Den of Thieves

by James B. Stewart

  Baird, Carroll, and Fardella, the prosecutors most involved in the case, agonized over the deal. They had genuine concerns that it was too favorable to Milken. They still had investigative leads worth pursuing. But they made the offer, and Milken’s lawyers indicated that they had a deal. Even though Flumenbaum and Sandler apparently continued to insist on Milken’s innocence, both Liman and Litt seemed to be favoring a plea bargain. Still, until Milken’s formal consent was obtained, nothing could be certain. Milken was given a deadline of 3 P.M. on Wednesday, March 29, after which he would be indicted.

  The day arrived with no word from Beverly Hills. Copying machines at the U.S. attorney’s office began to whir as the huge, 98-count Milken indictment was reproduced and press releases announcing the indictment were prepared. The most startling thing about the indictment wasn’t its length or its contents. It contained most of the same charges as in the SEC’s complaints, focusing on the Boesky scheme and the $5.3 million payment, as well as the Princeton-Newport scheme. It omitted all of the Dahl and Peizer revelations, most of which were still under investigation. What was eye-popping were the dollars involved. The indictment revealed, for the first time, that Milken had earned as much as $550 million in a single year from what it termed a “racketeering enterprise,” and the government demanded that a $1.2 billion bond be posted under the racketeering statute.

  That Thursday afternoon, Carroll and Fardella arrived in Romano’s office in St. Andrews Plaza to wait for the expected call from the Milken forces. The grand jury waited in the courthouse, standing by for the 3 P.M. deadline. As time passed with no word, Fardella left to join the grand jury at the courthouse. The jurors had already heard the government’s remaining evidence, and Fardella had reviewed the case for them. All that remained was a vote.

  Expecting that the case would end that day with a Milken settlement, Litt had planned a trip to Disneyland with his family. He sat by his phone, waiting for news. Liman had scheduled a trip to France. He, too, waited for word from Beverly Hills. As the morning wore on, Milken stopped taking phone calls. He was described as closeted in a room with his wife.

  Litt watched the clock move past noon; phone lines hummed as he talked to co-counsel, trying to figure out what was going on. He spoke to Carroll, who warned that there would be no reprieve. Finally he got through in Beverly Hills and Milken came to the phone.

  “I can’t decide,” Milken said. “I’ve got these concerns . . . ”

  Litt cut him off impatiently. “You’ve got to decide. They’re going to the grand jury.” Milken continued to waver. Finally, as the 3 P.M. deadline passed with no decision, Litt despaired. He called Romano’s office, saying it looked like they had failed to reach a deal.

  Carroll was crestfallen. Tired but resigned, he left to convey the news in person to Fardella, who finally asked the grand jury for a vote. It voted to indict Milken.

  Still, the government did nothing. A press conference at St. Andrews Plaza was scheduled for 4 P.M., then postponed. Late that afternoon, as copies of the indictment were being readied for distribution and the press conference was about to begin, Baird joined Romano in his office to discuss plans for the next steps in the case. Romano’s phone rang. It was Liman. He was breathless, calling from a pay phone at Kennedy International Airport, where he was waiting for the departure of his flight to France.

  Milken had finally made up his mind. “He’s ready to reach an agreement,” Liman said.

  “I’m sorry,” Romano responded after a pause. Without even conferring with Baird, he added, “It’s too late.”

  15.

  Milken had just made the worst trade of his career. Romano and Baird marveled at the turn of events, even as they wondered what could possibly have been going through Milken’s mind. Perhaps, as a trader, Milken had simply believed a better deal could be extracted by defying the deadline.

  The two prosecutors were relieved that the deadline had passed. They had worried that the plea bargain was too lenient, and had agreed that morning that the offer would be withdrawn after the deadline. They wouldn’t reconsider. Still, they said nothing of Liman’s call, not even to their own colleagues. Nor did Liman inform the Milken entourage.

