FINANCIAL
Judging Milken's Crimes; Will Sentencing Send Signal to Wall Street?
Robert J. McCartney
Washington Post Staff Writer
1,769 words
11 November 1990
The Washington Post
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FINAL
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English
(Copyright 1990)
His harshest critics say Michael Milken presided over an orgy of
financial excess in the 1980s that has crippled the U.S. economy-but
that isn't what he'll be punished for.
Instead, at the end of this week or early next week, U.S.
District Judge Kimba Wood will sentence Milken only for the six
stock-market crimes that Milken admits having committed several years
ago when he was the world's most powerful financier.
Nevertheless, Milken's punishment inevitably will be remembered
as a judgment on much more than the individual instances of
securities fraud and tax and regulatory offenses for which he faces
up to 28 years in jail. The severity of the sentence will color the
legacy of the man who is destined to go into the books as the "junk
bond king" for creating, virtually single-handedly, a $200 billion
market for the lucrative but risky securities.
Wood's decision will be an early milestone in the nation's
ongoing appraisal of an entire era, for Milken was at the cutting
edge of both the glories and debacles of one of the most vibrant
periods in American financial history. And while Wood will sentence
Milken as an individual rather than as a symbol of 1980s' greed, her
judgment will be scrutinized as a fresh signal of how the United
States views "crime in the suites."
Harry First, a New York University law professor and author of a
book on business crime, said Milken has drawn so much publicity that
an extreme sentence-whether harsh or lenient-would have "a flashbulb
effect" in focusing attention on the courts' handling of financial
crime.
"Suppose he got community service. This would go down as a case
of, `See, that's how they treat white-collar criminals, but the poor
kids go to jail,' " First said. "On the other hand, if he got 15
years, I think people would say, `Well, we've gone a little off the
deep end on this.' "
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Donald P. Jacobs, dean of the J.L. Kellogg Graduate School of
Management at Northwestern University, said he felt that Milken
deserved prison time for the damage that he had caused society, even
though he hadn't done anyone any physical harm.
"If you start to look at what happened, socially, probably he
was a very destructive human being," said Jacobs. "He developed a
market that created some good, but mostly bad. The legacy that he's
going to leave us is a lot of companies that are heavily in debt.
Some will survive, but many won't."
Dauntingly Complex
Judge Wood, 46, who is making a historic judicial decision
after less than 2 1/2 years on the federal bench, is pondering an
unusually daunting case.
First, it involves unprecedented sums of money that must be
weighed, somehow, in any reckoning of the good and bad for which
Milken is responsible.
Milken, 44, is estimated to have donated about $350 million of
his personal fortune to charity over the years, and the defense has
argued that his philanthropy should help win him a lenient sentence.
On the other hand, Milken agreed at the time of his plea bargain to
pay $600 million-a $200 million fine and $400 million to repay
victims of his swindles-in what is a record legal penalty for an
individual. Wood has said she will not view the payment as an
indication of the financial damage done by the crimes, but some
experts say the penalty's size could influence her judgment.
In addition, while a judge cannot consider how much money Milken
has left, the public certainly will look to see whether, in the end,
"crime paid." Even after paying his legal penalty, Milken is
estimated to have about $700 million left, according to last month's
annual ranking of the nation's rich by Forbes magazine. On the other
hand, some experts say that Milken's remaining fortune could be wiped
out in the future by civil suits to be brought by people who lost
money because of his illegal activities.
Second, Wood has never heard a word of testimony about the six
felonies to which Milken confessed last April and for which she must
sentence Milken. There was no trial on those charges because Milken
agreed to plead guilty, under heavy pressure from the government,
after months of intense bargaining.
The testimony that she did hear, in an unusual sentencing
hearing last month, came from witnesses who discussed in detail a
bundle of crimes that the prosecution claims Milken had committed in
addition to the ones that he has admitted. It may seem unfair to the
layman to present evidence against Milken on charges that the
government had agreed to drop when Milken copped a plea, and, indeed,
the practice is controversial even within the legal community. But
it is perfectly appropriate under the law for the government to try
to persuade the judge that Milken deserves a heavy sentence-within
the 28-year maximum-because he was suspected of having done far worse
than he had admitted.
A third element adding to the complexity of the case is an
ironic twist: Many observers believe that the sentencing hearing last
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month may have helped the defense more than the prosecution.
