If clarity is an object of justice, then the prosecution of Michael R. Milken has been a big disappointment so far. Indicted on 98 felony counts, Milken pleaded guilty last year to six of the least weighty charges. Because the criminal case against him never went to trial, most of the evidence remains off limits in grand jury proceedings. Milken went to prison in early March, leaving behind a massive amount of uncertainty about the extent of his wrongdoing.
The measure of the remaining gap between proven fact and persistent suspicion can be taken by two vastly disparate numbers: The judge who sentenced Milken estimated that the crimes to which he admitted cost their victims $318,082. The second figure, $12 billion, is what the Federal Deposit Insurance Corp. and the Resolution Trust Corp. claim Milken and his former cohorts at Drexel Burnham Lambert Inc. owe in damages for having "deliberately and systematically" plundered the savings and loan industry. (The FDIC also is seeking $6.8 billion from Drexel, which is being reorganized in bankruptcy court.)
According to the terms of Milken's plea bargain, he cannot be hit with additional criminal penalties. He remains, however, subject without limit to civil suits and now faces dozens of them seeking billions of dollars in damages. Although Round Two of Milken's inquisition is just beginning, the odds are surprisingly good that, unlike Round One, it will culminate in the clarifying rite of a jury trial. At a minimum, a legal battle royal looms.
'LINE IN THE SAND.' By far the most important of the civil suits against Milken is the FDIC-RTC action, which alleges pervasive securities fraud. Its charges were first aired last November in the form of a claim in Drexel's bankruptcy proceedings. A month later, Columbia Savings & Loan Assn. leveled almost identical accusations at Milken in a California suit asking $6 billion in damages. In what amounts to an East Coast version of Columbia's suit, the FDIC-RTC in January sued Milken and 21 of his former junk-bond colleagues for $6 billion in federal court in New York. All three actions are pending, although Columbia since has failed and is under RTC supervision.
As lawyers at Paul, Weiss, Rifkind, Wharton & Garrison prepare to respond to the FDIC-RTC complaint by an Apr. 1 deadline, the Milken camp rings with vows of a legal fight to the finish. "Mike Milken is not going to pay for things he did not do, and he did not destroy the S&L industry," proclaims one Milken adviser. "We're drawing a line in the sand right here. This suit will not end without a very, very tough fight."
In contrast to the government's criminal indictment, which was largely derived from transactions involving Ivan F. Boesky, the civil litigation focuses on Drexel's far more extensive dealings with 44 failed S&Ls that bought more than $28 billion in junk bonds through the firm. The civil actions differ also in emphasizing the only surviving part of Milken's ruined junk-bond empire: a subterranean labyrinth of partnerships presumed still to hold substantial assets. The FDIC-RTC suit names 415 of them as defendants.
The FDIC contends in effect that, in pioneering the junk-bond market, Milken perpetrated history's largest Ponzi scheme by orchestrating thousands of trades involving Drexel, its clients, and the numerous outside investment entities he secretly controlled. According to the FDIC, this orgy of insider dealing inflated artificially the value of many junk-bond issues while creating an illusory liquidity. In rushed hordes of unsuspecting investors, who were left holding the junk-bond bag when the market collapsed in 1989. The FDIC claims that Drexel's S&L customers alone lost at least $4 billion, and it is asking for treble damages under antiracketeering laws.
The FDIC asserts that, beginning in 1982, the Milken group targeted S&Ls as an integral part of its overall scheme. In its complaint, the FDIC accuses the group of having induced S&L bond-buying through a wide variety of illegal means: entering into "parking" agreements, by which S&Ls accepted large blocks of junk bonds with the understanding that they would be repurchased; bribing S&L executives to induce them to purchase or issue junk bonds; and coercing S&Ls to buy bonds through a system of rewards and punishments that included a standing refusal to broker any trades unless the customer also purchased other Drexel junk issues.
The FDIC also accuses the Milken group of "regularly engaging in self-dealing" by misappropriating through its partnerships warrants that should have gone to outside investors as an incentive for buying bonds. The FDIC alleges that the Milken group unlawfully deprived S&Ls of warrants in at least four leveraged buyouts, including Levitz Furniture, Storer Communications, Beatrice, and Marley.
RUNAWAY CLEANUP. Milken's advisers argue that the FDIC-RTC case doesn't add up to much more than a trumped-up attempt at scapegoating the fallen financier for the S&L fiasco. The agency certainly has growing need of a scapegoat as the costs of the cleanup continue to exceed all expectations. Lawyers for Milken and other defendants will respond to the FDIC complaint by moving for dismissal on the grounds that it lacks the specificity that is required under the rules of civil procedure. Indeed, most of the partnerships and individual defendants are not mentioned in the body of the complaint.
Expect the defense to attack head-on the notion that failed S&Ls were creatures of Milken. His lawyers will argue that long before thrifts were allowed to buy corporate securities, they were the most highly leveraged American financial institutions--by government design. More narrowly, they will contend that Drexel's S&L customers freely made their own investment decisions. Moreover, many of the intricate transactions that the FDIC now contends are fraudulent in fact were necessary to comply with regulations--and indeed were approved by regulators.
The defense will argue as well that the sharp decline in junk-bond prices should not be blamed on Milken, but on changes in market conditions brought on largely by restrictions imposed by the government. Milken's lawyers will argue that the FDIC's $4 billion loss computation fails to take into account interest income or trading profits reaped by S&L clients before the market tanked. They will point out, too, that Drexel's thrift customers were also trading the same junk-bond issues through rival Wall Street investment banks, all of which Paul Weiss intends to subpoena soon.
