Michael Milken
Encyclopedia
Michael Robert Milken is an American
business magnate
, financier, and philanthropist 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.
, where his classmates included actresses Sally Field
and Cindy Williams
.
Milken is a 1968 University of California, Berkeley
graduate with a B.S. with highest honors, was elected to Phi Beta Kappa and was a member of the Sigma Alpha Mu
fraternity. He received his MBA from the Wharton School at the University of Pennsylvania
.
While at Wharton, Milken was influenced by credit studies authored by W. Braddock Hickman
, a former president of the Federal Reserve Bank of Cleveland
, who noted that a portfolio of non-investment grade bonds offered "risk-adjusted" returns greater than that of an investment grade portfolio.
Drexel merged with Burnham and Company in 1973 to form Drexel Burnham. Despite the firm's name, Burnham was the nominal survivor; the Drexel name only came first at the insistence of the more powerful investment banks, whose blessing was necessary for the merged firm to inherit Drexel's position as a "major" firm. Milken was one of the few prominent holdovers from the Drexel side of the merger. He persuaded his new boss, Tubby Burnham (a fellow Wharton alumnus), to let him start a high-yield bond trading department—an operation that soon earned a remarkable 100% return on investment
. By 1976, Milken's income
at what was now Drexel Burnham Lambert
was estimated at $5 million a year.
One weekend in 1978, Milken moved the high-yield bond operation to Century City in Los Angeles. The transition went so smoothly that many clients were unaware that the department had moved between Friday and Monday. Later, the operation moved to Beverly Hills at 9560 Wilshire Boulevard
. On the fourth floor, he set up an X-shaped trading desk—designed to maximize his contact with traders and salesmen—from which he worked very long hours, invariably starting his day before 5 am Pacific
(8 am Eastern, prior to the opening of the markets in New York). The department grew and, in 1986-87, moved up to the fifth floor, where there were eventually three of the famous X-shaped trading desks.
and 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's Tele-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, and 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 like Kohlberg Kravis Roberts and of so-called "greenmail
ers." 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 St investment banks were unwilling to compete with him for fear of jeopardizing their longstanding and lucrative relationships with many of these blue-chip companies who were potentially his targets, although latterly companies like Salomon Brothers
, Morgan Stanley
and First Boston
did enter the high-yield market. Notable buyouts financed by Drexel of companies previously thought invulnerable included 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. Hence, citing the power behind the most aggressive firm on Wall Street, Drexel bankers often said "Michael says ..." to justify their tactics.
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.”
ur 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 fund
s 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.
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.
Two other counts were related to tax evasion in transactions Milken carried out for a client of the firm, David Solomon, a fund manager.
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:
Milken's sentence was later reduced to two years from ten; he served 22 months.
test from a routine medical exam. Because prostate cancer
is relatively rare for men in their 40s, Milken's doctor hadn't recommended the PSA test, but Milken asked for it. The results came back with a level of 24, which is extremely high. Milken repeated the PSA test twice and a subsequent biopsy revealed advanced prostate cancer, which had spread to his lymph nodes. At that time, doctors considered prostate cancer that advanced an indication that a man had less than 2 years to live. Milken opted for prostatectomy but a subsequent test showed that the cancer had already spread to his lymph nodes. Milken started hormone therapy to shut down production of testosterone. Hormone therapy cut his PSA over the course of several months to zero. He also opted to have radiation therapy. Subsequent scans showed the swelling in his lymph nodes had disappeared. Milken's cancer was in remission and still was in 2004 when he was profiled in Fortune.
to support medical research and education. Through the Milken Educator Awards (founded in 1985), the MFF has awarded a total of more than $60 million to more than 2,500 teachers. Among the other initiatives of the Milken Family Foundation are the:
Upon his release from prison in 1993, Milken founded the Prostate Cancer Foundation
for prostate cancer
research. Milken himself was diagnosed with advanced prostate cancer in the same month he was released. His cancer is currently in remission. The Prostate Cancer Foundation works closely with Major League Baseball
through its Home Run Challenge program to promote awareness of prostate cancer and raise money for medical research. Each season in the weeks leading up to Father's Day
, Milken visits many ballparks and appears on TV and radio broadcasts during the games.
