The salesmen and traders who worked closely with Milken, kids who became instant millionaires by their proximity to him, alternated between feelings of awe at their success and impulses of greed over what they did not yet have. Though they all earned tremendous sums, some of the most successful traders and salesmen became obsessed by how much their colleagues made, and there was widespread disgruntlement on the trading floor over the way Milken managed the employee-trading partnerships he organized—there was a feeling that while Milken doled out $1 million monthly paychecks, that wasn’t enough, because his iron control of the private-trading accounts cheated them all of millions more. Perspectives about money and value and purpose had been distorted by the sheer scale of the operation in Milken’s building that 1985, as if the junk bond department had been constructed in some new dimension where all the numbers automatically had extra zeros attached.
Irving Einhorn walked to work at the SEC. Milken was chauffeured to his office from his comfortable Encino home in a Mercedes Benz limousine. His traders and salesmen, almost all of them young white males, arrived in the modern equivalent of golden chariots. In the Drexel building, they traded bonds and talked about luxury sports cars with the enthusiasm of boys at a birthday party. Had an SEC investigator wandered through the parking lot at 9560, he would at one time or another have seen about thirty Porsches; a Testarossa; the BMW 750i that belonged to thirty-one-year-old top salesman Jim Dahl; the chauffeured Rolls-Royce in which Warren Trepp, the chief bond trader, commuted daily; the Mercedes 56osec belonging to salesman Roy Johnson; the Mercedes 56osec owned by assistant trader Lorraine Spurge; the Lotus Turbo Esprit belonging to salesman Terren Peizer, then about twenty-six years old; the Ferrari 328 driven by salesman Karl Deremer; the 700 series BMW driven by deal man Peter Ackerman; the pair of Jaguar XJ-S’s owned by bond specialist Bill Tobey and takeover maven Josh Friedman; and either a Cadillac or a Corvette convertible driven by Bill Frymer, depending on his mood that day. More than a hundred of them belonged to a service called the Ultimate Motor Car Concept—for $1,000 a year per auto, the cars were washed and waxed regularly right in the Drexel parking lot, while their owners sat upstairs working the telephones, selling and selling and selling Milken’s bonds.
There were two important rules: show up to work by 5:30 A.M., and make money. Registered brokerage and investment firms such as Drexel were expected to comply with a host of SEC rules governing trading practices, dealings with customers, capital rules, and other matters. But there was little emphasis on compliance with SEC rules in the Beverly Hills office, no formal orientation for new employees, no instructions about what practices in the bond and stock markets were legal and what were not. Milken was the boss, but beyond that there were no clear lines of authority, and in any event, what Milken wanted was work and profit. “I would say there is no second in command,” Milken told Einhorn’s investigators. “You could say on some days there’s a hundred seventy people that are second in command, and other days, you know, there’s ten. It depends on what’s happening, what the situation is. People have responsibilities rather than a formal organizational chart.”
Milken’s people were expected to remain in the office until mid-or late afternoon, unless they were out visiting a client. On Saturday morning, there sometimes was a mandatory 6:00 A.M. junk-bond-department staff meeting, which was well attended. If a major deal was under way, it was expected that nobody would check their watches even if it meant working around the clock. At about 11:00 A.M. each morning, lunch was wheeled onto the trading floor so that work would be interrupted for the least possible time. Assistants were assigned to each of the salesmen and traders to take care of distracting, time-consuming personal business ranging from paying home electric bills to getting their precious cars repaired. The sometimes uncomfortable truth was that by 1985, the junk bond department at Drexel had become a kind of cult, revolving around loyalty to Milken and intense devotion to work. Turnover was very low, for Milken’s salesmen and traders, many of whom had never sold or dealt a bond in their lives before he hired and trained them, could not have earned comparable salaries at any other firm on Wall Street.
