed radically. Milken, once completely dominant, was increasingly absent, busy with his public-relations campaign and his lawyers. The mantle of leadership had fallen uneasily on Peter Ackerman, the smooth-talking Ph.D. who was strong on client contact but lacked genius as a trader. Joseph himself had assumed much of the burden once shouldered by Milken. In the midst of some of the most damaging developments in the government’s investigation, he called personally on Kravis to convince him to retain Drexel.

  Kravis took almost no persuading, mainly because he remained loyal to Milken, even though it would once have been unthinkable for any respectable client to entrust a $5 billion bond offering to a securities firm being charged with securities fraud and other offenses by the SEC. But times had changed, and Kravis owed much of his empire to Drexel and Milken. Drexel had brought him Storer. It had raised $2.5 billion to conquer Beatrice. Results were what counted.

  Joseph assured Kravis that, even if Drexel were indicted, it would complete the deal for KKR. Although a Drexel “highly confident” letter had always been enough before, Drexel agreed it would provide a $1.5 billion bridge loan if necessary—a commitment of its own capital to the deal. At a Saturday meeting to complete arrangements for the RJR bid and its financing, Kravis asked Joseph only one question: “Fred, do we have your assurance that Drexel will complete the financing?” “Yes,” Joseph replied. KKR engaged Merrill Lynch as a co-manager of the offering, just in case. But Joseph vowed that Merrill Lynch would stay on the sidelines.

  Drexel launched the most ambitious capital-raising effort in its history. It scheduled 20 elaborate sales meetings, known as road shows, for potential buyers from Tokyo to Zurich. It wooed wealthy individuals and institutions, this time offering equity stakes to the buyers rather than keeping them for Milken-led partnerships. No effort was too small to be spared. Drexel even doled out RJR Nabisco products—shredded wheat, Planter’s peanuts, Oreo cookies, Carefree chewing gum—and RJR T-shirts and sweatshirts. Joseph knew that the future of the firm hinged on the deal.

  Despite his assurances to KKR, Joseph had concluded that Drexel could not, in fact, survive a criminal indictment, let alone an ensuing lengthy and damaging trial. Shortly after his cab ride with Curnin, he stepped up the pace of meetings with members of the Drexel board and top Drexel officials. Without elaborating or providing any details, he began to convey the message that he had ceased to believe in Milken’s innocence.

  718In late November 1988, the Justice Department approved the filing of RICO charges against Drexel and Milken, the last step before indictment. Drexel would have to post a bond with the government immediately after the filing of any charges. Much to Joseph’s fury, Baird and his colleagues refused to tell Drexel how much the government would demand. Joseph recognized that the financial uncertainty could cripple Drexel. Large securities firms like Drexel depend on their ability to obtain short-term loans and to issue commercial paper, mostly to large banks. In preliminary talks, Drexel’s banks warned that they wouldn’t be able to extend credit to a firm under the cloud of a RICO indictment. Drexel boasted over $1 billion in capital above regulatory requirements, and a litigation reserve of over $500 million. But the firm’s chief financial officer reported to Joseph that the company could survive a RICO indictment for—at most—one month. Joseph conveyed this dire forecast to top officials and stockholders.

  Their reactions reflected their financial self-interests. The firm’s emphasis on cash compensation and bonuses rather than equity stakes had left ownership largely in the hands of its European partner, Groupe Bruxelles Lambert, and senior officials, like Burnham and Kantor, who had little role in the firm’s recent success. Their top priority was to protect their equity interest by making sure Drexel survived. They favored settling the charges.

  Pitted against them were officials like Leon Black, who cared little about the value of his equity stake but seemed obsessed with maintaining his huge income stream—$20 million in 1989. He made it quite clear that he cared little about Milken’s ultimate innocence or guilt; he simply wanted the engine of the firm’s cash flow to keep running as long as possible. Black and his allies favored any strategy that would delay Milken’s departure, and opposed anything that would require his dismissal.

  Finally, there were the ardent Milken loyalists—Ackerman, Kissick, and Fred McCarthy, a managing director based in Boston—who wouldn’t entertain any proposal that might weaken his defense. Far from dreading Drexel’s demise, they seemed to welcome it, reasoning that Giuliani would be blamed for the firm’s collapse. They believed that the attendant outcry would weaken the government’s determination to prosecute Milken. This group’s motto: “Death Before Dishonor.”

  The split posed serious problems. While the old guard controlled the board, and could be persuaded to support a settlement, the Milken loyalists were the key to the firm’s future success and survival. If they defected, there would be little at Drexel worth saving.

  After a troubled Thanksgiving at his New Jersey farm, Joseph and Drexel’s lawyers plunged into a hectic series of negotiations with Giuliani, Baird, and others at the U.S. attorney’s office. The parameters were simple: Drexel would plead guilty as long as Joseph and his advisors thought the firm would survive. That meant, in essence, two things: Drexel could not be perceived by its top employees as turning against Milken, and the financial burden couldn’t be so crushing as to extinguish the firm. In that event, Drexel might as well go ahead and be indicted and be forced into bankruptcy.

