Milken, Michael (1946–)

DURING THE 1970s, Michael Milken developed a financial scheme that made him one of the richest and most powerful men in the United States. He found that he could make enormous profits from rescuing “fallen angels” by engineering financial deals that offered high yields on low-priced debt notes. These so-called junk bonds were financed by Milken and his company, Drexel Burnham Lambert, for small, high-risk companies that had faced financial troubles or even bankruptcy but who still showed potential for recovery. Because of the risks involved, these companies had been generally ignored by investment bankers.

Milken was a master at convincing perspective investors that junk bonds were more lucrative than the more stable low-risk bonds. By the late 1980s, Milken who had become known as the “junk bond king” or simply “the king,” seemed to be at the top of the world. However, Drexel appeared more profitable on paper than it actually was because of innovative accounting practices. Before the decade was over, however, both Milken and Drexel were brought down by an insider trading scandal.

In May 1986, Milkin received a subpoena from the office of Rudy Giuliani, U.S. attorney for the Southern District of New York. As Giuliani's investigation unfolded, along with an ongoing investigation by the Securities and Exchange Commission (SEC), numerous charges surfaced. In March 1989, both Milken and his brother Lowell were charged with 98 counts of racketeering and securities fraud. Milken hired one of the most impressive legal/public relations teams ever put together to help him fight the charges. Since he was afraid that he might be vulnerable before a jury composed of minorities, Milken's public relations experts worked hard to improve his image with minorities. Reportedly, Drexel, who footed the bill for the enormous fees for the attorneys and the public relations team, put Milken on a monthly budget of only $1.2 million. When ordered to appear before Congress, Milken followed his lawyer's advice and claimed the Fifth Amendment, which protected him from having to say anything that might incriminate him. He was wise enough to know, however, that pleading the Fifth did not solve his problems.

In April 1990, Milken pleaded guilty to six felonies and was forced to pay a $600 million fine. Drexel Burnham Lambert declared bankruptcy, and the junk bond market collapsed, although it slowly recovered over the course of the next decade. Overall, Milken paid $1.1 billion to settle the hundreds of lawsuits filed against him and Drexel Burnham Lambert by government agencies, corporations, service providers, and investors.

When the judge read out the verdict that sentenced Milken to two years on each of five counts to be served consecutively, Milken was apparently so stunned that he failed to realize the significance of the term. He later collapsed when he understood that he was actually sentenced to 10 years in prison for violations of securities laws. While Milken could have been sentenced to 28 years in prison, few people thought he would receive a sentence of more than a couple of years. A two- or three-year sentence was typical for white-collar criminals convicted of securities violations.

...