But the euphoria was short-lived. “They had parties in Berlin right before the end of the war, didn’t they?” asked one Drexel vice president after the party. Even as some Drexel officials were nursing their hangovers the next morning, Curnin got a call from the U.S. attorney’s office in what was termed a “sanity check.” Curnin and Carroll agreed that perhaps they could live with a further compromise. That night they closed the gap slightly: Drexel wouldn’t have to admit Milken’s guilt. The firm would be allowed to say that it “couldn’t disprove” the government’s allegations against him and itself. Drexel wouldn’t have to waive its attorney-client privilege. But it would have to cooperate against Milken. It would have to plead guilty to six felonies—including numerous Boesky-related offenses—and it would have to pay $650 million. And on one final point the government remained adamant: Drexel wouldn’t be allowed to pay Michael and Lowell Milken their bonuses, and the brothers would have to leave the firm, either voluntarily or by being fired.
Carroll made clear that this was the government’s final offer, that Drexel’s brinksmanship would produce no further concessions and would have to end. He told the firm that, if the government heard nothing further, it could expect to be indicted at the grand jury session the next afternoon. Around Drexel that week, Joseph wore a large lapel button that read STRESS: THAT’S WHAT HAPPENS WHEN THE MIND OVERRIDES THE BODY’S NEED TO KICK THE SHIT OUT OF SOMEONE WHO JUSTLY DESERVES IT.
Joseph convened another board meeting at noon on Wednesday, December 21. The choice, while agonizing, seemed clear. Drexel would collapse within a month if subjected to a RICO indictment. Curnin estimated that the firm would have to post a crippling $1 billion bond, and credit would evaporate almost immediately. On the other hand, the settlement, while harsh, wouldn’t cripple the firm if its people rallied behind the decision. Curnin recommended accepting the settlement, as did Irwin Schneiderman, the Cahill Gordon partner who had long been the firm’s principal outside counsel, and Millstein, Joseph’s personal lawyer.
Peter Fleming, however, broke ranks, casting his lot with the Milken loyalists. Joseph and Curnin knew that Fleming had been drifting closer and closer to the Milken camp for some time. Sounding much like the Milken lawyers, he claimed that none of the evidence amassed by the government was all that damaging. In fact, he was already angling to become part of the Milken defense team in the event that Drexel settled. As a criminal rather than corporate lawyer, he didn’t accept the premise that a RICO indictment would destroy the firm. He argued to the board that Drexel should reject the settlement, allow itself to be indicted, and then see what happened.
Black, Kissick, and Bachelor quickly lined up behind Fleming. Black, volatile under ordinary circumstances, seemed increasingly distraught at the prospect of Drexel’s abandoning Milken. At 4 P.M., with debate still raging, Carroll called and spoke to Curnin. “You’re about to be indicted,” he said.
News that the grand jury was, even then, beginning to vote sent panic through the ranks of the directors. Burnham himself, trying to salvage the remnants of a firm that bore his name but whose dynamics he now barely understood, called, almost hysterically, for an immediate vote.
Sixteen of the firm’s directors voted for the settlement, including Linton, Kantor, Burnham, and all six board representatives of Groupe Bruxelles Lambert. Kissick, Black, Bachelor, and two others voted against the settlement. With the outcome already decided, Joseph cast the last ballot. Although he had been the architect of the settlement, he made one last, transparently insincere attempt to bridge the looming chasm between himself and the Milken loyalists. He voted against the plea bargain.
As the directors filed out of the conference room in glum silence, Joseph returned to his office and placed the hardest call of his career: he called Milken in Beverly Hills, and they spoke for about 10 minutes. When Joseph broke the news of the board’s vote, Milken said he had already heard it from his lawyers. “Aren’t I innocent until proven guilty? Isn’t this a free country?” Milken asked aggressively.
Joseph had vowed he wouldn’t be diverted by another discussion of Nazi Germany or morality. “I’m sorry, Michael,” Joseph said. “The board has voted. It’s final. I hope you’ll understand.”
Even though Edward Bennett Williams had warned him long ago that this day would come, Milken seemed shaken and said he was deeply disappointed to lose the firm’s support. “I guess I’ll have to fight my own battles and make my own decisions,” he said.