Some defense lawyers contend that the FDIC's case is so weak that the agency cannot be serious about going to trial but rather is trying to bludgeon settlement money out of Milken and his most deep-pocketed cronies. According to this line of reasoning, the FDIC grossly underestimated Milken's combativeness and will eventually drop the case. This is probably wishful thinking, although the case is certain to be narrowed, perhaps markedly. The patchwork quality of the complaint is more likely a reflection of the haste with which it was put together to beat statutes of limitation than of halfheartedness.
'TON OF DOCUMENTS.' Then, too, the FDIC has had to start nearly from scratch in building its case against Milken. Since it is acting as a private plaintiff, the agency is denied access to the vast bulk of evidence amassed during the criminal investigation. The FDIC underscored its resolve by hiring one of New York's most high-powered law firms--Cravath, Swaine & Moore--which also drafted the Columbia suit. Cravath was so eager to win the FDIC business that it discounted its usual hourly rate. Cravath's star litigators, Thomas D. Barr and David Boies, head a team of a few dozen lawyers, who are busily poring over the voluminous papers provided by failed S&Ls. "We have got a ton of documents still to go over," says Barr, who estimates that the case won't be ready for trial for at least a year.
Certainly, the aggressive tactics Cravath is using betray no ambivalence about pursuing Milken all the way to trial. Indeed, in opposing attempts by Milken's lawyers to consolidate the New York and California suits--which are almost identical--Cravath seems to be angling for not one but two trials.
In addition, plaintiffs' lawyers have held "cooperation discussions" with several defendants, including James Dahl. Once Drexel's highest-paid junk-bond salesman, Dahl was Milken's chief liaison with Columbia, Lincoln, and other S&Ls. He was compelled by grant of immunity to appear before the Milken grand jury. Although immunity is not applicable to civil litigation, the FDIC could indemnify cooperating defendants against financial claims.
Equally important, Cravath may be on the verge of obtaining from Drexel itself all sorts of records that could be of use against Milken, perhaps even including files heretofore protected by attorney-client privilege. In February, a federal bankruptcy judge more or less forced Drexel and its many creditors and claimants into a preliminary settlement. The FDIC apparently consented to reduce sharply its $6.8 billion claim against Drexel in exchange for broad access to the firm's internal documents.
The core of the FDIC's case as filed is a dissection of the Milken group's dealings with 10 S&Ls over which it is alleged to have obtained "control or substantial influence" in junk-bond investment decisions. These include three of the most infamous S&Ls: CenTrust, Columbia, and Lincoln. Indeed, the CEOs of each of these failed thrifts--David Paul, Thomas Spiegel, and Charles H. Keating Jr., respectively--are named as defendants.
'PROPAGANDA CAMPAIGN.' The Keating charges seem particularly telling. The FDIC alleges, for example, that the Milken group helped Keating improperly shift funds from Lincoln to his holding company, American Continental Corp. One such case involved 2.1 million shares of Playtex International stock that Lincoln had been allowed by Drexel to purchase on favorable terms as an inducement to buy Playtex bonds. At Keating's request, Jim Dahl sent ACC a letter in April, 1987, valuing the Playtex stock at $1 a share--the price at which the transfer from Lincoln to ACC was indeed effected two days later. In December, however, ACC sold 1.5 million of the shares to CenTrust through Drexel for $7.25 a share. The remainder was unloaded two weeks later. Total proceeds amounted to $14.6 million. Thus, ACC reaped a $12.5 million profit that the FDIC asserts was rightfully Lincoln's.
The FDIC does not attempt a similar detailing of Milken's relationship with 34 of the 44 S&Ls it names as plaintiffs in its class action. Apparently to justify the suit's breadth, the S&L-specific charges are followed by a lengthy attack on Drexel's sales tactics. To induce S&Ls to buy junk, the Milken group mounted an extensive "propaganda campaign," which included numerous "intentionally false and misleading statements about credit quality," the suit contends.
While Milken's lawyers will have no trouble producing equally misleading research from every one of Drexel's junk-bond rivals, the FDIC's core charges seem likely to be litigated at length. Indeed, there is a definite possibility that despite his 10-year sentence, Milken will be freed before the S&L suits are resolved. Under federal parole guidelines, people whose crimes cause less than $1 million in damages often are released in 24 months. Who knows? That may be just in time for a civil trial.
ROUND TWO: THE FDIC VS. MILKEN FDIC CHARGES
--Milken and a cadre of co-conspirators defrauded 44 S&Ls in rigging the junk-bond market through a wide variety of illegal means, including price manipulation, bribery, and coercion
--The Milken group conspired in part through a vast, covert network of 415 partnerships that enriched themselves through rampant self-dealing
--The Milken group illegally induced its S&L customers to buy junk bonds, in part by mounting an extensive propaganda campaign that included deliberate misstatements about credit quality
--The Milken group is liable for $4 billion in losses suffered by its S&L clients when the junk-bond market collapsed and three times that amount under RICO
--The FDIC case is a trumped-up attempt to make Milken a scapegoat and should be dismissed under the rules of civil procedure for lack of specific evidence
--Some 87 of the partnerships have no tie to Milken and might not exist. The rest are a legitimate employee perk closely supervised by Drexel
--S&Ls bought junk bonds of their own free will. Drexel's arguments in favor of junk bonds were based on extensive research and did not differ materially from those advanced by other Wall Street houses
--S&L losses were caused by changing market conditions. Also, the FDIC's computation ignores profits made before the collapse or from transactions with other dealers