Eagle on the Street

  To get started, Hewitt punched Milken’s name into a computer at the SEC’s North Capitol Street headquarters in Washington. The screen indicated that lawyers in the commission’s New York office had questioned Milken in 1980 about his trading activities, so Hewitt dug out the deposition transcript and read it. He could hardly believe Milken’s description of his work in Beverly Hills—Milken was like a component in some high-speed telephonic machine. During one of his typical days on the Beverly Hills trading floor, Milken had said, he held roughly two hundred telephone conversations, at times talking with one party while “I’m at the same time carrying on ten other conversations. I would say that I listen to no more than twenty-five percent of the conversations I have with anyone during the trading day.… I would come in and out, buy and sell securities during any conversation.”

  Milken’s self-image as a whirlwind money-making machine intrigued Hewitt, and he had decided that when he got to Los Angeles, he would ask some questions about the salesman’s daily routine. In this case and others, Hewitt was drawn to moral and social questions raised by the uses of vast sums of money by traders such as Milken. He was no philosopher, but in 1968 he had spent thirteen bloody months as a platoon commander in the jungle and fields outside Da Nang during the Tet Offensive, and he had learned a few things about how humans make moral choices. After he came to the SEC, the experience of Vietnam became one filter through which Hewitt evaluated the people he met “in the field,” as law enforcement officials referred to the workaday world.

  What would Jack Hewitt have thought of Michael Milken if they had met in 1968, in the days of rage, rather than across a government conference room in 1982? Hewitt was only two years Milken’s senior, but a chasm of class, culture, and experience separated them. Jack Hewitt had been the kind of soldier that Hollywood lionized in its versions of the Vietnam War. He had blue eyes and brown hair, and was a middle-class Catholic from Pittsburgh, Pennsylvania, the son of a supervisor at a railroad-equipment manufacturer. A broad-shouldered offensive lineman, he went to college on a football scholarship, played on two undefeated teams, and then enlisted in the Marines because it seemed the right thing to do. After officer candidate school, they tossed him into the jungle. First Hewitt and his platoon chased the Vietcong in circles through the bush, then came the offensive led by the North Vietnamese Army, and suddenly it was an overwhelming, brutal war. Hewitt won a silver star for gallantry in action during the Tet Offensive, when his platoon of about sixty men defended Da Nang against an enemy force believed to be at least ten times larger. But when he came home—before they made the movies and built the Vietnam Memorial and had all the parades to set things straight—there were people who thought of him as a murderer. Hewitt got along all right, however; he didn’t become absorbed or obsessed by the rejection he met, but he understood why some veterans couldn’t take it.

  And suppose he had met Michael Milken then? Milken wasn’t one of the hippies, one of the radicals fighting against the war Hewitt believed in. That would have been something Hewitt could grapple with. Instead, it was as if Milken lived in some parallel universe that never intersected with Hewitt’s world. Upper-middle class, Jewish, and driven to achieve, Milken was the son of a prosperous southern California accountant who took him along to visit clients and enlisted his help preparing their tax returns. In high school, forty pounds lighter than Hewitt, Milken was the head cheerleader, the prom king, and an honors graduate who excelled in math and got a D in woodshop. While Hewitt was in the jungle, Milken was at the University of California at Berkeley, but amid all the campus craziness—the Black Panthers, the communes, the Summer of Love, the protests against the war—Milken concentrated on his studies and his fraternity, as if the rest of it didn’t matter one bit. He led an almost monastic life: no drugs, no beer, no tobacco, no escapades. After college he married Lori Anne Hackel, his childhood sweetheart, and headed straight for Philadelphia to get his master’s degree in business administration at the University of Pennsylvania’s Wharton School. From there he joined the Drexel investment firm and, by the fall of 1982, when Hewitt’s SEC investigation brought him to the conference room high above Wilshire Boulevard, Milken had returned to his old neighborhood, bought the old Clark Gable estate in Encino for around $700,000, and had become one of Drexel’s most important and successful executives. At thirty-six, Milken earned millions, more money in a year than Hewitt could realistically hope to earn in a lifetime at the SEC, with its more rigid government salary scale.