  Joseph tried to get prosecutors to understand the delicate dynamics of the firm—but the years of defiance and bad publicity aimed at the government now took its toll. The prosecutors had little but contempt for the Milken loyalists. It infuriated them that, even on the eve of capitulation, Drexel still insisted on soft-pedaling Milken’s guilt. Drexel refused to admit publicly that the $5.3 million payment was part of the illegal Boesky arrangement—because Milken insisted that it was not. It didn’t want to fire Milken. It still wanted to pay Milken more than $200 million in compensation that was due him that year.

  In a heated exchange, Baird banged his fist down and said, “Stop talking about money. I’m talking about justice.”

  Joseph erupted. “I’m not representing a church. Ten thousand people are clothed and fed off our payroll.”

  A Drexel guilty plea began to look inevitable. On Thursday, December 1, Joseph issued a memo to all Drexel employees. “I want to bring you up to date on the status of the investigation. In recent weeks, we have had discussions with the government which are now
reaching a critical stage. If we do not agree to settle with the U.S. Attorney, we believe that he intends to indict the firm (as well as certain of our employees), and to include in such an indictment so-called racketeering charges (‘RICO’). We expect that one of these two alternative scenarios will unfold within a short time.”

  Astute readers realized that the memo dwelled on the hazards of indictment and the virtues of settlement. An indictment “will put pressure on the firm and its businesses. We will also face a long, drawn out battle in the courts (and, unfortunately, in the press) before any final resolution of the matter. . . . If we settle, we can put this constant attack on the firm behind us. But to do so will require a guilty plea.”

  For the first time, Joseph attempted to quantify the cost to Drexel of the investigation: “We believe Drexel has lost some $1.5 billion of potential revenues and has spent over $175 million in direct expenses during the past two years because of the investigation. The toll on our people has been high. . . . We would like to put the trauma of the past two years behind us, but not at an unfair cost to the firm and its employees.”

  Not surprisingly, the memo’s implications were clear to Milken loyalists, who were horrified at the drift of events. Foremost among them was Don Engel, who was kept informed of almost every development by Fred McCarthy, his chief ally on the board. In early December, the board held a Sunday meeting, and McCarthy called Engel at home immediately afterward with an ominous message. “I get the feeling they’ll sell out Mike,” McCarthy reported.

  Engel’s fears deepened when he and Black met with Joseph the next week. Engel knew Joseph liked to reach a consensus by tossing up trial balloons, and at the meeting Joseph said he was worried about the individuals who might be indicted if Drexel didn’t settle. “How would you feel if the two of you, Ackerman, Kissick, were all indicted?” Joseph asked.

  “Fuck it, let them indict us,” Engel said, and Joseph realized he meant it.

  Baird was now threatening to have the grand jury indict the firm at any moment. He gave Joseph an ultimatum: Drexel was going to have to plead guilty to six felonies, and pay a whopping fine. Joseph read with anguish the disclosure in The Wall Street Journal on December 14 that Drexel had set aside a $700 million contingency fund—far more than the government realized Drexel had. Baird immediately boosted his demand from $450 million to $750 million. But at this point money wasn’t the issue. Drexel could survive a payment of that size. Even at this late stage, the most important figure in the negotiations was still offstage: Milken.

  To placate Milken’s allies, Joseph was still fighting to avoid turning evidence related to Milken over to the government, to prevent him from being fired, and to pay him the hundreds of millions of dollars he was still owed. He was even trying to avoid mentioning the $5.3 million.

  On Friday, December 15, Joseph undertook a last round of diplomacy to gain support for the settlement. Late that afternoon, about 5 P.M., Joseph arrived at Paul, Weiss to meet with Liman. After that, he planned to meet with Engel. Even though Engel wasn’t on the board and wasn’t even officially part of the firm, Joseph had pegged him as the ringleader of the pro-Milken faction.

  By the time Joseph reached his office, Liman was well aware of the latest developments. Joseph did his best to explain what he thought was Drexel’s hazardous choice, emphasizing the dire credit situation if Drexel were indicted and what he was doing to try to safeguard Milken. Liman didn’t seem impressed. Instead, he began lecturing Joseph on principles of justice, philosophy, notions of right and wrong. Then he stunned Joseph by comparing his decision to the Nazi persecution of the Jews. He argued that Joseph was depriving Milken of his rights prior to trial. “That’s the first step towards concentration camps,” Liman argued. “No man can deprive another of his freedoms.”

  Joseph could hardly listen. He was too shocked by the unfairness of Liman’s charge and the attempt to manipulate his emotions. “Mike did what he did,” Joseph responded. “What we do won’t have any affect on the proceedings against him. I’m not here to try Michael Milken.”

  Joseph said his own decision was final, but he couldn’t speak for the board. Perhaps he’d be voted down. Liman, abandoning the Nazi angle, seemed disappointed but resigned. Then, as he prepared to leave, Joseph added, almost as an afterthought, “Mike is going to plead guilty anyway.” This really aroused Liman’s indignation. “Never,” he said firmly, showing Joseph to the door. “Absolutely not.”