In 2003, Milken launched a Washington, D.C.-based think tank
called FasterCures, which seeks greater efficiency in researching all serious diseases. A key initiative of FasterCures is Biobank Central, which is advancing life sciences research in areas as diverse as autism, psoriasis and breast cancer.
The Melanoma Research Alliance (MRA) was launched in 2007 to support innovative translational studies that advance the diagnosis, staging and treatment of melanoma, the deadliest skin cancer.
Fortune magazine called Milken "The Man Who Changed Medicine" in a 2004 cover story on his philanthropy.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
business magnate
Business magnate
A business magnate, sometimes referred to as a capitalist, czar, mogul, tycoon, baron, oligarch, or industrialist, is an informal term used to refer to an entrepreneur who has reached prominence and derived a notable amount of wealth from a particular industry .-Etymology:The word magnate itself...
, financier, and philanthropist 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
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
in 1989 as the result of an insider trading
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
investigation. After a plea bargain
Plea bargain
A plea bargain is an agreement in a criminal case whereby the prosecutor offers the defendant the opportunity to plead guilty, usually to a lesser charge or to the original criminal charge with a recommendation of a lighter than the maximum sentence.A plea bargain allows criminal defendants to...
, 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
George Gilder
George F. Gilder is an American writer, techno-utopian intellectual, Republican Party activist, and co-founder of the Discovery Institute...
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
Milken Institute
The Milken Institute is an independent economic think tank based in Santa Monica, California that publishes research and hosts conferences that apply market-based principles and financial innovations to a variety of societal issues in the US and internationally.The mission of the Institute, founded...
, and founder of medical philanthropies funding research into melanoma
Melanoma
Melanoma is a malignant tumor of melanocytes. Melanocytes are cells that produce the dark pigment, melanin, which is responsible for the color of skin. They predominantly occur in skin, but are also found in other parts of the body, including the bowel and the eye...
, 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
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
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
Forbes
Forbes is an American publishing and media company. Its flagship publication, the Forbes magazine, is published biweekly. Its primary competitors in the national business magazine category are Fortune, which is also published biweekly, and Business Week...
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.
Education
Milken was born to a Jewish family in Encino, California. He graduated from Birmingham High SchoolBirmingham High School
Birmingham Community Charter High School is a public coeducational high school in the neighborhood/district of Lake Balboa in the San Fernando Valley section of Los Angeles, California, United States...
, where his classmates included actresses Sally Field
Sally Field
Sally Margaret Field is an American actress, singer, producer, director, and screenwriter. In each decade of her career, she has been known for major roles in American TV/film culture, including: in the 1960s, for Gidget or Sister Bertrille on The Flying Nun ; in the 1970s, for Sybil , Smokey and...
and Cindy Williams
Cindy Williams
Cynthia Jane "Cindy" Williams is an American actress best known for starring in the television situation-comedy series Laverne & Shirley, in the role of "Shirley Feeney", and for her role as Laurie Henderson in the classic film American Graffiti.-Early life:Williams was born in Van Nuys,...
.
Milken is a 1968 University of California, Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...
graduate with a B.S. with highest honors, was elected to Phi Beta Kappa and was a member of the Sigma Alpha Mu
Sigma Alpha Mu
Sigma Alpha Mu , also known as "Sammy", is a college fraternity founded at the City College of New York in 1909. Originally only for Jewish men, Sigma Alpha Mu remained so until 1953, when members from all backgrounds were accepted. Originally headquartered in New York, Sigma Alpha Mu has...
fraternity. He received his MBA from the Wharton School at the University of Pennsylvania
University of Pennsylvania
The University of Pennsylvania is a private, Ivy League university located in Philadelphia, Pennsylvania, United States. Penn is the fourth-oldest institution of higher education in the United States,Penn is the fourth-oldest using the founding dates claimed by each institution...
.
While at Wharton, Milken was influenced by credit studies authored by W. Braddock Hickman
W. Braddock Hickman
Walter Braddock Hickman was President of the Federal Reserve Bank of Cleveland from May 1, 1963 to November 28, 1970 ....