  That morning, Hewitt asked Milken what, exactly, he did for a living.

  “Trying to make money for the firm in the purchase and sale of securities,” Milken answered vaguely.

  By “securities” Milken meant stocks and bonds. He was laconic to the point of condescension, as if Hewitt’s questions were an utter waste of his time. How could Hewitt or the SEC really hurt an executive like Milken? The commission’s subpoena power could force him to testify, as he was doing this Saturday. But its fraud investigations often dragged on for years, and even then it was usually possible for someone with Milken’s resources to reach a harmless, civil settlement—no big fines, no jail time. If Hewitt’s investigation uncovered serious securities fraud, the SEC might refer the matter to the Justice Department for criminal prosecution, and the commission could itself bar Milken from the brokerage business. But such severe sanctions were rare. Milken’s indifference to Hewitt seemed to be reinforced by the high-priced lawyer beside him, Thomas Curnin, from a prestigious New York firm. Curnin was the sort of litigator who liked to make deposition testimony as unpleasant as possible for the lawyer on the other side—especially a less-experienced government lawyer. He repeatedly ridiculed Hewitt and his inquiries.

  Hewitt asked Milken to give him a rundown of a typical day in his Beverly Hills office. It was a simple, softball question, a way to get a sense of Milken’s personality before moving on to the substantive questions about fraud and manipulation.

  But Milken was argumentative. “There’s no such thing as a typical day,” he replied. “I don’t know what a typical day is. Let me describe what generally happens. I could do that?”

  “Yes, if you could.…”

  “I come in, in the morning between four-thirty and five o’clock. I generally read the Wall Street Journal. I generally write notes for the people in the department, put them on an administrative person’s chair. By five-fifteen, she’s put them on everyone’s chair in the department, so if they’re not in they can’t sit down without picking up their note.”

  Hewitt didn’t interrupt. It was obvious now that he had struck a chord. Milken apparently didn’t mind bragging about how hard he worked.

  “I then direct administrative people to make phone calls for me and get people on the phone, and that generally runs till around two o’clock in the afternoon,” he continued. “Sometime around ten forty-five to eleven-fifteen [A.M.] they put some food on my desk, which I eat in anywhere from one to five minutes. Sometimes in the afternoon, it’s possible corporations would come in for meetings [about raising money with Milken’s help].… Sometime between four o’clock and six o’clock, a position sheet is put out as to what the [stock and bond ownership] position is for the department, which I start to review. And if I’m not too tried, I then start writing out notes for the people in the department, asking them why they bought or sold a security—if I have an opinion, or I don’t think that’s a good idea, or that it might be a good idea. When I’m exhausted I go home and I get ready for the next day.”

  “… Do you have any role or participation in the trading at the department?” Hewitt asked.

  “I have good hearing, and over the years it developed that I can hear most conversations in the department,” Milken said. “… I might overhear someone doing a trade that I don’t think’s a good idea and might scream at them before they’ve completed that trade or try to provide direction.”

  There was a part of Hewitt that admired Milken’s dedication to work,
but there was a part of him, too, that considered Milken a threat. Hewitt didn’t know that Saturday morning where the tip about Milken’s alleged stock and bond manipulation would lead, how serious the matter was, or whether he would eventually muster enough evidence to impress Fedders, who was several layers above Hewitt in the enforcement division’s hierarchy. Still, because it involved allegedly deliberate manipulation of the stock and bond markets by powerful financial interests, this was exactly the sort of investigation Hewitt thought the SEC should be concentrating on.