It took several days for final details of the elaborate plea agreement to be worked out, but the pact was finally sealed and the news broke just before Christmas. The specific counts to which Drexel would plead guilty weren’t disclosed, nor were any terms of the agreement relating to Milken’s future. But, in a crucial concession extracted by the government, Drexel acknowledged it would cooperate in the continuing investigation. The significance for Milken was obvious. As Alan Bromberg, a securities law professor at Southern Methodist University, remarked to The Wall Street Journal, “This is a very shrewd prosecution by Giuliani. It is a classic case of turning the screws on one defendant to get incriminating information on higher-ups.”
In at least two respects, Joseph’s judgment was vindicated: Drexel survived the initial blow of the guilty plea, and none of the top performers resigned. Ackerman was offered a seat on the board, joining Kissick and Black, and the three plunged into the still-pending RJR junk-bond deal. RJR now loomed as a test for a post-Milken Drexel. Drexel began its U.S. road show with a presentation for investors in San Diego on January 18; hundreds of potential buyers later packed the ballroom at the Helmsley Palace hotel in New York for a breakfast presentation. By the end of January, exultant Drexel officials were able to term the offering a resounding success. The firm had obtained so many commitments—more than $5 billion—that the offering had to be increased. Drexel earned more than $250 million in fees. And like the Drexel of old, it had shut Merrill Lynch out of the offering altogether.
Even Engel, dismayed though he was by the Drexel plea, agreed to assume his customary role organizing the 1989 Predators’ Ball. He continued to insist that Drexel would have been better off going bankrupt than turning against Milken, but the success of the RJR offering seemed to placate him.
Engel flew back to Beverly Hills to meet with the conference committee and plan the first Predators’ Ball at which Milken wouldn’t be present. He insisted that no one try to fill Milken’s shoes, not even John Kissick, whom Joseph had designated as Milken’s heir apparent after passing over Ackerman as too divisive, and Trepp as lacking the necessary demeanor and management abilities. (Unlike Kissick, the two other candidates also remained under investigation; Joseph didn’t want yet another indictment to disrupt the Beverly Hills operation.) Engel decreed that no one would deliver the customary speeches that Milken had used to set the tone for each day of the conference. Instead, the conference would feature videos in which the spirit of Milken would predominate. Indeed, the high point of the conference was to be a lavish and emotional filmed tribute to Milken.
Then Joseph enraged the committee by issuing a memorandum ordering that Drexel employees were to have no further contact with Milken. He also banned the Milken video from the conference. It was too much for Milken’s assistant Lorraine Spurge, who became nearly hysterical over the video issue. She, Robert Davidow, a high-yield department official, and Harry Horowitz, Milken’s boyhood friend, threatened to sabotage the conference unless Joseph allowed the video. Joseph held firm, anxious that nothing at the conference upset the SEC at a delicate stage in their negotiations.
In March, a glum conference committee—Engel, Horowitz, Davidow, and Spurge—gathered in the fifth-floor conference room in Beverly Hills. Their planning efforts had proceeded in a desultory fashion. Engel couldn’t muster any enthusiasm; he barely wanted to go on, and was thinking of quitting. Suddenly the door opened and Milken himself came in, bursting with vitality and ideas. He sat down at the table and began talking almos
t immediately, focusing on the conference as though nothing had changed, as though he’d be leading the sessions, taking the stage to introduce the year’s surprise celebrity. He reeled off the latest detailed financial statistics on key Drexel clients, focusing in particular on the recent success of MCI Communications and 20th Century-Fox, and how they should be presented to participants.
As suddenly as he’d come in, Milken left. Somehow, Engel knew that it was the last time Milken would help them plan a conference. He felt tears well up in his eyes. He looked around the table and saw that the others, too, were trying to keep their emotions in check. But their cause had been renewed. They would show the world. The conference would go on. They would show their video, no matter what Joseph said. They would do it for Milken’s clients. They would do this for Mike.
Drexel’s plea agreement with the U.S. attorney’s office was contingent on the firm’s reaching a settlement of the SEC case. In Washington, it was time for the commission, still smarting from the Drexel-generated bashing after the Boesky agreement and all that had ensued, to extract its revenge.
