Beautiful Christmas Card certificate from Drexel Burnham Lambert
printed in 1986. This historic document has an
ornate border around it with a vignette of a stack of coins and has a gold corporate seal. The Christmas Greeting was made on the form of a High Yield Bond. This item has the printed signature of Michael Milken and is over 31 years old.
Michael Robert Milken (born July 4, 1946 in Encino, California) is an American financier best known as the "Junk Bond King" of 1980s era Wall Street and the biggest player in the insider trading scandals of 1980s. He was highly influential in developing the market for junk bonds (a.k.a. "high-yield debt") during the 1970s and 1980s, which in turn fueled the 1980s boom in corporate raids and hostile corporate takeovers. He has been called both a financial innovator and the epitome of 1980s Wall Street greed.
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, Milken pled guilty to six securities and reporting violations. He was sentenced to ten years in prison, but was released after less than two years. He then launched a public relations campaign to highlight his role as a financial innovator, particularly with regard to popularizing higher-risk alternative investments. He also devoted much time and money to charity over the past three decades. With an estimated net worth of around $2.1 billion as of 2007, he is ranked by Forbes magazine as the 458th richest person in the world.
Milken was born in the San Fernando Valley. He is a graduate of Birmingham High School, where his classmates included actresses Sally Field and Cindy Williams.
A summa cum laude B.S. 1968 graduate of the Haas School of Business of the University of California, Berkeley, where he was elected a member of Phi Beta Kappa, Milken went on to receive his master's degree in Business Administration from the University of Pennsylvania Wharton School.
While at the Wharton School, he 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.
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 now known as Drexel Firestone) as director of low-grade bond research. He was also given some capital and permitted to trade.
Drexel merged with Burnham and Company in 1973 to form Drexel Burnham and Company, with Milken as one of the few prominent holdovers from the Drexel side of the merger. He persuaded his new boss, Tubby Burnham 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.
In 1978, Milken moved the high-yield bond operation to Beverly Hills. He set up an X-shaped trading desk from which he worked very long hours--often starting his day at 5 am Pacific (8 am Eastern, when the markets opened in New York).
Milken was a major contributor to the success of Drexel, which went from $1.2 million in fees to over $4 billion during Milken's time there, making it the most profitable firm on Wall Street at the time. Such was Milken's importance to the success of Drexel's ventures that he was given huge salaries and bonuses, one year earning in excess of $500 million. According to James B. Stewart's Den of Thieves, however, Milken "earned" this massive sum because, as head of Drexel Burnham Lambert's Beverly Hills operation, he was in charge of the distribution of that office's bonus pool. The bonus pool that year (1986) amounted to about $700 million. After giving out about $150 million to his Beverly Hills colleagues, Milken just kept the remaining $550 million for himself, despite indicating to one colleague that Milken's take would be $10 million. Milken's take was even more than the whole 10,000-person company's profit that year ($522.5 million). Although he was merely a senior vice president and reported to Drexel's head of trading, he was by far the dominant force in the firm.
Milken greatly expanded the use of high yield debt (junk bonds) in corporate finance and mergers and acquisitions, which in turn fueled the 1980s boom in leveraged buyouts, hostile takeovers, and corporate raids. Oliver Stone later stated in the special features of the DVD release of the movie Wall Street starring Michael Douglas that the movie is a close parallel to Milken's past career.
When his junk-bond clients teetered, Milken propped them up by restructuring their debt, but this usually meant more leverage, and it only delayed the inevitable write-offs. "With the benefit of hindsight, Milken's 'genius' seemed his ability to make so many believe his gospel of high return at low risk," wrote Stewart in "Den of Thieves." According to Stewart, of the 104 small companies that had been involved in public issues of Milken's junk bonds, 24 percent defaulted on their debt or were bankrupt by 1990. In addition, every savings and loan that was a "major" purchaser of Milken's junk bonds was declared insolvent.
Amongst his 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.
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, as he was arguably the face of the most aggressive firm on Wall Street, Drexel bankers often said "Michael says ..." to justify their tactics.
According to several of Milken's Drexel colleagues, Milken viewed the securities laws, rules and regulations with a degree of contempt, feeling they hindered the free flow of trading. He thus condoned unethical and sometimes outright illegal behavior by many of his colleagues in Beverly Hills.