Family, as a metaphor and in blood ties, was invoked to build loyalty. There was Mike’s brother, Lowell Milken, who spent much of his time in an office off the trading floor, investing the Milkens’ family money. There was Mike’s brother-in-law, former dentist Alan Flans, a man who was said to take occasional naps in his car while others covered his junk-bond-sales accounts. One of the games the traders in the Drexel office liked to play was to “wake up Flans” by calling him on his car phone. He drove a Ford Thunderbird and had the curious habit some days of taking large amounts of food off the bond trading floor at midmorning, when the cold cuts arrived. Then Flans would head home and enjoy a hearty lunch with his own family, something it was felt Milken would not have allowed others to do. Even Milken’s tenants at 9560 Wilshire had close ties; in addition to Drexel, there were clients, accountants, and lawyers close to the junk bond visionary who rented space.
Though controlled in public, on the trading floor Milken could be a screamer, a frantic obsessive. He sat at the center of a giant X-shaped desk, directly across from his blond protégé, Jim Dahl, juggling telephones and shouting the results of his trades to nearby aides. He handled call after call like a blindfolded man on a circus high-wire. “I sometimes don’t even listen on the phone to people that are talking to me,” he explained to the SEC during his day-long interrogation at the L.A. regional office a few miles east on Wilshire. “So, all I’ve got is the guy’s name and his phone number. I don’t even remember what company he was from, or what he wanted to do.… I might do as much as five hundred trades in one day. The normal procedure is, I turn around and in a loud voice, scream the trade I’ve done to any one of three to five people sitting behind me.”
To the degree they thought about the Securities and Exchange Commission at all, Milken’s top employees considered the chief regulatory agency responsible for oversight of their work to be a joke, a nuisance that cropped up from time to time and was easily dismissed. There was no panic when SEC subpoenas or requests for testimony arrived. Later, some of those who glided down to Einhorn’s office for interrogations would say that they knew of widespread securities law violations and systematic corruption inside Milken’s building, but none of them worried in 1985 that the commission would find out. Testimony was regarded as a necessity best handled as expediently as possible. At the time, nobody close to Milken believed the commission could touch him, although some said later that they worried in 1985 that practices on the junk bond trading floor were spinning dangerously out of control.
In addition to the pioneering, legal sales tactics the persuasive Milken used to peddle junk bonds, there were flagrant violations of the law that served Milken and his customers well. The violations gave the junk bond department a critical edge, enabling it to produce extraordinary profits and to build unusual loyalty from results-oriented customers who recognized that Drexel could perform feats of financial magic for them that other firms could not. Ivan Boesky was just such a customer, a trader of takeover stocks who often sought to avoid detection of his illegal activities and needed an accommodating broker on the other end of the phone to help him hide stock positions, rig takeovers, and purchase more shares than he had the money to buy. Milken obliged, personally approving of Drexel’s purchase of millions of dollars of shares from Boesky with the oral understanding that Boesky would buy them back later and reimburse Drexel for any losses. That sort of “stock parking” scheme, which Einhorn and his SEC investigators knew nothing about and which was reflected in a secret set of records that a Milken employee maintained, allowed Boesky to continue loading up on the stocks of takeover targets even after he exceeded legal limits on borrowing to finance those purchases.
Boesky wasn’t the only customer for whom Milken and his traders were willing to break the rules. When the casino company Golden Nugget, controlled by one of M
ilken’s loyal clients and friends Steve Wynn, wanted to sell a big block of MCA entertainment company stock for the highest possible price, Wynn turned to Milken, who did not disappoint him. A traditional broker might have sought bids for the stock from other Wall Street houses, a move which could have depressed the value of the shares by signaling that a large amount of MCA stock was for sale. Even if it meant breaking the law, Milken wanted to attain the highest possible price and keep Golden Nugget’s identity as a seller a secret, so he called upon his increasingly convenient relationship with Boesky. Milken arranged for Boesky to purchase the MCA stock in a series of trades that disguised what was going on by secretly promising that if Boesky bought the shares up front for a high price, Milken would reimburse him later for any losses, after Boesky had sold the shares into the marketplace over time to unwitting investors who ran the risk of seeing their holdings plummet after it became known that Golden Nugget had sold its MCA shares. Rather than depressing the MCA stock price, the illusion created by the sale of the shares to Boesky was one of additional demand for the stock.