Joseph, stung by criticism from Engel and others within Drexel that he’d been outnegotiated by Giuliani and Baird, assembled a new team to handle the SEC negotiations. He replaced Curnin and Fleming, who’d generated so much resentment over the SEC case—Lynch was candid in acknowledging that he “hate[d] their guts”—with another Cahill Gordon partner, Gerald Tannenbaum. And he added John Sorte, a mild-mannered corporate finance executive untainted by any of Milken’s transgressions. Unfortunately, Joseph also included Leon Black, who quickly drove the SEC lawyers to new plateaus of rage.
When the Drexel negotiating team arrived in Washington in January, Lynch, Sturc, and others at the SEC expected them to have finally adopted the posture of supplicants seeking mercy. After all, the firm had just admitted six felonies and agreed to the largest fine in the history of the securities laws. At the outset, Lynch made clear that no settlement would be reached unless Drexel admitted wrongdoing. Yet Black, speaking in his usual nasal whine, asserted, “I don’t know that there have been any problems” at Drexel. The SEC lawyers were dumbfounded. Black repeated several times that he didn’t see any evidence of wrongdoing and added, arrogantly in the SEC’s view, that “we” would need much more proof from the SEC before reaching any agreement.
Black’s posture enraged not only the enforcement staff but the commissioners. The SEC retaliated by insisting, on top of their other demands, that Milken and Lowell be fired, that Drexel be barred from any junk-bond underwritings for two years, and—a demand that enraged Black—that the Beverly Hills office be closed and moved to New York. With the exception of the firing of Milken, Lynch himself hadn’t originally cared about these provisions; he had simply seen them as bargaining chips. But the commissioners were now so angry that they dug in and refused to drop any of the demands.
Black continued his obstreperous ways, and the SEC became convinced that his mission was to sabotage any possibility of an SEC settlement—which would, in turn, cause Drexel’s criminal plea bargain to unravel. Joseph wasn’t so sure; the tactics struck him as Black’s usual negotiating style, which was to be as offensive as possible to the other side. But with negotiations near collapse, he went to Washington to meet Lynch.
Joseph was at his most reasonable. He was tired of all the fighting; he wanted to put the nightmare behind the firm. “Gary,” he began, “you’ve got to tell me honestly. Do you want to shut Drexel down? Or are you trying to set new compliance standards, ones that could be a model for the whole industry? Because if you’re determined to shut us down, we won’t settle with Rudy Giuliani. We’ll get RICO’d. Let it be. But if you want to set a compliance model, that’s our goal, too. So what’s the game?”
“The latter,” Lynch replied. “We’re not trying to put you out of business. We’re not trying to punish you further.” Joseph agreed to remove Black from the negotiations and work hard toward an agreement. Relations between Lynch and Joseph now seemed so reasonable and constructive that each wondered how differently the whole affair might have gone had they adopted this posture two years ago, before their first negotiations had collapsed in acrimony.
With Lynch’s and Joseph’s new rapport, and with Black gone, the negotiations regained a modicum of civility. Sorte and Tannenbaum were able to convince Lynch and his colleagues that the internal situation at Drexel was volatile; that any sense of vindictiveness toward Milken could rupture the fragile support for the firm’s settlement. The SEC agreed to drop its demands that the Beverly Hills office be relocated and that Drexel be barred from junk-bond underwritings. It wouldn’t relent, however, on the fate of the Milken brothers: they had to be gone before the SEC would entertain any settlement. On this front, Joseph took matters into his own hands, recognizing that the moment had come to break the news to Milken. As he had done the day of the board vote on the guilty plea, Joseph reached Milken in Beverly Hills by phone.
Milken began by telling Joseph he was going through tough times, that his kids had been beaten up at school, that they were being taunted for having a criminal as a father. At this point, Joseph didn’t know whether to believe Milken or not. “Michael, I know you’ve got a lot of concerns,” Joseph said, but then he got to the crux. “From my point of view, I’d rather you resign than have to terminate you. But it’s your choice. How do you want to handle this?”
