Den of Thieves

by James B. Stewart

  So far, the legal and PR efforts have yielded scant benefit. Judge Wood has declined to reduce Milken’s sentence, saying she awaits further indications that Milken is cooperating with prosecutors. Milken has spent hours with government lawyers as part of his agreement to cooperate, but has left prosecutors frustrated and doubting that he is telling all that he knows, or anything that would prove of substantial value to law enforcement. On those grounds, prosecutors have formally opposed any reduction in Milken’s ten-year term, and they scheduled a May 1992 trial of Milken’s ally Alan Rosenthal, the longtime friend who had never turned against Milken and was indicted for his role in the Solomon scheme.

  Milken was slated to be the government’s star witness in the Rosenthal trial, and Judge Wood said that she would reserve ruling on Milken’s motion until after he testified, in order to make her own determination as to his value as a witness and his degree of cooperation. The stage was set for a crucial test of Milken’s strategy. In the face of such pressure, would Milken admit the extent of his own crimes and implicate one of his closest friends? Or would he maintain the code of silence that he had once tried to impose on all those around him, and that Rosenthal had honored?

  Meanwhile, as Milken continued to spar with prosecutors, a more intriguing drama unfolded in the civil litigation involving Milken and his now-bankrupt former employer, Drexel. Shortly after his guilty pleas, a slew of civil lawsuits were filed against Milken.

  The most of important of these were a suit filed by the Federal Deposit Insurance Corporation, claiming that Milken’s role in the savings and loan crisis had cost taxpayers unspecified billions of dollars in losses, and one filed by Drexel itself, seeking to hold Milken responsible for the catastrophic damage he had inflicted on the firm. In an unusual move, both the government and Drexel hired lawyers Thomas Barr and David Boies of Cravath, Swaine & Moore, one of the few firms that could be considered a match for the combined forces of Paul, Weiss, Alan Dershowitz, and the scores of additional Milken lawyers. In a sense, the decade had now come full circle: Barr and Boies were the same lawyers who had defeated the government while representing IBM in the massive antitrust case whose end inaugurated the 1980s; they were now representing the government against a symbol of that decade’s excess.

  Milken and his entourage responded with aggressive denials of wrongdoing, Milken going so far as to say that he was looking forward to having his day in court, when he would finally demonstrate that the government’s charges were baseless.

  To Barr and Boies, however, a different Milken quickly emerged, a man almost desperate to reach a settlement that would prevent the public from learning any more about the tangled relationships at the center of his once-vast empire. The Cravath lawyers learned from interviews with customers of Milken, for example, that the incidents in which Milken had freely traded on behalf of his captive clients, acting as both buyer and seller, weren’t confined to Fred Carr and First Executive. The pattern, they believed, extended to Tom Spiegel and Columbia Savings, as well as other large clients. They reached the conclusion that Milken had, in effect, bribed his major clients into ceding control to him. They recognized that this information was a potentially explosive link between Milken and the S&L scandal, a fiasco growing ever more potent in the minds of the American public. Milken, of course, was hardly the only financier to blame, or even the main culprit. But the value of the junk bonds in the portfolios of First Executive and Columbia alone totaled more than $10 billion.

  In early 1991, Cravath amended its lawsuit against Milken, charging that Milken had engaged in an illegal, concerted plan to control Columbia, and by extension other S&L clients, and to encourage thrift officials to abuse their control of their institutions. At the same time, the lawyers began formal questioning of Milken’s former colleagues in Beverly Hills.

  The first witness was Richard Bergman, an accountant for the Drexel employee investment partnerships in Beverly Hills. His questioning lasted eight mostly fruitless days. He answered “I don’t recall” more than 1,200 times. Cravath was more successful with their document request. The judge ordered the Milken forces to turn over a large cache of documents relating to the partnerships that they had tried to avoid producing.