, a former president of the Federal Reserve Bank of Cleveland
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is the Cleveland-based headquarters of the U.S. Federal Reserve System's Fourth District. The district is composed of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. It has branch offices in Cincinnati and Pittsburgh....
, who noted that a portfolio of non-investment grade bonds offered "risk-adjusted" returns greater than that of an investment grade portfolio.
Career
Through his Wharton professors, Milken landed a summer job at Drexel Harriman Ripley, an old-line investment bank, in 1969. After completing his MBA, he joined Drexel (by then known as Drexel Firestone) as director of low-grade bond research. He was also given some capital and permitted to trade. According to legend, he was so devoted to his work that he wore a miner's headlamp while commuting on the bus so that he could read company prospectuses.Drexel merged with Burnham and Company in 1973 to form Drexel Burnham. Despite the firm's name, Burnham was the nominal survivor; the Drexel name only came first at the insistence of the more powerful investment banks, whose blessing was necessary for the merged firm to inherit Drexel's position as a "major" firm. Milken was one of the few prominent holdovers from the Drexel side of the merger. He persuaded his new boss, Tubby Burnham (a fellow Wharton alumnus), to let him start a high-yield bond trading department—an operation that soon earned a remarkable 100% return on investment
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
. By 1976, Milken's income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
at what was now Drexel Burnham Lambert
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
was estimated at $5 million a year.
One weekend in 1978, Milken moved the high-yield bond operation to Century City in Los Angeles. The transition went so smoothly that many clients were unaware that the department had moved between Friday and Monday. Later, the operation moved to Beverly Hills at 9560 Wilshire Boulevard
Wilshire Boulevard
Wilshire Boulevard is one of the principal east-west arterial roads in Los Angeles, California, United States. It was named for Henry Gaylord Wilshire , an Ohio native who made and lost fortunes in real estate, farming, and gold mining. Henry Wilshire initiated what was to become Wilshire...
. On the fourth floor, he set up an X-shaped trading desk—designed to maximize his contact with traders and salesmen—from which he worked very long hours, invariably starting his day before 5 am Pacific
Pacific Time Zone
The Pacific Time Zone observes standard time by subtracting eight hours from Coordinated Universal Time . The clock time in this zone is based on the mean solar time of the 120th meridian west of the Greenwich Observatory. During daylight saving time, its time offset is UTC-7.In the United States...
(8 am Eastern, prior to the opening of the markets in New York). The department grew and, in 1986-87, moved up to the fifth floor, where there were eventually three of the famous X-shaped trading desks.
The high-yield market and the 1980s buyout boom
By the mid-1980s, Milken's network of high-yield bond buyers (notably Fred Carr's Executive Life Insurance CompanyExecutive Life Insurance Company
Executive Life Insurance Company was once the largest life insurance company in California. Its financial problems and subsequent insolvency in April 1991 shocked its policyholders and the financial world....
and 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
MCI Communications
MCI Communications Corp. was an American telecommunications company that was instrumental in legal and regulatory changes that led to the breakup of the AT&T monopoly of American telephony and ushered in the competitive long-distance telephone industry. It was headquartered in Washington,...
, then an upstart provider of long-distance telephone services, in the space of one hour on the telephone. Cable TV companies, like John Malone's Tele-Communications Inc.
Tele-Communications Inc.
Tele-Communications, Inc. or TCI was a cable television provider in the United States, for much of its history controlled by Bob Magness and John Malone....
, were also favorite clients, as were Ted Turner
Ted Turner
Robert Edward "Ted" Turner III is an American media mogul and philanthropist. As a businessman, he is known as founder of the cable news network CNN, the first dedicated 24-hour cable news channel. In addition, he founded WTBS, which pioneered the superstation concept in cable television...
's maverick Turner Broadcasting, cellphone pioneer Craig McCaw
Craig McCaw
Craig McCaw is a Seattle-area businessman and entrepreneur who achieved success as a pioneer in the cellular phone industry. He is the founder of McCaw Cellular and Clearwire Corporation.-Early life and cable TV beginnings:Craig is the second of four sons of Marion and John Elroy 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, and 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
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
(LBO) firms like Kohlberg Kravis Roberts and of so-called "greenmail
Greenmail
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover....
ers." Armed with a "highly confident letter
Highly confident letter
The "highly confident letter" was a financing tool created by investment bankers at Drexel Burnham Lambert, dominated by Michael Milken, in the 1980s...