Milken's own role in such activity has been much debated. Some argued that he himself personally observed the rules and laws, his contempt for them notwithstanding. 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 Stewart used for Den of Thieves told him that Milken often tried to get a higher markup on trades than was permitted at the time. Whatever the case, Milken's reputation for sailing close to the wind resulted in him being under nearly-constant scrutiny from the Securities and Exchange Commission from 1979 onward.
None of these actions got beyond the investigation phase until 1986, when arbitrageur Ivan Boesky pled guilty to securities fraud as part of a larger insider trading investigation. As part of his plea, Boesky implicated 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, the 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. 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 partnership, 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 funds 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, it appeared that Milken had violated Drexel company policy, 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 (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, Drexel pleaded nolo contendere to six counts of stock parking and stock manipulation, and agreed that Milken had to leave the firm if indicted.
On March 29, 1989, a federal grand jury indicted Milken on 98 counts of racketeering and fraud. The indictment accused Milken of an eye-popping litany of misconduct, including insider trading, stock parking, 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, hiring 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 cohorts hired various other attorneys and his case became more difficult.
However, on April 24, 1990, Milken pled guilty to six securities and reporting felonies in 1990:
Conspiring with Boesky to trade on inside information.
Aiding and abetting the filing of a false tax return. The charge relates to
Boesky’s false 13-d statement.
Using Boesky to conceal the true ownership of MCA stock, hiding the fact that Milken's client Golden Nugget Companies was selling MCA.
Aiding and abetting Boesky in filing false SEC statements in their illegal scheme to help a client take over the Fischbach Corporation.
Committing mail fraud in his scheme to defraud the investors of the Finsbury Fund, a junk-bond mutual fund. Milken and an associate inflated the prices that Finsbury paid for junk bonds to increase his commissions.
Aiding and abetting the evasion of regulatory capital requirements.
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 disgorged $400 million, to be paid to shareholders who had been hurt by his actions. He also accepted a lifetime ban from any involvement in the securities industry.
The government's tactics during the investigation have been much criticized. At the behest of Attorney General Dick Thornburgh, Giuliani threatened to indict Milken's brother, Lowell (a lawyer for Drexel) for racketeering when Milken initially balked at pleading guilty. As part of the deal, the case against Lowell was dropped. Federal investigators also questioned some of Milken's relatives--including his aging father--about their investments. There may have been a basis for investigating Lowell because of his employment with Drexel and the fact Milken often traded funds into his family's accounts.
Many experts believed that Milken had little chance of acquittal, in part because a potential jury would have had trouble relating to a man who earned more in one hour than most of them earned in one year. Also, it was felt that a jury would have trouble believing that anyone could earn the money Milken earned and do so legally. The case would have been difficult to explain to a jury but there was strong evidence.
At Milken's sentencing, Judge Kimba Wood told him:
You were willing to commit only crimes that were unlikely to be detected.... When a man of your power in the financial world... repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself... a significant prison term is required.
Wood recommended a 10-year prison sentence, of which, in her opinion, Milken should have served at least 36 to 40 months. However, Milken hired Alan Dershowitz to help reduce his sentence. Milken served only about 22 months (from March 1991 until January 1993) before being released. Wood was picked by President Bill Clinton to be attorney general in what some called a reward for reducing Milken's sentence. She was forced to withdraw because she had hired an illegal alien as her nanny.
Upon his release, he still had net worth of over $1 billion, despite having paid a total of $200 million in fines and settlements, relating primarily to civil lawsuits. As of 2007, Milken was worth about $2.1 billion and has long since entered other business ventures. Most of his wealth comes from his success as a bond trader; according to Highly Confident by Jesse Kornbluth, he only had three losing months in 17 years of trading. The penalty only covered a few years of trading where the government had evidence of insider trading from Boesky, so other years of earnings were untouched.
In 1998, without admitting any guilt, he returned $47 million in fees to settle an SEC charge related to the 1990 order barring him from the securities industry. He allegedly breached the order when he advised MCI/News Corporation in a transaction in 1995, for which he received $27 million in advisory fees, and when he advised Revlon chairman Ronald Perelman on a Revlon/New World Communications deal in 1996, with $15 million in fees to Milken. In 1996, he received $50 million when Time Warner acquired Turner Broadcasting. The SEC did not bring up the last deal in the charge.
History from Wikipedia and OldCompanyResearch.com (old stock certificate research service).