Then, too, there was the loyalty Milken commanded from money managers at insurance companies, savings and loans, and mutual funds around the country who bought billions of dollars of his new junk bonds every year. Other Wall Street firms found it difficult to break into the junk market, and one reason was that Milken did illegal personal financial favors for some of the money managers. For one of his best clients, David Solomon of Solomon Asset Management Company Inc., Milken made it especially appealing: While Solomon bought Milken’s junk bonds with the client funds that he managed, Milken helped Solomon cheat on his personal income taxes by engaging in a series of sham trades that generated paper losses that reduced Solomon’s tax bill. Milken told Solomon he would arrange a series of transactions so that Solomon would suffer no real financial losses in the scheme. To conceal the true nature of the trades and to avoid detection of the fraud, Milken carefully and purposefully used seldom-traded securities so that he could set the prices where he wanted them in order to help Solomon lower his personal tax bill. While some of the Drexel employees who sat on the trading floor near Milken were aware of the Solomon trades and other violations of the law committed in the name of client service and Drexel profits, nobody down the road in Einhorn’s SEC office had a clue. They either didn’t ask the right people the right questions, or, when they did, Milken and the others dodged them, just as Milken had done when Hewitt had asked him a few years earlier about his trading with the Boesky firm. That the SEC investigators lacked the creativity and tenacity of their rivals only added to the impression on the Drexel trading floor that government investigators were easily brushed off.
The Drexel traders were not alone in their lack of respect for the commission’s investigators, and it was widely believed in the enforcement division that people frequently lied to the SEC. One favorite during the 1980s was the “airplane defense.” Time after time, when SEC attorneys asked people who had traded in a stock in advance of the announcement of a takeover bid how they had learned about it, they said they overheard people talking about the stock on an airplane. While it is illegal to trade on inside information about a corporate takeover bid, it is legal to trade on information about a stock that one randomly overhears on an airplane flight. Even when the SEC did file insider trading cases, as it did against several people who traded in the stock of RCA Corporation just before the company was acquired by General Electric, commission investigators were able to make cases against only a fraction of those they suspected had broken the law.
The public had little indication that SEC officials felt many people were getting away with insider trading. Agency officials hailed the RCA case as a triumph for the SEC’s enforcement program, and as an important vindication of Jack Shad’s policies, including the ability to detect illegal trading through Swiss banks. Inside the commission’s enforcement division though, RCA was a reminder that Shad’s much ballyhooed campaign against insider trading often was ineffective, even when it gave the public appearance of succeeding. There were scores of people who traded RCA shares that the commission just couldn’t mount cases against. One man who worked in Manhattan’s garment district and purchased 10,000 shares just before the takeover was announced said he had been in a croissant shop in New York a few days before he made his purchases and heard two men discussing something in hushed tones. He said that they repeatedly mentioned RCA and that they sounded like they “had just found something.” After discussing what he had heard with his son, the father and son purchased RCA shares through a relative who was a stockbroker at E. F. Hutton. When SEC investigators heard the tale, they found it laughable. Of course, the man may well have been telling the truth, and certainly no one at the SEC could prove otherwise. But his “croissant defense” sounded like so many others the enforcement attorneys heard.
