Milken, Michael - Junk Bond Inmate

Michael Milken

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An American business magnate, financier, and philanthropist born July 4, 1946, noted for his role in the development of the market for high-yield bonds (also called junk bonds) during the 1970s and 1980s, for his 1990 guilty plea to felony charges for violating US securities laws, and for his funding of medical research.

Milken was indicted on 98 counts of racketeering and securities fraud in 1989 as the result of an insider trading investigation. After a plea bargain, he pled guilty to six securities and reporting violations but was never convicted of racketeering or insider trading. Milken was sentenced to ten years in prison and permanently barred from the securities industry by the Securities and Exchange Commission. After the presiding judge reduced his sentence for cooperating with testimony against his former colleagues and good behavior, he was released after less than two years.

His critics cited him as the epitome of Wall Street greed during the 1980s, and nicknamed him the "Junk Bond King". Supporters, like George Gilder in his book,Telecosm, note that "Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken … and others took the vast sums trapped in old-line businesses and put them back into the markets."

Milken has also been engaged in philanthropic activities since the early 1980s. He is co-founder of the Milken Family Foundation, chairman of the Milken Institute, and founder of medical philanthropies funding research into melanoma, cancer and other life-threatening diseases. In a November 2004 cover article, Fortune magazine called him "The Man Who Changed Medicine" for his positive influence on medical research.

Milken's compensation, while head of the high-yield bond department at Drexel Burnham Lambert in the late 1980s, exceeded $1 billion in a four-year period, a new record for US income at that time. Drexel went bankrupt in 1990. With an estimated net worth of around $2 billion as of 2010, he is ranked by Forbes magazine as the 488th richest person in the world.Much of that wealth comes from his success as a bond trader; he only had four losing months in 17 years of trading.

High-yield bonds and leveraged buyouts

By the mid-1980s, Milken's network of high-yield bond buyers (notably Fred Carr's Executive Life Insurance Companyand Tom Spiegel's Columbia Savings & Loan) had reached a size which enabled him to raise large amounts of money very quickly. It was said, for example, that Milken raised $1 billion for MCI Communications, then an upstart provider of long-distance telephone services, in the space of one hour on the telephone. Cable TV companies, like John Malone'sTele-Communications Inc., were also favorite clients, as were Ted Turner's maverick Turner Broadcasting, cellphone pioneer Craig McCaw, and casino entrepreneur Steve Wynn. Before long, the CEOs and CFOs of many smaller and mid-sized companies previously limited to the slow and expensive private-placement market were making early-morning pilgrimages to Beverly Hills seeking to issue high-yield and/or convertible bonds through Drexel Burnham. Without question, many leading entrepreneurs of the 1980s owe their success at least partly to Milken's perception of this market opportunity. One of his favorite sayings: "There is no shortage of capital; there is only a shortage of management talent."

Milken was largely involved with kick-starting investments in Nevada, which for many years was the fastest-growing state in the U.S. Milken funded the gaming industry, newspapers and homebuilders; among the companies he financed were MGM Mirage, Mandalay Resorts, Harrah's Entertainment and Park Place.

This money-raising ability also facilitated the activities of leveraged buyout (LBO) firms such as Kohlberg Kravis Roberts and of so-called "greenmailers". Armed with a "highly confident letter" from Drexel (in which Drexel promised to get the necessary debt in time to fulfill the buyer's obligations), these firms and greenmailers were able to profit by merely threatening LBOs of large, blue-chip companies in which they had built up equity positions. Milken's task was perhaps made easier by the fact that the top-tier Wall Street investment banks were unwilling to compete with him for fear of jeopardizing their longstanding and lucrative relationships with many of the blue-chip companies who were potentially his targets, although companies such as Salomon Brothers,Morgan Stanley, and First Boston later entered the high-yield market. Drexel financed notable buyouts of companies previously thought invulnerable, including Beatrice Companies and the cosmetics firm Revlon.