" 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 St investment banks were unwilling to compete with him for fear of jeopardizing their longstanding and lucrative relationships with many of these blue-chip companies who were potentially his targets, although latterly companies like Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
, Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
and First Boston
First Boston
First Boston Corporation was a New York-based, bulge bracket, investment bank, founded in 1932 and acquired by Credit Suisse in 1990. Together with its sister investment banks, it was referred to as CS First Boston after 1993 and part of Credit Suisse First Boston after 1996, the First Boston part...
did enter the high-yield market. Notable buyouts financed by Drexel of companies previously thought invulnerable included Beatrice Companies and the cosmetics firm, Revlon
Revlon
Revlon is an American cosmetics, skin care, fragrance, and personal care company founded in 1932.-History:Revlon was founded in the midst of the Great Depression, 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name...
.
Amongst his significant detractors have been Martin Fridson
Martin Fridson
Martin Steven Fridson is an eminent American investment thinker known for his application of rigorous financial theory to the field of high yield bonds. He is also a philanthropist and prolific author in the subjects of financial reporting, financial history, and political economy...
formerly of Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
and author Ben Stein
Ben Stein
Benjamin Jeremy "Ben" Stein is an American actor, writer, lawyer, and commentator on political and economic issues. He attained early success as a speechwriter for American presidents Richard Nixon and Gerald Ford...
. 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
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. 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. Hence, citing the power behind the most aggressive firm on Wall Street, Drexel bankers often said "Michael says ..." to justify their tactics.
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. StewartJames B. Stewart
James Bennett Stewart is an American lawyer, journalist, and author.-Life and career:Stewart was born in Quincy, Illinois. A graduate of DePauw University and Harvard Law School, James B. Stewart is a member of the Bar of New York and Bloomberg Professor of Business and Economic Journalism at the...
used for Den of Thieves
Den of Thieves (Book)
Den of Thieves is a 1992 non-fiction bestselling work by Pulitzer prize-winning writer James B. Stewart. The book recounts the insider trading scandals involving Ivan Boesky, Michael Milken and other Wall Street financiers in the United States during the 1980s such as Martin Siegel, Dennis Levine,...
told him that Milken often tried to get a higher markup on trades than was permitted at the time.
Harvey A. Silverglate
Harvey A. Silverglate
Harvey A. Silverglate is an attorney based out of Cambridge, Massachusetts. He is the co-founder, with Alan Charles Kors, of the Foundation for Individual Rights in Education , for which he also serves as the current Chairman of the Board of Directors.He holds degrees from Princeton University ...
, 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 arbitrageArbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
ur Ivan Boesky
Ivan Boesky
Ivan Frederick Boesky is an American stock trader who is notable for his prominent role in a Wall Street insider trading scandal that occurred in the United States in the mid-1980s.-Life and career:...
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
Rudy Giuliani
Rudolph William Louis "Rudy" Giuliani KBE is an American lawyer, businessman, and politician from New York. He served as Mayor of New York City from 1994 to 2001....
, 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
Racketeer Influenced and Corrupt Organizations Act
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization...
, 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
Warrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
for the stock of Storer Broadcasting
Storer Broadcasting
Storer Broadcasting, Inc. was an American company which owned several television and radio stations in the northeast United States. It was incorporated in Ohio in 1927, and sold its broadcasting properties in 1983.-1920s—1940s:...
in 1985. At the time, Kohlberg Kravis Roberts was in the midst of a leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
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 fund
Money fund
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield...
s 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
Bribery
Bribery, a form of corruption, is an act implying money or gift giving that alters the behavior of the recipient. Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or...
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
Nolo contendere
is a legal term that comes from the Latin for "I do not wish to contend." It is also referred to as a plea of no contest.In criminal trials, and in some common law jurisdictions, it is a plea where the defendant neither admits nor disputes a charge, serving as an alternative to a pleading of...
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 racketeeringRacket (crime)
A racket is an illegal business, usually run as part of organized crime. Engaging in a racket is called racketeering.Several forms of racket exist. The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of "protection" against crimes...