In the proceedings, the government presented its evidence that
Milken had engaged in much more serious and venal crimes-insider
trading, bribery, stock price manipulation and obstruction of
justice-than the ones that he had admitted. But several lawyers and
law professors said that the evidence seemed too shaky to justify the
government's sweeping claim that Milken was the worst white-collar
criminal of the 1980s.
For instance, in trying to prove that Milken had engaged in
insider trading in the stock of Caesars World Inc. in 1983, the
prosecution produced little beyond the evidence that already had been
judged insufficient to warrant action by the Securities and Exchange
Commission in a previous inquiry in 1985.
In another transaction, involving a manipulation of Wickes Cos.
stock, there was substantial circumstantial evidence of Milken's
involvement. But the prosecution's principal witness-who was granted
immunity despite having confessed that he had lied under oath many
times in the past-had a suspiciously hazy memory about everything
except damaging details of Milken's behavior that the prosecution
wanted to elicit.
"The government scored some points, but came across as having
overstated what it was actually able to prove," said lawyer Jed S.
Rakoff, who has worked on both sides of securities fraud cases, once
as a prosecutor and now as a defense attorney in New York.
On the other hand, Milken may have suffered at the hearing from
testimony that certain kinds of securities crimes were routine at
Milken's command post in the Beverly Hills, Calif., trading room of
Drexel Burnham Lambert Inc. Witnesses indicated that "parking" of
securities, or the concealing of ownership, and manipulation of
records to conceal illicit payments were standard practice in the
go-go atmosphere at Drexel, which collapsed in February under the
burden of junk bond losses.
Tarnished Image
Moreover, Milken's image certainly was tarnished by accounts at
last month's hearings of his suspicious behavior in November 1986,
immediately after he learned that the nation's most influential stock
speculator, Ivan F. Boesky, was cooperating with a federal
investigation into wrongdoing on Wall Street.
Clearly panicked by the prospect that Boesky would finger him-as
Boesky indeed did-Milken spoke to a colleague in the men's room at
the Beverly Hills office with the faucets running to stymie any
government listening devices, the Drexel colleague testified.
Another co-worker testified that Milken scribbled notes on a legal
pad for another colleague rather than risk being overheard by bugs.
"The common sense approach is that people who think they are
doing things that are lawful don't behave this way," law professor
First said.
Milken's defenders argue that federal prosecutors in the
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mid-1980s changed the ground rules for white-collar crimes without
giving fair warning. In this view, Milken was prosecuted for
activities that, while unquestionably illegal, had come to be rather
common practices on Wall Street. If caught, one could have expected
at the time at most a fine or loss of one's securities trading
license-but certainly never a jail sentence.
These Milken supporters argue that former U.S. District Attorney
Rudolph Giuliani, who launched the investigation that ultimately
targeted Milken, went after tycoon crimes because he thirsted for
publicity to mount what became a losing campaign to be elected mayor
of New York.
"I'm not sure it was necessarily fair to single out Drexel. A
lot of things that came out in the {Milken case} hearings were
occurring throughout the Street, not just at Drexel," said C. Keith
Hartley, who worked for 17 years at Drexel and was a managing
director in corporate finance when he resigned in June 1989.
But other experts contend that Drexel relied on illicit dealing
far more than other securities firms and that the junk bond market
was built in part on crooked activities. Management school dean
Jacobs said that junk bonds clearly had a role to play in the
financial markets, but that Milken used artificial methods to build
the market to where it was "substantially larger"-and therefore
riskier-than it should have been.
"Excesses were created because he found purchasers who really
shouldn't have been purchasers, like the savings and loans, who were
playing games with the government's money. ... These were
gimmicks," Jacobs said.
Even Milken's former Drexel colleague Hartley said the firm got
involved in excessively risky deals because Milken was obsessed with
dominating the junk bond market he had created. "I think Mike just
didn't want somebody else to gain a foothold in his marketplace," he
said.
Interestingly, if Milken had committed his crimes just a few
years later, Wood would have much less flexibility in fixing the
sentence. Under federal sentencing guidelines that have been phased
in gradually since 1987, she would have been limited to setting a
prison sentence in a range of 2 to 4 1/2 years, with a maximum of
15 percent off for good behavior, according to lawyers familiar with
the case.
PHOTO,,Reuter;PHOTO,,Ap
Caption: Michael Milken faces up to 28 years in prison.
Caption: Milken, shown with his wife, Lori, is estimated to be worth
about $700 million.
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