  When the press conference finally convened, at about 5:15 P.M., Romano announced that Milken had been indicted on 98 counts, including RICO charges. He noted that the bond was the largest amount ever sought by the government against an individual defendant. Milken, as he had agreed, began his leave of absence from Drexel and issued a statement. “In America, an indictment marks the beginning of the legal process, not the end. After almost 2½ years of leaks and distortions, I am now eager to present all the facts in an open and unbiased forum. I will plead not guilty to the charges and vigorously fight these accusations. I am confident that in the end I will be vindicated.”

  Milken pleaded not guilty two weeks later, secretly entering the U.S. courthouse in Manhattan three hours before his scheduled arraignment. It was his first meeting with the judge assigned to his case, Kimba Wood, a recent Reagan appointee with a gentle manner, a keen mind, and flowing dark hair. There was little in her record to suggest how she would approach a major securities fraud case.

  Milken, tanned and looking relaxed, stood before Judge Wood with Liman and Flumenbaum on either side. His wife, Lori, sat with Sandler in the first bench behind him, along with a capacity crowd of hundreds, mostly reporters. “How do you feel today, physically?” Judge Wood asked. “Okay, Your Honor,” Milken replied. “Are you under the care of a physician or psychiatrist?” “No, Your Honor,” he replied. Indeed, his lawyers thought his spirits seemed better than they had been for weeks. The indictment itself had come as something of a relief, particularly since it still relied heavily on the Boesky allegations. Milken, once again, believed he was going to win at trial. “How do you wish to plead?” Judge Wood asked. “Not guilty, Your Honor,” Milken replied firmly.

  Milken had now inherited the notoriety once reserved for Boesky. A phalanx of helmeted New York City policemen had to hold back the crowds of onlookers and television crews as he left the courthouse and hurried into a waiting limousine. Hundreds of supporters wore T-shirts and baseball caps that read MIKE MILKEN: WE BELIEVE IN YOU. In an unprecedented display of business support for a charged felon, major Milken clients took out full-page newspaper ads in The Wall Street Journal, The New York Times, and other papers, repeating the refrain, “We Believe in You.”

  But Milken’s public-relations effort was diverging ever further from the truth. In the wake of the indictment, a new wave of witnesses against Milken cut deals with the government. David Solomon was probably the most damaging; he provided complete disclosure of the illegal arrangement between him and Milken in the Finsbury and MacPherson matters, as well as other crimes. Reed Harmon, another Beverly Hills employee involved in the Boesky transactions, obtained immunity and testified. Milken’s dealings with Columbia Savings and Loan, including the illegal tax trades, were now under intense investigation.

  In March 1989, the government began its first courtroom test of a case arising from the Levine and Boesky allegations: the trial of Lisa Jones on perjury charges. Her lawyer, Brian O’Neill, could do little except appeal to the jury’s sympathies for the young former runaway. Jones took the witness stand and, weeping, told the jury, “I was scared in the grand jury room” and “I just think I answered inaccurately because I couldn’t remember.” The jury took just four hours to convict Jones on all counts: five of perjury and two of obstruction of justice. Jones sobbed as the verdict was read. In an obvious message to other likely witnesses, Romano added that the Jones case demonstrates that the government takes perjury charges “very seriously.”

  A far more important test loomed, however: the trial of Regan and his co-defendants in the Princeton-Newport case. The Milken forces had often said they didn’t think a jury could understand such complicated financial cases. The trial began in June and lasted for five weeks of often tedious, complicated testimony.
The jury listened to dozens of the tapes seized by the government in its raid of Princeton-Newport’s headquarters. Both Will Hale, the dismissed Princeton-Newport employee, and more significantly, Fred Joseph, testified. As a government witness, Joseph explained Drexel’s own rules restricting trading in clients’ securities.

  The jury spent barely two days deliberating, a relatively short time given the complexity of the 64 separate felony counts. Defendants took that as a sign that they would be vindicated; James Regan, in particular, had never wavered in his belief that no jury would convict him. As Cartusciello had put it in his closing arguments, the defendants were guilty of an “arrogance that everything is so complicated and so clever that no one will be able to piece it together.”

  On July 31, as the jurors filed back into the courtroom, Zarzecki, who had been featured so prominently in the tapes, smiled broadly and made a thumbs-up gesture toward spectators. The mood changed abruptly as the foreman delivered the verdict: guilty on 63 of the 64 counts. The wives of many of the defendants wept.