Amongst his significant detractors have been Martin Fridson formerly of Merrill Lynch and author Ben Stein. Milken's high-yield "pioneer" status has proved dubious as studies show "original issue" high-yield issues were common during and after the Great Depression. Others such as Stanford Phelps, an early co-associate and rival at Drexel, have also contested his credit as pioneering the modern high-yield market. This is, however, quibbling, as Drexel was for all intents and purposes unchallenged as essentially the only underwriter and trader of high-yield bonds throughout almost the entire decade of the 1980s.

Despite his influence in the financial world (at least one source called him the most powerful American financier since J.P. Morgan), Milken was an intensely private man who shunned publicity. Citing the power behind the most aggressive firm on Wall Street, Drexel bankers often used "Michael says ..." to justify their tactics.

Later career

Milken and his brother Lowell founded Knowledge Universe in 1996, the parent company of KinderCare Learning Centers. He is currently chairman of the company.

Scandal

Dan Stone, a former Drexel executive, wrote in his book April Fools that Milken was under nearly-constant scrutiny from the Securities and Exchange Commission from 1979 onward due to unethical and sometimes illegal behavior in the high-yield department. His own role in such behavior has been much debated. Stone claims that Milken viewed the securities laws, rules and regulations with a degree of contempt, feeling they hindered the free flow of trade. However, Stone said that while Milken condoned questionable and illegal acts by his colleagues, Milken himself personally followed the rules. He often called Drexel's president and CEO, Fred Joseph—known for his strict view of the securities laws—with ethical questions.  On the other hand, several of the sources James B. Stewart used for Den of Thieves told him that Milken often tried to get a higher markup on trades than was permitted at the time.

Harvey A. Silverglate, a prominent defense attorney who represented Milken during the appellate process, disputes that view in his book Three Felonies a Day: “Milken’s biggest problem was that some of his most ingenious but entirely lawful maneuvers were viewed, by those who initially did not understand them, as felonious, precisely because they were novel – and often extremely profitable.”

Ivan Boesky and an intensifying investigation

The SEC inquiries never got beyond the investigation phase until 1986, when arbitrageur Ivan Boesky pled guilty to securities fraud as part of a larger insider trading investigation. As part of his plea, Boesky purported to implicate Milken in several illegal transactions, including insider trading, stock manipulation, fraud and stock parking (buying stocks for the benefit of another). This led to an SEC probe of Drexel, as well as a separate criminal probe by Rudy Giuliani, then United States Attorney for the Southern District of New York. Although both investigations were almost entirely focused on Milken's department, Milken refused to talk with Drexel (which launched its own internal investigation) except through his lawyers.

For two years, Drexel insisted that nothing illegal occurred, even when the SEC formally sued Drexel in 1988. Later that year, Giuliani began seriously considering an indictment of Drexel under the powerful Racketeer Influenced and Corrupt Organizations Act, which he had previously used against organized crime. Drexel management immediately began plea bargain talks, concluding that no financial institution could survive a RICO indictment. However, talks collapsed on December 19 when Giuliani made several demands that Drexel found too harsh, including one that Milken leave the firm if indicted.

Only a day later, however, Drexel lawyers discovered suspicious activity in one of the limited partnerships Milken set up to allow members of his department to make their own investments. That entity, MacPherson Partners, had acquired several warrants for the stock of Storer Broadcasting in 1985. At the time, Kohlberg Kravis Roberts was in the midst of a leveraged buyout of Storer, and Drexel was lead underwriter for the bonds being issued. One of Drexel's other clients bought several Storer warrants and sold them back to the high-yield bond department. The department in turn sold them to MacPherson. This partnership included Milken, other Drexel executives, and a few Drexel customers. However, it also included several managers of money funds who had worked with Milken in the past. It appeared that the money managers bought the warrants for themselves and didn't offer the same opportunity to the funds they managed.  Some of Milken's children also got warrants, according to Stewart, raising the appearance of Milken self-dealing.

