BUSINESS

THE WAGES OF GREED

A DETERMINED JUDGE SENTENCES JUNK BOND KING MICHAEL MILKEN TO A 10-YEAR PRISON TERM

TOM FENNELL December 3 1990
BUSINESS

THE WAGES OF GREED

A DETERMINED JUDGE SENTENCES JUNK BOND KING MICHAEL MILKEN TO A 10-YEAR PRISON TERM

TOM FENNELL December 3 1990

THE WAGES OF GREED

BUSINESS

A DETERMINED JUDGE SENTENCES JUNK BOND KING MICHAEL MILKEN TO A 10-YEAR PRISON TERM

The large crowd gathered outside the New York City Federal Court house was a clear indication that the proceedings inside would be controversial. Standing in the dock was a boyishly handsome convicted criminal whose name just a few years ago was synonymous with daring, wealth and corporate success. But as he awaited sentencing last week, Michael Milken’s name was more closely associated with a much less popular attribute—greed. More than any other individual, the 44-y'ear-old Milken was responsible for igniting the debt-charged economic boom of the 1980s. His creative use of highrisk, high-interest securities—which he named “junk bonds”—helped hundreds of U.S. companies to finance expansions and takeovers. But a 4V2-year investigation by the U.S. Securities and Exchange Commission (SEC) concluded that Milken had manipulated stock prices, concealed the ownership of securities and committed a raft of other crimes. And last week, ignoring his tears and pleas for leniency, federal district Judge Kimba Wood ordered him to serve 10 years in prison.

Milken gave every indication of recognizing the magnitude of his crimes. He declared: “What I did violated not just the law, but all of my principles and values, and I will regret it for the rest of my life. I am truly sorry.” The 200 spectators, many of them Milken’s relatives and friends, who packed Wood’s courtroom seemed stunned by the decision. And some of those in the crowd outside complained that the sentence was excessive. Said Martin Klein, a New York lawyer and close friend of Milken’s: “This is clearly way out of proportion to the crime.” Standing nearby, Ira Lee Sorkin, a former prosecutor, offered a different view. Declared Sorkin: “This sends a very clear message to Wall Street that this sort of systematic abuse will be dealt with very harshly.”

Throughout North America, many corporate executives said that Milken had been made a scapegoat for corruption on Wall Street. Roger Stone, chairman of Chicagobased Stone Container Corp., which used many of Milken’s revolutionary financing schemes in the 1980s, was among many who applauded Milken’s achievements as one of the world’s most influential financiers. Said Stone:

“Because of his creativity and ability to make things happen, society benefited as a whole.”

But other analysts said that Milken’s sentencing marked the end of an era of unprecedented greed. Said economist John Kenneth Galbraith:

“This will send a chill through Wall Street. A lot of people will probably be staying up nights wondering if they are

next.” Indeed, Wood said that she would consider reducing Milken’s sentence—if he turned over information that helps to uncover other violations of securities regulations.

To a large extent, the SEC investigation focused on Drexel Burnham Lambert Inc.—the now-bankrupt Wall Street investment firm that employed the Los Angelesbased Milken as head of its high-yield bond division. In 1986, SEC investigators charged Drexel’s managing director, Dennis Levine, with insider trading in a case also involving Ivan Boesky, a New York stock speculator. Levine was subsequently sentenced to two years in jail. Boesky, meanwhile, paid i. $139 million in fines and pen§ alties, and was sentenced to 5 three years in jail—a sen-

tence that would likely have been more severe if he had not agreed to provide damaging evidence about other stock traders, including Milken. Boesky, who served two years in prison, is now trying to re-establish himself as an investment dealer on Wall Street.

While Milken made millions of dollars legitimately selling junk bonds, he also admitted to breaking the law several times. In April, he pleaded guilty to obstructing justice, manipulating stock prices, paying bribes to investment managers and misusing pension fund money. In

one instance, Milken overcharged a large investment fund so that he could compensate Drexel brokers who sold shares in the fund. In another case, Milken admitted to manipulating share prices to enrich Drexel, and to bribing fund managers to buy junk bonds from Drexel.

Last spring, Milken paid a record $700million fine. But Wood postponed her decision on a prison term until she had received a presentence report that, among other things, described how Milken had overseen the destruction of evidence. In his defence, Milken’s lawyers argued that their client was a distracted genius whose crimes were an unintentional result of his overzealous approach to business. But Wood brushed aside their arguments, saying that Milken’s repeated violations of securities laws demanded “serious punishment.”

There was little in Milken’s background to suggest that he would become one of Wall Street’s most notorious figures. As a child in a middle-class Los Angeles neighborhood, he showed a remarkable aptitude for mathematics. At 10, he was helping his father, an accountant, prepare income tax returns.

As a business student at the University of

California at Berkeley in the mid-1960s, Milken studied the use of high-risk, high-yield bonds—then known as “fallen angels.” At the time, most of those securities were issued by companies that had financial problems and could not raise money from banks or other conventional lenders. Milken concluded that although high-yield bonds had a higher default rate than normal securities, they often proved to be better overall investments than blue-chip bonds because their purchase price was so low.

Milken put his ideas to work after joining Drexel in 1970. By 1984, he was earning nearly $300 million a year. In the financial world, his achievements were legendary. He usually arrived at his office carrying two large sacks of documents. Sitting behind an X-shaped desk, he would ask visiting executives to describe their corporate dreams. He then showed them how to transform those visions into reality—usually by convincing investors, including conservative pension funds and insurance companies, to buy high-interest bonds issued by his clients. As well as helping companies expand, Milken’s bond-financing schemes also helped corporate raiders without many assets take over huge companies.

Relatively few junk bonds have ever been issued in Canada. Between 1986 and 1988, Toronto-based developer Robert Campeau sold $2.7 billion in junk bonds, primarily to U.S. investors, to help finance his purchase of two giant U.S. retail chains, Allied Stores Corp. and Federated Department Stores Inc., for $13 billion. But Campeau’s empire collapsed earlier this year when he could not make full interest payments on the almost $10 billion in debts that he ran up to finance the deal. Last January, when Campeau went into bankruptcy, his junk bonds, with a face value of $1,000, were trading for $110. Since then, the market for junk bonds has virtually dried up.

Roger Stone was among those executives who began to do business with Milken in the early 1980s. Stone recalled that at first he could not fully understand Milken’s complicated bond proposals, but that he was captivated by his drive and determination. He added that Milken’s main achievement lay in expanding the use of high-risk bonds by convincing large institutional investors to buy them. That allowed firms like Stone’s, which undertook riskier investments, to raise money and expand.

Whether those bonds were safe investments may soon be resolved in court. Nearly $30 billion in civil suits, many of them alleging fraud, have been filed against Drexel. Federal officials also say that Drexel’s illegal acts led to the failure of 48 small banks that had junk-bond holdings. But because Drexel has few remaining assets, many lawyers say that they will likely sue Milken, who some analysts claim is still worth $1 billion. If that happens, he will be forced to defend the business practices that have been his stock-in-trade since university— and that have made him one of North America’s most notorious financiers.

TOM FENNELL

LARRY BLACK

in New York