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
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
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
Organized crime
Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
. 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
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
's former campaign aides, Linda Goodson Robinson (the wife of American Express
American Express
American Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
president James Robinson
James D. Robinson III
James Dixon Robinson III was the chief executive officer of American Express Co. from 1977 until his retirement in 1993.-Education:...
) to launch a public relations campaign prior to the trial. Milken and other Drexel figures hired Edward Bennett Williams
Edward Bennett Williams
Edward Bennett Williams was a Washington, D.C. trial attorney who founded the law firm of Williams & Connolly and owned several professional sports teams...
as their attorney. Williams was well known for representing Watergate figures as well as major Mafia figures including Frank Costello
Frank Costello
Frank Costello was an Italian New York City gangster who rose to the top of America's underworld, controlled a vast gambling empire across the United States and enjoyed political influence.Nicknamed the "Prime Minister of the Underworld", he became one of the most powerful and influential Mafia...
. 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 accurate 13d statementSchedule 13dSchedule 13D is an SEC filing that must be submitted to the US Securities and Exchange Commission within 10 days, by anyone who acquires beneficial ownership of more than 5% of any class of publicly-traded securities in a public company...
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.
- 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
Kimba Wood
Kimba Maureen Wood is a United States federal judge for the United States District Court for the Southern District of New York.-Early life and education:...
told him:
Milken's sentence was later reduced to two years from ten; he served 22 months.
Prostate cancer
In January 1993, Milken received the results of a PSAProstate specific antigen
Prostate-specific antigen also known as gamma-seminoprotein or kallikrein-3 is a glycoprotein that in humans is encoded by the KLK3 gene. KLK3 is a member of the kallikrein-related peptidase family that are secreted by the epithelial cells of the prostate gland...
test from a routine medical exam. Because prostate cancer
Prostate cancer
Prostate cancer is a form of cancer that develops in the prostate, a gland in the male reproductive system. Most prostate cancers are slow growing; however, there are cases of aggressive prostate cancers. The cancer cells may metastasize from the prostate to other parts of the body, particularly...
is relatively rare for men in their 40s, Milken's doctor hadn't recommended the PSA test, but Milken asked for it. The results came back with a level of 24, which is extremely high. Milken repeated the PSA test twice and a subsequent biopsy revealed advanced prostate cancer, which had spread to his lymph nodes. At that time, doctors considered prostate cancer that advanced an indication that a man had less than 2 years to live. Milken opted for prostatectomy but a subsequent test showed that the cancer had already spread to his lymph nodes. Milken started hormone therapy to shut down production of testosterone. Hormone therapy cut his PSA over the course of several months to zero. He also opted to have radiation therapy. Subsequent scans showed the swelling in his lymph nodes had disappeared. Milken's cancer was in remission and still was in 2004 when he was profiled in Fortune.
Philanthropic activities
In 1982, Milken and his brother Lowell founded the Milken Family FoundationMilken Family Foundation
The Milken Family Foundation is a private foundation established by Lowell Milken and Michael Milken in 1982. Lowell Milken serves as chairman and co-founder of the foundation.-Goals:...
to support medical research and education. Through the Milken Educator Awards (founded in 1985), the MFF has awarded a total of more than $60 million to more than 2,500 teachers. Among the other initiatives of the Milken Family Foundation are the:
- Milken InstituteMilken InstituteThe Milken Institute is an independent economic think tank based in Santa Monica, California that publishes research and hosts conferences that apply market-based principles and financial innovations to a variety of societal issues in the US and internationally.The mission of the Institute, founded...
, a non-profit, non-partisan economic think tank whose scholars publish research papers and conduct conferences on global and regional economies, human capital, demographics and capital markets. Each spring, the Institute hosts a Global Conference in Los Angeles; - Milken Scholars, a program that provides outstanding high school graduates with a commitment of four years of college financial assistance, counseling, volunteer opportunities and preparation for graduate studies;
- TAP: The System for Teacher and Student Advancement, a comprehensive research-based strategy to attract, develop, motivate and retain high-quality teachers for America's schools;
- Mike's Math Club, a curriculum enrichment program that shows students in inner-city elementary schools that math is not only useful, but entertaining;
- Festival for Youth, a school-based community service program that engages students in yearlong service projects to help build vibrant communities; and the
- Milken Family Foundation Epilepsy Research Awards Program, which funds research to understand and conquer epilepsy.