  Hewitt had been attracted to the commission in the late 1970s by Stanley Sporkin, whose charisma reminded him of the late football coach Vince Lombardi. He had enrolled in a nighttime masters program at Georgetown University Law School in Washington and had agreed to write a long research paper on market manipulation. Day after day Hewitt sat in the SEC library, reading transcripts of the Pecora hearings, the landmark congressional hearings held in the 1930s, in the aftermath of the stock market crash and in the depths of the Great Depression. The hearings exposed the rampant corruption prevalent on Wall Street during the 1920s, particularly a series of brazen, secret stock and bond manipulation schemes carried out by some of the financial community’s most respected denizens. The soaring stock market of the 1920s, it turned out, had been driven by speculation and a web of complex, conspiratorial frauds—that was why it had crashed so disastrously in October 1929, the hearings showed. Hewitt was certain that Wall Street in the 1980s was more honest and better regulated than Wall Street in the 1920s. But as he studied Michael Milken’s life and career, especially the way in which Milken was rapidly building a dominant role for himself in the fastest-growing segment of the bond market, Hewitt constantly was reminded of the Pecora hearings. Certain parallels between Milken and Wall Street figures from earlier in the century took shape in his mind.

  Since the 1970s, Milken had devoted himself to an obscure corner of the bond market shunned by Wall Street’s respectable firms, and he was beginning to build in Beverly Hills an innovative, enormously profitable franchise, selling bonds for small, growing companies that most of Wall Street considered too risky to finance. Soon the national press would be comparing Milken to the legendary financier J. P. Morgan, who dominated Wall Street and the economy during the 1920s—and the comparisons would be made with uneasy ambivalence, as if the sheer scale of Milken’s influence augered repetition of earlier disasters. (Milken’s friends and colleagues said such doubts reflected typical small-mindedness in the face of innovation; every genius was labeled a heretic in his own time, they said.) Hewitt’s concerns were reinforced by the evidence he had accumulated about Milken’s potentially shady dealings. Hewitt was convinced that the economic strength of the United States was wholly dependent on effective enforcement of the securities laws. To Hewitt, there was more involved in all of this than just keeping a few brokers or traders honest; the SEC was saving the economic and political system from the sort of turmoil that prevailed after the 1929 crash.

  That Saturday, Hewitt found Milken an elusive quarry. He was distracted by Milken’s attorney, Curnin, who interrupted continually. Depositions constituted the bulk of an SEC lawyer’s field work. There was no judge to resolve disputes, so an experienced defense litigator like Curnin could test the patience and skills of a commission lawyer like Hewitt with virtual impunity.

  Hewitt tried to press for explanations of some specific stock and bond trades that had aroused his suspicions. Some of the trades involved shares of Reliance Group, a giant New York–based insurance company headed by corporate raider Saul Steinberg, with whom Milken had a close relationship. Steinberg had announced a takeover bid for Reliance—meaning he would buy back all of its shares in the public stock market and turn it into a private corporation no longer subject to the same degree of SEC regulation. Hewitt thought there was a web of potential conflicts of interest and suspicious trading before and after the deal was announced. Steinberg was Milken’s client, and it looked as though Milken had acquired a big block of Reliance stock on Steinberg’s behalf. But Milken was also trading Reliance stock for his own account and for Drexel. Milken could potentially have been trading illegally on inside information about Steinberg’s takeover plans for Reliance. Then, too, there was a series of trades involving another intimate of Milken’s, Fred Carr, an insurance executive. It appeared unusual to Hewitt that one Carr subsidiary had sold Reliance stock to another Carr subsidiary, brokered in the middle by Milken. Hewitt also had questions about the prices of these trades. He wondered about the sales calls allegedly made by Milken’s brother, Lowell, a lawyer who was supposed to be concentrating on compliance with SEC rules and administrative matters, not selling bonds. It was all exceedingly complex, and it was hard for Hewitt to read the Drexel trading records and gain any clear understanding of what scheme, if any, had motivated the web of trades Milken had engineered. Milken didn’t operate like an ordinary stockbroker who took orders from customers, recommended attractive investments, and sold new issues of stocks and bonds. Instead, in his flurry of two hundred phone calls every day, Milken did it all at once—he was a middleman one minute, a principal the next; he was a broker; a buyer; a seller; an adviser; a deal maker. Hewitt thought the complexity of Milken’s Beverly Hills operation might hide a variety of secret, illegal schemes: tax evasion, insider trading, and evasion of a host of technical SEC regulations. What the schemes might have in common, Hewitt suspected, was the tight control over the trading of Reliance’s stocks and bonds that Milken exercised from his command post in Beverly Hills at the center of the Drexel trading floor.