However, the warrants to money managers were especially problematic. At the very least, Milken's actions were a serious breach of Drexel's internal regulations, and the money managers had breached their fiduciary duty to their clients. At worst, the warrants could have been construed as bribes to the money managers to influence decisions they made for their funds (and indeed, several money managers were eventually convicted on bribery charges). The discovery of MacPherson Partners—whose very existence had not been known to the public at the time—seriously eroded Milken's credibility with the board. On December 21, 1988, Drexel pleaded nolo contendere to six counts of stock parking and stock manipulation, and agreed that Milken had to leave the firm if indicted.

Indictment and sentencing

In March 1989, a federal grand jury indicted Milken on 98 counts of racketeering and fraud. The indictment accused Milken of a litany of misconduct, including insider trading, stock parking (concealing the real owner of a stock), tax evasion and numerous instances of repayment of illicit profits. The most intriguing charge was that Boesky paid Drexel $5.3 million in 1986 for Milken's share of profits from illegal trading. This payment was represented as a consulting fee to Drexel. Shortly afterward, Milken resigned from Drexel and formed his own firm, International Capital Access Group.

This was one of the first times RICO was used against an individual with no ties to organized crime. Milken originally planned to fight the charges against him, even though he risked spending the rest of his life in prison if convicted. He hired one of Ronald Reagan's former campaign aides, Linda Goodson Robinson (the wife of American Express president James Robinson) to launch a public relations campaign prior to the trial. Milken and other Drexel figures hired Edward Bennett Williams as their attorney. Williams was well known for representing Watergate figures as well as major Mafia figures including Frank Costello. After Williams died of cancer, Milken's handlers hired various other attorneys and his case became more difficult.

On April 24, 1990, Milken pleaded guilty to six counts of securities and tax violations.  Three of them involved dealings with Ivan Boesky to conceal the real owner of a stock.

§ Aiding and abetting another person's failure to file an accurate13d statement with the SEC, since the schedule was not amended to reflect an understanding that any loss would be made up.

§ Sending confirmation slips through the mail that failed to disclose that a commission was included in the price.

§ Aiding and abetting another in filing inaccurate broker-dealer reports with the SEC.

Two other counts were related to tax evasion in transactions Milken carried out for a client of the firm, David Solomon, a fund manager.^[11]

§ Selling stock without disclosure of an understanding that the purchaser would not lose money.

§ Agreeing to sell securities to a customer and to buy those securities back at a real loss to the customer, but with an understanding that he would try to find a future profitable transaction to make up for any losses.

The last count was for conspiracy to commit these five violations.

The estimated injury for all counts combined was, by the judge's account, $318,000 and by the U.S. Probation Office's account $685,000.

As part of his plea, Milken agreed to pay $200 million in fines. At the same time, he agreed to a settlement with the SEC in which he paid $400 million to investors who had been hurt by his actions. He also accepted a lifetime ban from any involvement in the securities industry. In a related civil lawsuit against Drexel he agreed to pay $500 million to Drexel's investors.  In total this means that he paid $1.1 billion for all lawsuits related to his actions while working at Drexel.

Critics of the government charge that the government indicted Milken's brother Lowell in order to put pressure on Milken to settle, a tactic condemned as unethical by some legal scholars. "I am troubled by - and other scholars are troubled by - the notion of putting relatives on the bargaining table," said Vivian Berger, a professor at Columbia University Law School, in a 1990 interview with the New York Times.  As part of the deal, the case against Lowell was dropped. Federal investigators also questioned some of Milken's relatives—including his aging grandfather—about their investments.

At Milken's sentencing, Judge Kimba Wood told him:

You were willing to commit only crimes that were unlikely to be detected.... When a man of your power in the financial world... repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself... a significant prison term is required.

Milken's sentence was later reduced to two years from ten; he served 22 months.