  Lowell Milken was next; his deposition was videotaped over his objections. Lowell testified that he did whatever Michael told him to do and never asked questions. He said the first time he realized Michael might have done anything wrong was “on the eve of my brother’s guilty plea.” Fred Joseph and Craig Cogut, the Drexel lawyer in Beverly Hills who had blown the whistle on the MacPherson situation, also testified, repeating much of the information they’d already given the government. But Cogut added a new glimpse into Milken’s motivation. Cogut testified that during his job interview in Beverly Hills, Lowell had told him, in a matter-of-fact manner, that “the Milkens want to become the richest family in America.”

  Perhaps the most important deposition was the one that was never taken: that of James Dahl. As the salesman in charge of the now-notorious Lincoln Savings account, the person who’d often acted as a go-between for Milken and Charles Keating, Dahl was situated at the heart of Milken’s dealings with the S&L’s. No one knew exactly what Dahl might say, but every time he was scheduled to testify, a reason was found to postpone his deposition. Milken’s lawyers never objected; indeed, it quickly became apparent to the government’s lawyers that the last thing they wanted was for Dahl to tell what he knew.

  Thus, with only four depositions completed, it became obvious to Boies and Barr that Milken was going to capitulate. Shortly after the Cogut deposition, Boies sat down with Arthur Liman and Richard Sandler in a Paul, Weiss conference room. “You can’t afford to go to trial,” Boies bluntly told them. “The claims are too high and the conduct is too bad.” For once, neither of Milken’s lawyers disagreed.

  Despite continued public posturing, Milken’s fight was gone. He wanted to get out of the threat of further litigation, and he wanted to preserve as much of his fortune as possible. So far, he had managed to keep secret the true extent of his wealth, but Cravath had shrewdly filed a formal motion to force Milken to reveal the extent of his personal assets. Before any ruling on that motion, in January 1992, Boies sat down with another Paul, Weiss partner, Mark Belnick, and took out a yellow pad. Boies wrote down a set of numbers that came to about $1.3 billion. “I think this will settle it,” Boies said. “I think it will, too,” Belnick replied. In this anti-climactic, almost casual manner, Milken’s financial fate was decided.

  The final negotiations weren’t without their moments of minor drama—at one point, Sandler smashed a bottle of soda against a conference-room wall—but the final settlement was remarkably close to the numbers first jotted down by Boies. In March 1992, the government unveiled the deal. It called for Milken to pay an additional $500 million on top of the $600 million criminal settlement. Of that amount, $190 million was in cash and the remainder in partnership assets to be paid over a three-year period. Milken was allowed to continue to manage the partnerships from his prison cell in order to maximize their value. Others once at Drexel, including Lowell Milken, Peter Ackerman, Leon Black, and Warren Trepp, were responsible for a total of about $300 million, with the largest share coming from Ackerman. Insurers contributed another $100 million. Added to the $400 million in restitution already paid by Milken, the total came to the roughly $1.3 billion estimated by Boies.

  In many ways, the settlement—the largest ever against an individual defendant—was a coup for the government, the culmination of a campaign that had begun six years earlier with the arrest of Dennis Levine. It had netted the government more in fines and restitution than any other prior series of cases. Yet the settlement left nagging questions. Foremost among them: Just how rich is Milken, even after forking over more than $1 billion?

  As a result of the settlement, Milken has managed to keep the answer to that question secret. Yet numerous clues suggest a fortune that might still be large enough to allow the
Milkens to realize their dream of becoming, if not the richest, at least one of the richest families in America. When Milken emerges from prison, he will remain a formidable financial power.

  Cravath and the other lawyers never received a detailed accounting of the Milken family wealth; but during the negotiations, Milken’s lawyers indicated to them and to the judge in the case that after paying the additional $500 million, Milken would still retain a personal fortune of about $500 million. They indicated that about $200 million of this was in Milken accounts and partnerships, and that about $300 million was lodged in accounts in the names of Milken’s wife and children. Milken agreed to forfeit any assets later determined to have been hidden by him at the time of the settlement.