  Milken said he had no idea what Hewitt was talking about.

  “Do you know what a wash trade is?” Hewitt asked, referring to bogus trades of stocks or bonds, designed to evade taxed or generate risk-free profits.

  “As it relates to tax purposes?” Milken asked.

  “No, as it relates to the securities laws.”

  “… I recall that term more in relation to tax transactions.”

  “All right. Do you have any understanding at all as it relates to the securities laws?”

  “I’m not familiar with that specific term as it relates to the securities laws.”

  “How about a match sale?”

  “I’m not familiar with that specific term.… I don’t use that in my terminology.”

  “What about a prearranged trade?”

  “I’ve heard that term before.”

  Now Hewitt was finally getting somewhere. Perhaps Milken was going to admit to setting up prearranged trades that violated securities laws even as they generated profits and served his clients. But when Hewitt asked him to explain, Milken instead went on to tell some vague story about placing orders on the floors of the New York financial exchanges and finding out later that the orders hadn’t been accepted because of “prearranged” trades by floor brokers. Whenever Hewitt pressed for specifics, Milken dodged. Milken’s claims of ignorance stretched Hewitt’s credulity. When Hewitt asked him about stock trading in accounts established for Milken’s children, Milken said he didn’t know who made investment decisions for the accounts. Hewitt also asked about the trading activities of Belvedere Securities, a Chicago brokerage in which Milken was the majority owner—it had been established to generate tax benefits by trading government bonds. Hewitt thought it was unusual that Drexel would let Milken have his own, separate brokerage firm that traded bonds in apparent competition with Drexel. Milken said he hardly knew anything about it.

  “I knew I had an investment in something called Belvedere,” he said. “I didn’t know what the last name was or what it was.… I believe my brother, Lowell Milken, came to me and suggested I make an investment in this entity.”

  Finally, with an air of desperation, Hewitt pulled out a list of Wall Street firms whose trades had shown up in the records he had examined back at SEC headquarters in Washington. He asked Milken if he had any business relationship with each of the firms.

  “Do you deal wi
th the Bear Stearns firm on a regular basis in your trading?”

  “No.”

  “… Any association with the Queen City Securities Corporation of Cincinnati in the trading in your department?”

  “No.”

  “How about the L. F. Rothschild firm?”

  “No.”

  “How about the firm titled Seemela, S-e-e-m-e-l-a, brokerage firm?”

  Milken paused. That was the firm run by Ivan F. Boesky, one of Wall Street’s most powerful and aggressive independent stock traders who specialized in shares of companies involved in corporate takeovers. Like Milken, Boesky was fast becoming a figure of national importance, and his trading in connection with takeover bids was rapidly changing the way Wall Street and the economy functioned. Hewitt didn’t know all that much about Boesky, and he didn’t notice that Milken had failed to answer his question about whether he had any relationship with Boesky’s brokerage firm. Without stopping, Hewitt plowed on with his list of Wall Street firms, provoking a new chorus of noes from Milken, followed by a sarcastic, contemptuous question:

  “Are these potential customers,” Milken asked, “that we should be taking their names down?”

  The interrogation wound slowly to a close. Hewitt knew that he faced months of work ahead, much of it mind-numbing reconstruction of the stock and bond trades about which he had questioned Milken, before he would be ready to present a memo to Fedders about the case. Milken remained something of an enigma to Hewitt. What stayed with Hewitt, after that weekend in Los Angeles, was that he had looked Milken in the eye, asked him simply what he did for a living, and yet Milken had given no answer, or at least none that was satisfactory to a man from Pittsburgh, where people knew what they did and what they made—sheets of steel for cars and girders for buildings and ball bearings for tanks. There had been something about Milken’s manner during the deposition, something about his arrogance and evasions that struck Hewitt as fiendish.