  Within minutes, Liman was on the phone to Engel to report on his meeting with Joseph. “Donny,” Liman reported in grave tones, “he’s selling him out.”

  Joseph went from Liman’s office to Engel’s spacious co-op apartment at 570 Park Avenue. He arrived about 7 P.M. The two men sat down with drinks in Engel’s library. To Engel, Joseph had aged markedly; he was coughing. But in spite of all that, and despite an outward civility, Engel was spoiling for a fight, and he got it.

  As Engel launched an impassioned defense of Milken, Joseph cut him off. “I know you’re loyal,” Joseph said. “I appreciate loyalty.” Then his tone shifted. “But get your fingers out of my eyes.”

  Engel retorted that he had had no choice but to turn against Joseph and rally others to Milken’s defense. “He’s our brother,” Engel said. “You’ve got to fight. A mafia lawyer wouldn’t act like this,” Engel said, indignant over what he saw as Joseph’s weakness.

  “We’re not a mafia company,” Joseph responded. “Donny,” he continued in a more conciliatory tone, “don’t do anything hasty. Remember, we have to think of 10,000 people.” Engel practically leaped from his chair in rage and indignation. “What the fuck are you talking about?” he yelled. “We don’t have 10,000 people to think about. We have one person.”

  On Saturday, December 17, Engel flew to California for Milken’s son’s bar mitzvah, seizing the opportunity to plot strategy with Peter Ackerman and Leon Black, who also attended. Joseph hadn’t been invited. At the party, Engel managed to maneuver Ackerman into a conversation about Milken and Joseph. “The little bastard is selling him out,” Engel said. “There’s only one way to stop this.” Then he unveiled his trump card: “You’ve got to stand up on your desk on Monday and say, ‘No RJR.’ The salesmen will not sell another bond.” It was a bold gamble that could have crippled the deal on which Drexel’s future—with or without Milken—depended. Engel believed that the threat alone would force Joseph to end all talk of settlement.

  “Let it play out, Donny,” Ackerman replied enigmatically. But Engel insisted. “You’re the only person who can do this,” he emphasized.

  Word of the bar mitzvah meeting among Black, Engel, and Ackerman swept the firm, along with rumors of threats to defect if Drexel settled with the government. Robinson, Lake officials, even Robinson herself, fanned the flames, planting stories with reporters that rebellion was brewing in opposition to any settlement with the government. Milken loyalists even suggested that Joseph had negotiated his own immunity from prosecution as part of the deal, putting his interest ahead of the firm’s and Milken’s. The story, patently false, found its way into print. Joseph was never a target, and his immunity had never been discussed. Joseph had been secretly taped when he visited the Beverly Hills office in September, pledging to back Milken. Now Lowell’s lawyer, Michael Armstrong, threatened to release transcripts. Joseph was appalled that his own employees had taped him.

  Taken together, the desperate efforts to sabotage any settlement showed how ugly the Milken camp’s attacks on Joseph were becoming. Millstein was so concerned that he called Liman, speaking to him as one dean of the New York bar to another. “I certainly hope this isn’t going to turn into a PR contest,” he said. Liman refused to acknowledge that there had been any PR campaign directed at Joseph; nonetheless, the attacks eased off after Millstein’s call.

  Black and Ackerman stopped short of actually threatening to quit if Drexel pleaded guilty, but they left the possibility hanging. Joseph ultimately guaranteed their loyalty to the firm the
only way he could: he bought it. Ackerman’s price: $100 million, which Joseph pledged would be his reward for the RJR deal. Black and Kissick were also promised outsize bonuses.

  Ackerman also told Joseph about Engel’s RJR threat. Joseph was in a fury when he reached Engel on the phone on Monday. “You’re inciting,” he practically shouted at him. “I want this stopped.” Engel was equally angry. “Have you told the government we’re going bankrupt? If you haven’t, then you can’t negotiate. You’ve got to say, ‘Here are the keys. The place is yours. It’s your responsibility.’ Have you said that?” “No,” Joseph answered, and Engel slammed down the phone.

  Drexel’s board met that afternoon, and again rejected the government’s proposed settlement as too harsh. Engel and his allies believed they had prevailed. That evening, Drexel’s corporate finance officials, with their spouses and dates, hurried through the revolving doors of New York’s Waldorf-Astoria and into the hotel’s grand ballroom for the department’s annual Christmas party. With the balconies decked in greenery, Christmas trees twinkling, and champagne flowing, it seemed, at least for an evening, like the brash, confident Drexel of old.

  Drexel’s chairman, Robert Linton, took to the stage for a rendition of “Rudy the Red-Nosed Reindeer,” attacking Giuliani in verse. Then Joseph moved to the podium and, with Linton at his side, announced that the board had met that afternoon and voted unanimously to reject the government’s settlement offer. “We’re going to fight!” he exclaimed as hundreds jumped to their feet, yelling, cheering, clapping, and beating on the tables in an ovation that seemed as though it wouldn’t stop.