  That leaves Milken, by his own admission, with an extraordinary fortune, one that would place him high on any list of the richest Americans. Yet there is every reason to believe that the Milken fortune is much greater than $500 million. The partnerships, for example, are notoriously difficult to value. Cravath lawyers were so baffled by the intricate interlocking ownership stakes and the complexity of the securities positions that they had to retain Salomon Brothers to assist them. In the negotiations, it became clear that Milken was attempting to pay as much of the settlement as possible in the form of partnership interests, enabling him to choose those assets least likely to appreciate substantially in value over the coming years, and to retain those with the best prospects. Because of his intimate familiarity with the assets in the partnerships, Milken was in a position to manipulate the valuation process. Moreover, the partnership interests were valued at a time when the junk-bond market remained devastated; values have since recovered substantially.

  It is fair to say that junk-bond assets valued at $300 million at the end of 1991 would have already appreciated by about 20%, or $60 million. Thus, assuming that Milken adopted the lowest possible values for the partnership interests he retains, and that those assets have since appreciated, a rough but still conservative estimate of his assets as of mid-1992 would be $600 million.

  In addition, Milken retains a dominant role in the Milken family foundation, which was unaffected by the settlement. The foundation had assets of approximately $375 million at the time of the settlement.

  There is also Lowell Milken’s fortune. Given their relationship, and the debt Lowell owes his brother for saving him from criminal charges, Lowell’s fortune may fairly be considered part of Milken’s wealth. Lowell was paid more than $100 million in salary and bonuses during his career at Drexel. His share of the partnerships, if in the same proportion as Milken’s, would total at least $250 million, leaving him, after taxes, interests valued at about $300 million. Even assuming a generous $50 million contribution to the $300 million portion of the settlement, Lowell would retain assets of about $250 million.

  Thus, considering only the wealth of Milken and his immediate family along with the assets of the foundation, Milken controls a fortune of $1.2 billion. If reasonably well managed, it will grow while Milken completes his prison term. As Martin Auerbach, the lawyer representing David Solomon, said on learning the terms of the settlement, “That’s not bad for a half decade of work.”

  And what about Ivan Boesky? The numbers may be smaller, but he rivals Milken in sheer audacity. In May 1992, capping years of rumors and a prolonged separation, Seema Boesky sued Ivan for divorce in New York state court. To the dismay of many in the Boesky entourage, including his children, Seema even appeared on the ABC newsmagazine show “20/20” with Barbara Walters to discuss her anguish over her husband’s scandal. She revealed that she had finally left Boesky when she discovered he had another long-term lover. What she didn’t say was that the lover was the daughter of her close friend.

  Boesky countered by seeking alimony of $1 million a year from his wife. According to people familiar with his plans, he may also invoke New York’s law of equitable distribution and claim half of his wife’s assets as part of any final divorce settlement.

  In a confidential report to the government at the time he settled charges, Boesky indicated he had assets of about $25 million after paying the $100 million penalty. While he is a rich man by almost any measure, many of his assets are in real estate, such as the house he shares with Hushang Wekili on the Côte d’Azur, the apartment in Paris, and the Yacht Harbor Towers condominium in Honolulu he bought in 1986, just before his settlement, for $2.9 million. Boesky has indicated he has spent about $5 million on legal fees since filing his asset disclosure, that he is unemployed, and that the income generated by his remaining wealth is insufficient to enable him to live in the comfort to which he became accustomed during the 1980s.

  A little-noticed aspect of Boesky’s settlement with the government protected Seema Boesky’s assets, as well as those of the Boesky children, from any claim by the government arising from Boesky’s wrongdoing. Thus, any wealth Boesky generated for his wife and children using illegal inside information was protected from any government claim. This included the family’s share of the Boesky partnership dissolved in 1986 at the time of the new Drexel financing, in which Seema was the largest single investor. It was this partnership that benefitted most heavily from Boesky’s insider trading in the early and mid-eighties. The proceeds to Seema and the Boesky children have never been disclosed: People familiar with the accounts say Seema was the beneficiary of trusts and accounts funded with about $100 million; the children’s interests amounted to about $96 million at the time of the Boesky settlement.