Many of the people the SEC suspected of trading RCA stock with inside information also traded suspiciously in other takeover stocks, according to a confidential 1985 SEC memo. “It appears that certain members of this group received information about not only RCA but about General Foods, Union Carbide, and WCI (Warner Communications), and that there may be a common link to all or some of these companies,” the memo said. “We do not have any direct evidence that any of these individuals possessed and/or traded on material, nonpublic information relating to RCA, but the trading activity, superficially weak stories, and assertions of the 5th Amendment suggest that certain of the above-described individuals may have traded in RCA securities while in possession of material nonpublic information.” But after a series of depositions with witnesses around the country, the RCA case was dropped; those on the fringes traded safely beyond the SEC’s reach. Although in theory if someone had lied to the commission they could be prosecuted criminally for perjury, the risk seemed small since the SEC had difficulty getting criminal prosecutors interested in bringing such cases.
To those investors and traders large and small who escaped SEC prosecution, Shad’s commission seemed weak. In the Drexel case, the SEC failed to inspect scrupulously the junk bond operation; other enforcement investigations also seemed flaccid to some Drexel salesmen who later said they were aware of corruption. Jim Dahl, Milken’s protégé who later became a government witness against him, testified twice before the SEC during the mid-1980s, each time at the L.A. regional office on Wilshire, each time without any concern that the commission’s investigation would lead to serious trouble. One of the cases involved the accumulation of stock in an entertainment company by Centrust Savings, a Florida savings and loan built almost entirely on a portfolio of junk bonds. Einhorn’s staff wondered whether stock bought by Drexel for its own account at the same time that its client Centrust was accumulating the entertainment concern’s shares had been intended for use in forcing a takeover—if so, Drexel might have violated SEC disclosure rules. But Dahl denied that there was any such intent, and the investigation petered out.
In 1985, when he was questioned about legal matters by the commission, Milken was his usual confident self. “Common sense is that you don’t operate on inside information, period,” he declared bluntly one Saturday afternoon early in 1985, when it was his turn to visit with Einhorn’s staff and answer questions about “LA-441,” as the Caesars World investigation was captioned.
Later, salesman Dahl and Terren Peizer would tell federal prosecutors in New York that Milken routinely acted on the basis of inside information about the deals he engineered—indeed, so convoluted was the web of corporate, personal, and client accounts that Milken controlled that it was difficult to imagine how he could avoid such a transgression. But at that Saturday’s interrogation in the midst of Einhorn’s investigation, Milken repeated the same blunt, sometimes contemptuous, denials he had made to Hewitt more than two years before: He was too busy to remember many specifics, but he never violated the federal securities laws. What else did the SEC want to know?
Not much, as it turned out. The handful
of staff lawyers assigned by Einhorn to handle the Caesars investigation tried to assemble a case the commission could bring to court, but after Milken denied during his interrogation that he knew of anything improper about the bond trades, they were stymied. To a degree, because market manipulation and insider trading were crimes that depended on the perpetrator’s motives, his state of mind, Einhorn’s team was frustrated by the same problem that plagued the campaigns against insider trading run by Fedders and Lynch in Washington: Without a cooperating witness, the evidence was strictly circumstantial. That legitimate problem, however, didn’t completely explain the failure of the L.A. staff to conduct on-site inspections of the Beverly Hills office or concoct creative approaches to investigation of Milken’s systematic use of junk bonds, loyal clients, and personal and corporate trading accounts to shape and even determine the outcome of billion-dollar hostile takeovers.
In some respects, Einhorn and his troops failed to grasp the broader significance of what Milken did inside his building just a few miles away. That spring of 1985, for example, while Einhorn’s staff was putting time and effort into the Caesars bond-trading investigation, Milken, Drexel, and Ivan Boesky engineered an unsolicited takeover of giant Phillips Petroleum that, on its face, raised questions about insider trading, conflict-of-interest, and market manipulation. Yet while Milken spent an entire Saturday in Einhorn’s office being interrogated about his bond trades, remarkably he wasn’t asked a single question about the Phillips deal, which was making headlines each day around the country.
Frustrated and worried that his staff couldn’t break through the secrecy shrouding Milken’s dealings in Caesars bonds, Einhorn finally called a meeting in his office. He and his senior staff sat around the conference table that doubled as a desk.
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