  There was gloom in the Robinson, Lake offices. Ken Lerer, in particular, seemed devastated by the verdict. He’d been prominent among those confidently predicting an acquittal or, at worst, a mistrial.

  For the prosecutors, however, the sweeping guilty verdict didn’t produce the immediate breakthroughs they’d hoped for. Despite renewed pressure, Newberg and Regan, the two defendants probably in the position to give the government valuable information about Milken and Freeman, refused.

  With Regan still recalcitrant, almost every investigative avenue in the Freeman case had been exhausted. Cartusciello and McEnany were making little headway. No one within Goldman, Sachs broke ranks, a reflection in part of an institutional culture that had placed the firm ahead of its individual partners for generations. The prosecutors had pursued the Beatrice lead from the Journal article, questioning Bunny Lasker about his call to Freeman. Lasker claimed he didn’t remember it. Increasingly desperate, the prosecutors went so far as to offer Tabor immunity in return for any testimony that could further implicate Freeman. But Tabor, sensing the government was making no progress, refused. Wigton was all but forgotten.

  Siegel, isolated in Florida, was growing increasingly desperate to be sentenced. Freeman, Goldman, Sachs, and Drexel had hired private detective Jules Kroll, and the detective’s investigators were shadowing all Siegel’s moves. Once, while working on setting up a computer camp for children in Jacksonville, Siegel was in the office of a potential donor when the phone rang. The caller identified himself as “Phil Spence,” a freelance reporter for the Associated Press. He told the businessman that he was doing a story on “Ivan Boesky’s relationship with Martin Siegel.” He asked him whether Siegel had a “hidden interest” in the man’s company. When “Phil” refused to further identify himself or leave a number, the businessman hung up. He also pulled out of Siegel’s computer project.

  Siegel and Rakoff complained to Cartusciello, who pursued the matter and found there was no Phil Spence at the AP. The caller was actually a Kroll operative. The same person called all of Siegel’s former neighbors in Connecticut. When Siegel visited a friend in New York, “Phil” called the friend. “I know you’re hiding money for Marty Siegel,” he began. “We know this.” Later, a man showed up at the friend’s apartment and identified himself as a New York Police detective, showing a badge. The friend let him in, and he looked around. Later the friend called the police—and learned that no such detective existed. From the man’s license plate, the U.S. attorney’s office was able to trace the detective to Kroll Associates.

  The prosecutors were so angry they threatened to charge Kroll with obstruction of justice and harassment of a federal witness. Kroll agreed to stop. Then Kroll operatives started contacting parents in the Siegels’ children’s car pool. An investigator bribed their 16-year-old baby-sitter with $50, asking her whether Siegel paid her in cash and whether she’d seen Siegel smoke marijuana. The Siegels were constantly interrupted by phone calls in the middle of the night; they had to change their phone number three times. Prosecutors warned Kroll again, and the incidents tapered off.

  Although unpleasant for Siegel, the $1.5 million Kroll effort produced laughably insignificant results. Still, Siegel wondered how much more he could take. Every time the Freeman case was mentioned in the press, Siegel was pilloried as a liar. In January he met with Baird in New York and all but begged to be sentenced. Baird again talked him out of it.

  Freeman’s lawyers, Robert B. Fiske, Jr., of Davis Polk and Wardwell and Paul Curran, of Kaye, Scholer, and Goldman, Sachs’s Pedowitz, were also effective in their continuing meetings with the government. Unlike Milken’s lawyers, they never claimed that Freeman was innocent. They never insulted the prosecutors’ intelligence and judgment by claiming that everything Siegel said was a lie or that Freeman was a national treasure. Instead, they produced voluminous research demonstrating possible alternative sources for Freeman’s and Siegel’s trading information. They didn’t claim that these were the actual sources; they simply emphasized that they could raise doubts in the minds of any jury. Their efforts demonstrated the difficulty of proving an insider-trading case against any professional arbitrageur, even with a cooperating witness like Siegel.