  Seema Boesky’s wealth also includes the proceeds from the sale of the Beverly Hills Hotel in 1986 for $135 million. She owned 47% of the hotel in her own name, and realized just under $65 million as her interest. Thus, her shares of the Boesky partnerships and the Beverly Hills Hotel alone would indicate assets of more than $165 million.

  Should Ivan Boesky succeed in obtaining half of her estate, he will not only be a much richer man, he would have succeeded in returning to his own pockets about $50 million in trading profits from a partnership thoroughly tainted by his own crimes. It surely is an outcome unanticipated by the government at the time it entered into the Boesky settlement.

  Michael Milken may be an extreme example, but every major participant in these crimes emerged from the experience as a wealthy man, at least by the standards of the average American. Such results have understandably led many to question whether justice was served, and whether future scandals will be deterred.

  Since the end of the 1980s, profound changes have already taken place on Wall Street. Suffering from extensive layoffs and a recession as well as the aftermath of this scandal, Wall Street has given every sign of being severely chastened. Individuals may have survived the scandal, but their institutions have foundered, with Drexel in bankruptcy and a struggling Kidder, Peabody quietly put up for sale by General Electric. Salomon Brothers, caught in a Treasury-market scandal, was eventually fined $290 million, and it, too, had to struggle to survive. New instances of major securities prosecutions were few, and the takeovers that spawned so much crime nearly vanished from the financial landscape. The perception, at least, was that insider trading and more devious forms of securities fraud had become far less prevalent.

  Yet history offers little comfort. The famed English jurist Sir Edward Coke wrote as early as 1602 that “fraud and deceit abound in these days more than in former times.” Wall Street has shown itself peculiarly susceptible to the notion, refined by Milken and Boesky and their allies, that reward need not be accompanied by risk. Perhaps no one will ever again dominate the financial world like Milken with his junk bonds. But surely a pied piper will emerge in some other sector.

  Over time, the financial markets have shown remarkable resilience and an ability to curb their own excesses. Yet they are surprisingly vulnerable to corruption from within. If nothing else, the scandals of the 1980s underscore the importance and wisdom of the securities laws and their vigorous enforcement. The Wall Street criminals were consummate evaluators of risk—and the equatio
n as they saw it suggested little likelihood of getting caught.

  The government’s record on appeal did little to change the sense on Wall Street that most securities crimes were beyond the reach of law enforcement. Part of the Princeton-Newport verdict, including the RICO convictions, was reversed on appeal, and John Mulheren’s conviction was entirely reversed. Mulheren’s securities-manipulation charges were dismissed in an opinion that concluded, “No rational trier of fact could have found the elements of the crimes charged here beyond a reasonable doubt.” His year-and-a-day prison term and $1.5 million fine were set aside.

  The Mulheren result wasn’t surprising. It seems obvious from the events themselves that Boesky manipulated Mulheren, not that Mulheren manipulated the market. If Mulheren was guilty of anything, it was the parking charges on which the jury couldn’t reach a verdict. The Princeton-Newport reversal and reversals in other securities cases were on largely technical grounds. Still, confronted with Wall Street crime on an unprecedented scale, prosecutors were desperate to convict on practically any grounds. In some cases, they overreached.

  These results don’t change the fact that there was massive wrongdoing on Wall Street. But they do call into question the wholesale criminalization of the securities laws. Congress should enact a tough but precise criminal securities code that targets the most serious violations of securities fraud while leaving enforcement of matters such as net capital requirements to the SEC.

  At the very least, Congress should enact a statutory definition of insider trading, and should define a “group” as part of a criminal ban on fraudulent disclosure practices, so “arrangements” such as Icahn’s and Boesky’s would have to be made public. Securities firms should be barred from arbitrage; self-policing has clearly failed, as Kidder, Peabody recognized when it abandoned arbitrage. And courts should continue to define mail and wire fraud broadly; fraud has proven itself to be, as Lord MacNaghten predicted at the turn of the century, “infinite in variety.”