Financier Michael Milken Is Indicted for Racketeering and Fraud

Date March 29, 1989

Michael Milken, known as the junk-bond king of Wall Street during the 1980’s, was indicted for insider trading and other illegal activities under the RICO Act, making him the first person not tied to organized crime to be charged under this act. He was sentenced to ten years in prison but served less than two years. He also paid $600 million in fines to the U.S. government and more than $1 billion to the Federal Deposit Insurance Corporation.

Locale New York, New York

Key Figures

• Michael Milken (b. 1946), Wall Street investment banker
• Ivan Boesky (b. 1937), Wall Street arbitrageur
• Rudy Giuliani (b. 1944), U.S. attorney for the Southern District of New York, 1983-1989, and mayor of New York, 1994-2001

Summary of Event

Michael Milken was born into a Jewish, middle-class family and was raised by his parents in the San Fernando Valley of Los Angeles. An exceptionally bright child, Milken discovered at an early age that he had both a photographic memory and an interest in mathematics and finances. In 1968, he graduated from the University of California, Berkeley, with a degree in business administration. That same year, he also married his high school sweetheart, Lori Hackel. They relocated to Philadelphia so that Milken could attend the Wharton School of Business at the University of Pennsylvania. After earning his master’s degree in business administration, he was hired by the Drexel Corporation.

In 1973, Drexel had merged with Burnham and Company to become the Wall Street investment firm Drexel Burnham Lambert. Following the merger, Milken became the head of a bond-trading department. It was in this position that he began using his junk-bond theory, which he originally developed as an undergraduate student at Berkeley to make money.

In the financial world, a conventional bond was a certificate of debt that was usually sold by a government to a company that wanted to raise capital by borrowing money. Most often, these bonds were then repaid by the borrowing company with interest. Conventional bonds also were rated according to the value of the business minus its current liabilities. In contrast to these practices, Milken believed that junk bonds, which would be unrated, could be sold to small companies that lacked a credit history and were heavily in debt. By targeting these kinds of companies, he could potentially make a lot of money because junk bonds would be issued at a higher interest rate than conventional bonds. These higher interest rates would, in turn, earn higher profits for Milken. The junk-bond strategy was so successful that by 1976, Milken was earning more than five million dollars a year.

In 1977, Milken relocated his family and the company’s noninvestment-grade bond-trading department to Los Angeles. By 1978, Drexel Burnham Lambert had issued approximately $439 million in junk bonds, and Milken was soon known as the junk-bond king of Wall Street. During the early 1980’s, investors also began using junk bonds to finance leveraged buyouts (LBOs). By definition, a leveraged buyout was the purchase of a company using a significant amount of borrowed money, in the form of bonds and loans, to meet the cost of acquisition. By 1985, the junk-bond market on Wall Street was worth more than $100 billion.

Throughout the 1980’s, the U.S. Securities and Exchange Commission (SEC) closely watched Milken’s business dealings on Wall Street. In 1986, Ivan Boesky, a successful Wall Street arbitrageur, plea bargained with the SEC and implicated Milken and Drexel Burnham Lambert in several illegal financial transactions. These included insider trading, illegal takeovers, fraud, and stock manipulation. Milken also was charged with stock parking, a financial activity in which an investor conceals the real owner of a stock to bypass a tax liability or financial regulation. Simultaneously, Rudy Giuliani, the U.S. attorney for the Southern District of New York, began a criminal investigation of the embattled investor. Milken claimed his innocence on all charges.

In 1987, James B. Stewart, a reporter for The Wall Street Journal, began investigating that year’s stock market crash and the scandal that implicated Milken and others in insider trading and other crimes. Stewart was awarded a Pulitzer Prize in 1988 for his investigative reporting, and his book, Den of Thieves, which details the crimes of Wall Street, was published in 1991. The book remains highly controversial and has been targeted by supporters of Milken.

On March 29, 1989, under the Racketeer Influenced and Corrupt Organizations (RICO) Act, Milken was indicted by a federal grand jury on ninety-eight counts of racketeering and fraud as well as insider trading, stock parking, and tax evasion. The indictment was especially significant because it was the first time in American legal history that the RICO Act was used against an individual with no connection to organized crime. In June, at the company’s request, Milken resigned from Drexel Burnham Lambert and formed his own company, International Capital Access Group.

Milken had maintained his innocence throughout the affair, but on April 24, 1990, he pleaded guilty to six counts of violating federal securities and tax laws. The charges included insider trading, tax evasion, stock parking, filing false SEC reports, mail fraud, and the evasion of regulatory capital requirements. Interestingly, at his trial, Milken not only apologized for his crimes but also admitted to the court that he willingly conspired with Boesky to defraud financial clients. As part of his plea agreement, Milken was sentenced to a ten-year prison term by Judge Kimba Wood. He was fined $200 million, agreed to pay $400 million into a special fund set up by the SEC to reimburse his victims, and accepted a lifetime ban from the securities industry.

On January 2, 1993, Milken was released from a federal penitentiary in Pleasanton, California, after serving only twenty-two months of his ten-year sentence. He was relocated to a halfway house but was released from there on February 4. The court also required him to perform eighteen hundred hours of community service each year for three years. In addition, he settled a lawsuit with the Federal Deposit Insurance Corporation (FDIC) by agreeing to pay the agency more than $1 billion. Following his release from prison, Milken’s net worth was estimated to be more than $125 million.

Impact

Milken not only epitomized the Wall Street investor of the 1980’s but also symbolized American capitalism and greed during the 1980’s. The highly intelligent financier went to Wall Street as an outsider during the 1970’s, and through diligence, hard work, and an obsession with making money, he redefined the stereotypical Ivy League image of the Wall Street careerist. Milken’s reign on Wall Street, however, came to an abrupt end in 1989 when he was indicted, but in the end, his symbolic reign continues—as the junk-bond king who defined an era in American financial history.

Bibliography

Bailey, Fenton. Fall from Grace: The Untold Story of Michael Milken. Secaucus, N.J.: Carol, 1992. This book explores the power of the American media and its role in the downfall of Michael Milken.

Bruck, Connie. The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. New York: Penguin Books, 1989. Bruck provides a detailed history of the junk-bond industry during the 1980’s, with a look at Drexel Burnham Lambert and its hired junk-bond brokers.

Chancellor, Edward. Devil Take the Hindmost: A History of Financial Speculation. New York: Plume, 2000. A detailed history of financial speculation—the quest for money and assets—in the United States.

Grant, James. Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. New York: Farrar, Straus and Giroux, 1992. A history of the credit and lending systems in the United States and their profound effect on the American marketplace and consumerism.

MacDonald, Scott B., and Jane E. Hughes. Separating Fools from Their Money: A History of American Financial Scandals. New Brunswick, N.J.: Rutgers University Press, 2007. This book provides readers with an easy-to-read, detailed history of finance-related scandals in the United States, scandals that target those least able to afford it: ordinary consumers.

Sobel, Robert. Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken. Washington, D.C.: Beardbooks, 2000. This book explores the history of America’s most notable financiers and their impact on the American economy.