The Man Who Mopped Up The Milken Mess

When the Securities & Exchange Commission filed its massive securities fraud suit against Michael R. Milken in 1988, his lawyers tried to get U.S. Judge Milton Pollack off the case. They accused Pollack of conflict of interest, pointing out that his wife stood to make $30 million in a leveraged buyout of a family retail chain financed by Milken employer Drexel Burnham Lambert Inc. When Pollack refused to step aside, Milken's lawyers took their appeal all the way to the U.S. Supreme Court.

The high court refused to take the case, and Pollack stayed put. Now, Milken's lawyers are set to announce the final details in a $1.3 billion settlement of 9,000 civil claims filed by the Federal Deposit Insurance Corp. and investors against the high felon of junk finance. The pact, which marks the end of the Drexel saga, forces Milken to put in $500 million. That's on top of the $400 million he had already agreed to pay to a restitution fund as part of his plea bargain with the federal government, though it still leaves him with hundreds of millions in assets. The remaining $400 million will come from Drexel-related investment partnerships and insurers. Before signing off, Pollack hired a former investment banker to make sure Milken was good for his share.

`TOUR DE FORCE.' Nearly everyone involved in the case had reason to settle. Milken, for one, surely wanted to avoid a publicity-heavy trial. But it was Pollack, more than anyone else, who finally got the deal done. His strategy: unorthodox maneuvering and some strong-arming. "He can stare you down," says Ira M. Millstein, a partner at the New York law firm of Weil, Gotshal & Manges, who negotiated the deal for Drexel.

The 85-year-old judge says settling the Milken cases is the "tour de force" of a career that includes 38 years as a trial lawyer and 25 years as a judge on the U.S. District Court in Manhattan. His time on the bench, plus his experience in securities law, allowed him to wrap things up quickly, say lawyers involved. "Pollack didn't have to learn the Drexel business," says Millstein. "He knew it."

Indeed, by the time the SEC brought its case before Pollack, he was everything the Milken camp feared in a judge. Pollack was regarded as a forceful jurist who tended to favor the government in securities fraud cases. Worse, Milken's top lawyer, Arthur L. Liman, had tangled with Pollack before. In the late 1970s, after a protracted takeover battle between Chris-Craft Industries and Piper Aircraft Corp., Pollack awarded Liman's client, Chris-Craft, a disappointing $3 million. Liman persuaded an appeals court to up the award to $36 million, but the Supreme Court agreed with Pollack and reversed the decision.

APRIL FOOL. Pollack's angling to settle the Milken claims began a year ago, when he seized control of the Drexel bankruptcy. He quickened the pace of the settlement talks by threatening to turn the bankruptcy reorganization into a liquidation. By May, Pollack had gotten the army of bankruptcy lawyers to agree to a tentative pact. A key component of the deal was an injunction barring future Drexel-related securities fraud suits by private individuals against Milken, former Drexel employees with partnership stakes, and others.

There was one hitch: To get the benefit of the injunction, Milken and the other defendants had to settle the civil suits before Drexel's plan was confirmed. A scheduled Mar. 5 confirmation hearing on the Drexel plan gave Pollack the opening he needed to push a civil settlement. As an added incentive, he set an Apr. 1 trial date for one case--months earlier than the lawyers wanted.

Pollack's most successful strategy may have been his most unorthodox. Normally, judges are barred from talking about cases with some of the participating lawyers and not others. Here, Pollack got all the lawyers to agree from the start that his door would always be open for private chats, as well as for resolving impasses. The move not only helped Pollack understand everyone's problems but also turned the judge into a key player. Liman observes: "He was indispensable."

Some parties charge that Pollack pushed a deal that favors Milken and his inner circle. "Everyone who is not in the top group is incensed by this whole process," says one defendant.

Still, the litigation has been sidestepped. Now, Milken is turning his attention to getting out of jail. A hearing on reducing his 10-year sentence could come this spring. Milken partisans are hoping that the billion-dollar pact will help convince the sentencing judge that the financier deserves a break. Pollack's imprimatur on the deal won't hurt.

Before it's here, it's on the Bloomberg Terminal.