  Still, Baird and his colleagues were prepared to present the case to a jury. They thought they could rely on a strong performance by Siegel and corroborating documentary evidence. Then, finally, came a lucky breakthrough.

  In a last effort to corroborate Siegel’s testimony, the prosecutors immunized Frank Brosens, one of Freeman’s top aides in the Goldman, Sachs arbitrage department, and brought him before the Freeman grand jury. At first, Brosens provided nothing new or of value. Then, on the point of giving up, McEnany asked him, “Is there anything else you remember?” Brosens seemed uncomfortable, and asked if he could confer with his lawyer. A brief recess was called.

  When Brosens returned, he answered the question: “Yes.” To the amazement of the prosecutors, he acknowledged that Freeman had called Siegel during the Beatrice deal. Freeman hadn’t been able to resist repeating Siegel’s confirmation of Bunny Lasker’s tip: “Your bunny has a good nose.” It proved a fatal indiscretion.

  At last, the government had obtained a shred of corroboration. It produced more startling effects than expected. Brosens was immediately debriefed by the Goldman, Sachs and Freeman lawyers, and repeated his damaging admission. They were alarmed. When The Wall Street Journal article containing the “bunny” quote had appeared more than a year earlier, they had assumed that government prosecutors had leaked the information to the Journal in order to pressure Freeman. That meant, they reasoned, that the government had to have a source—presumably Siegel—who could testify to the exchange with Freeman.

  Yet Siegel had not been questioned by the prosecutors about the “bunny” quote until June 1989, when he was again brought before the grand jury. Asked about the Beatrice incident, and the “bunny” remark, Siegel recalled talking that day to Henry Kravis and to Freeman. But the best he could say about the actual quote was that it sounded like something he might have said. He didn’t remember it, and he didn’t remember giving Freeman inside information about Beatrice.

  Freeman’s lawyers fell into the same trap that had snared Milken’s and Drexel’s: they simply couldn’t believe that reporters could have obtained their information from anyone but the government. They failed to consider the possibility that the government had known nothing about the “bunny” exchange before the Journal article. They assumed that Siegel would testify to his end of the conversation, and they now concluded—erroneously—that the government had two witnesses, not just Brosens.

  Bob Rubin, Freeman’s longtime supporter and now co-chairman of Goldman, Sachs, was finally swayed in his view of the case. He had always thought Freeman had a “triable” case, one he had a good chance of winning. Yet research into the makeup of any potential jury hadn’t been encouraging. The public clearly held all arbitrageu
rs in low esteem, and Freeman had earned huge amounts of money. The Princeton-Newport verdict had confirmed Rubin’s fears that the public was ill-disposed toward wealthy Wall Street executives.

  Moreover, Freeman didn’t dispute the facts about Beatrice; he had never denied receiving the “bunny” tip, or having traded on the basis of the information. And the Princeton-Newport verdict had been particularly hard on Freeman. One lawyer thought “the fight just went out of him” after Regan was convicted.

  Rubin himself now decided that Freeman had made an “error in judgment,” as he told his colleagues at Goldman, Sachs. If the vast conspiracy once alleged by the government could be boiled down to a single communication, “Your bunny has a good nose,” Rubin was confident that the case could be disposed of with minimal damage to Goldman, Sachs. Indeed, the government would probably seem a laughingstock.

  The Freeman forces approached Baird and the prosecutors and indicated a willingness to consider a guilty plea to one count of insider trading based on the Beatrice incident. A battle erupted immediately among the prosecutors. Cartusciello and McEnany, adamantly opposed to such a favorable deal for Freeman, were willing to go ahead and try the case. Baird, however, thought the deal had much to recommend it. It would be an admission of guilt, it would remove Freeman from the securities business, and it would subject him to a possible prison term; the SEC could deal with the loose ends in a civil suit.

  Baird didn’t think he could keep putting Siegel off; he’d been waiting to be sentenced for over two years. In addition, unlike Milken’s, Freeman’s case wasn’t growing stronger with age. Baird had vowed to see the Freeman case through, but he was anxious to leave the U.S. attorney’s office for private practice.