Upon his release from prison in 1993, Milken founded the Prostate Cancer Foundation
Prostate Cancer Foundation
The Prostate Cancer Foundation , formerly known as CaP CURE, is the world’s largest philanthropic source of support for prostate cancer research. PCF was founded in 1993 in order to discover better treatments and a cure for prostate cancer...
for prostate cancer
Prostate cancer
Prostate cancer is a form of cancer that develops in the prostate, a gland in the male reproductive system. Most prostate cancers are slow growing; however, there are cases of aggressive prostate cancers. The cancer cells may metastasize from the prostate to other parts of the body, particularly...
research. Milken himself was diagnosed with advanced prostate cancer in the same month he was released. His cancer is currently in remission. The Prostate Cancer Foundation works closely with Major League Baseball
Major League Baseball
Major League Baseball is the highest level of professional baseball in the United States and Canada, consisting of teams that play in the National League and the American League...
through its Home Run Challenge program to promote awareness of prostate cancer and raise money for medical research. Each season in the weeks leading up to Father's Day
Father's Day
Father's Day is a celebration honoring fathers and celebrating fatherhood, paternal bonds, and the influence of fathers in society. Many countries celebrate it on the third Sunday of June but it is also celebrated widely on other days...
, Milken visits many ballparks and appears on TV and radio broadcasts during the games.
In 2003, Milken launched a Washington, D.C.-based think tank
Think tank
A think tank is an organization that conducts research and engages in advocacy in areas such as social policy, political strategy, economics, military, and technology issues. Most think tanks are non-profit organizations, which some countries such as the United States and Canada provide with tax...
called FasterCures, which seeks greater efficiency in researching all serious diseases. A key initiative of FasterCures is Biobank Central, which is advancing life sciences research in areas as diverse as autism, psoriasis and breast cancer.
The Melanoma Research Alliance (MRA) was launched in 2007 to support innovative translational studies that advance the diagnosis, staging and treatment of melanoma, the deadliest skin cancer.
Fortune magazine called Milken "The Man Who Changed Medicine" in a 2004 cover story on his philanthropy.
Further reading
- Connie Bruck - The Predators' Ball: the inside story of Drexel Burnham and the rise of the junk bond raiders, New York: American Lawyer/Simon and Schuster, 1988, Penguin paperback (updated), 1989.
- Fenton Bailey - "Fall From Grace: The Untold Story of Michael Milken", Carol Publishing Corporation (October 1992), ISBN 1559721359.
- James B. StewartJames B. StewartJames Bennett Stewart is an American lawyer, journalist, and author.-Life and career:Stewart was born in Quincy, Illinois. A graduate of DePauw University and Harvard Law School, James B. Stewart is a member of the Bar of New York and Bloomberg Professor of Business and Economic Journalism at the...
- Den of ThievesDen of Thieves (Book)Den of Thieves is a 1992 non-fiction bestselling work by Pulitzer prize-winning writer James B. Stewart. The book recounts the insider trading scandals involving Ivan Boesky, Michael Milken and other Wall Street financiers in the United States during the 1980s such as Martin Siegel, Dennis Levine,...
, New York: Simon & Schuster, 1991, (ISBN 0-671-63802-5). - Ben SteinBen SteinBenjamin Jeremy "Ben" Stein is an American actor, writer, lawyer, and commentator on political and economic issues. He attained early success as a speechwriter for American presidents Richard Nixon and Gerald Ford...
- A License to Steal: the Untold Story of Michael Milken and the Conspiracy to Bilk the Nation, Simon and Schuster, 1992 - Daniel R. Fischel - Payback: the conspiracy to destroy Michael Milken and his financial revolution, New York, New York: HarperBusiness, 1995, (ISBN 0-88730-757-4).
- Robert SobelRobert SobelRobert Sobel was an American professor of history at Hofstra University, and a well-known and prolific writer of business histories.- Biography :...
- Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken (1993), (ISBN 0-471-57734-0).