Milken seemed startled, even though his departure had plainly been a condition of the plea bargain. He sounded wistful. “I thought I’d work here forever,” he said softly. But he agreed that he and Lowell would take a leave of absence and eventually resign, sparing Joseph the task of firing them. The lawyers could work out the details, they agreed, and then hung up. It was their last conversation.
At the U.S. attorney’s office, change was in the air, and a new sense of urgency. Giuliani, on his way out of office, wanted to resolve the Freeman and Milken cases. He was immensely frustrated, he told Baird, that the Freeman case hadn’t made more progress. Freeman’s lawyers were pressing hard for a settlement that would involve dropping the criminal charges in return for settling related SEC charges, and Giuliani warned Bruce Baird that he was seriously considering that approach. A loss on the Freeman front could be outweighed by a Milken conviction.
Cartusciello, Carroll, and others working on the cases had misgivings. Princeton-Newport still hadn’t gone to trial; success for the government in that case might finally pressure Regan, Newberg, and the other defendants to capitulate and finally cooperate. That meant that the Freeman investigation had yet to exhaust all possibilities for a breakthrough. But on the Milken front, Carroll agreed to approach the Milken camp again, despite its continued public defiance. He contacted Litt at Williams & Connolly and began some preliminary talks; he was encouraged when Liman stepped into the negotiations. That meant Milken, possibly for the first time, was taking the negotiations seriously.
But the talks stalled when Milken insisted that Lowell be granted immunity as a part of any settlement. Giuliani was deeply disappointed. To his credit, he put the brakes on hasty efforts to resolve matters before his departure. Without a Milken conviction to soften the impact, there was no further thought of abandoning the Freeman case. Giuliani left office at the end of January 1989, and was immediately attacked by the Milken public relations forces for his handling of the cases. As the campaign unfolded, they became the most publicized blots on a largely outstanding record of convictions.
Word of the Milken negotiations leaked out to The Wall Street Journal even as Milken’s lawyers continued to insist to Joseph and Curnin that no settlement talks were underway. Milken’s lawyers released a statement: “Discussions between prosecutors and defense attorneys are routine in any criminal case, especially where the Department of Justice has authorized a [racketeering] prosecution. In this case, the prosecutors approached us and made certain proposals, which we rejected. There are now no discussions between us and the U.S. Attorney. Mr. Milke
n and his attorneys are preparing his defense. If Mr. Milken is indicted, he will plead not guilty and defend himself vigorously.”
But with a new interim U.S. attorney in place—Benito Romano, a former Giuliani aide who returned from private practice at Giuliani’s behest to take up the post—Milken’s lawyers resumed plea bargaining almost immediately, testing the new regime’s resolve. Incentives for a plea bargain were strong on both sides. Despite their confidence, the prosecutors, exhausted by the long two-and-a-half-year investigation, were facing the prospect of a long, complicated trial. This type of complex financial fraud case had never been tested before a jury. For Milken, if he were going to plead, doing so before indictment had obvious advantages. It would enable him to put the case behind him before being subjected to public disclosure of the full scope of the government’s case. Carroll again called Litt at Williams & Connolly to start the process.
Weeks of talks ensued. The prosecutors knew the Milken camp was serious when Sandler himself flew in from the West Coast and met with Baird at St. Andrews Plaza. Baird was curious about Sandler’s role. Even though Milken had both Paul, Weiss and Williams & Connolly—two of the most sophisticated criminal law firms in the country—representing him, Sandler seemed to be calling the shots. He said little at the meeting and seemed to be trying to gauge Baird’s strength and sincerity more than the merits of the government’s case. He acted as if he suspected that the government’s entire investigation and threat to indict Milken were some kind of subterfuge. Baird did his best to convey to him that a settlement offer wasn’t a sign of weakness—that if it were rejected by Milken, the government would obtain his indictment.
By late March, the prosecutors had put an offer on the table. Many details remained to be resolved, such as the amount of any fine. But Milken had never shown any concern about the money; that could easily be negotiated. Given the recent testimony by Peizer and Dahl, the offer was a favorable one for Milken: a guilty plea to just two felony counts, three if the deal also included immunity for Lowell. But, as is routine in most plea agreements, Milken would have to admit wrongdoing and agree to cooperate with the government.
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