A Stiff Term for the Wizard

By John Greenwald

The sobs that shook Michael Milken in Manhattan federal court last week punctuated the most dizzying fall from power in modern Wall Street history. They came as federal Judge Kimba Wood sentenced the financial wizard, whose junk bonds fueled the epic 1980s takeover wars, to 10 years in prison. Said the tearful felon: "What I did violated not just the law but all of my principles and values, and I will regret it for the rest of my life. I am truly sorry."

The sentence was by far the stiffest jail term in a five-year federal crackdown on securities fraud that has so far netted a dozen major convictions. The big fish included Wall Street speculator Ivan Boesky, who was fined $100 million for insider trading in 1986 and sentenced to three years in prison (he served two). As a condition of his plea bargain, Boesky helped prosecutors pursue Milken.

The severity of the sentence stunned members of Milken's camp, one of whom had allowed before the sentencing that he "would consider three years to be too harsh." In its strategy the defense sought to portray Milken as a concerned citizen who taught math to inner-city children and donated large sums of money to charity, while striving to overcome his image as the personification of Wall Street greed. "Our goal was to make Michael a human being rather than a symbol," said a Milken source.

But chief defense lawyer Arthur Liman may have blundered in his insistence that Milken's crimes were merely technical ones, even after the financier pleaded guilty last April to six of 98 counts of securities violations and agreed to pay a record $600 million in fines and restitution. The defense tactic helped precipitate an unusual two-week presentencing hearing that showed Milken's operations at the now defunct Wall Street firm Drexel Burnham Lambert to have been riddled with unlawful activities. Significantly, the new testimony did nothing to refute the government's claim that Milken had encouraged Drexel employees under him to destroy or remove incriminating documents. Moreover, Liman's strategy precluded Wood from crediting Milken for any real remorse. Said Wood: "Your crimes show a pattern of skirting the law, stepping just over to the wrong side of the law in an apparent effort to get some of the benefits from violating the law without running a substantial risk of being caught."

How much time will Milken, 44, ultimately spend on ice? Wood said she will consider reducing the sentence if Milken cooperates with other government probes of Wall Street before he enters prison next March. Once he begins his term, Milken can be eligible for parole at any time. But experts said he would probably serve at least three years of the 10-year sentence because of the importance of the case as a deterrent to white-collar crime. Once Milken leaves the slammer, he will have to perform 5,400 hours of community service over three years.

Some legal scholars were as shocked as the defense team by the length of the jail time. "Wow! I'm surprised," said Harry First, a New York University law professor who specializes in white-collar cases. "I was expecting five years just based on what other people have gotten." Declared Columbia law professor Harvey Goldschmid: "The message being sent is that you've got to play within the rules of the game. White-collar crime will be taken seriously and sentenced in a serious way."

Wood drove home that point in rendering her decision. While she acknowledged that sentencing Milken to community service would permit him "to work productively with others," she asserted that "a prison term is required for the purposes of general deterrence." Moreover, she added, Milken had committed "serious crimes warranting serious punishment and the discomfort and opprobrium of being removed from society."

Milken has the right to appeal on grounds that the presentencing hearing violated his rights by introducing charges that had already been dropped. But legal experts saw little hope for that strategy. "There is no right to appeal on the length of a sentence," says Columbia law professor John Coffee Jr. "They may try to challenge the constitutionality of the hearing, but I'm certain they will be unsuccessful."

Even as Milken heard his sentence, the firm he had built into a financial powerhouse was under legal siege once again. Federal regulators earlier this month filed a $6.8 billion claim against the bankrupt Drexel for allegedly rigging the junk-bond market and selling bonds to savings and loans before the value of the IOUs collapsed. The government expects to lose at least $2 billion on junk bonds that it has taken over from seized thrifts. Drexel said it would strongly contest the government claim.

When he emerges from prison, Milken will remain an extravagantly wealthy man. At the height of his power, from 1983 to 1987, Drexel paid him $1.1 billion for pioneering junk bonds and turning them into Wall Street's most lucrative money machine. Instead of squandering the fortune on yachts and jets, Milken formed investment partnerships that earned him additional millions. But riches will not shield Milken from the loss of his freedom. In an 11-page plea for leniency that he wrote to Wood last month, Milken acknowledged, "All people, I am sure, have a fear of incarceration and separation. I am not unique, and I, too, have those fears."

It is precisely such fears that Judge Wood intends to reinforce with her stiff sentencing of Milken, say experts. "We are dealing here with a theme that resonates very strongly in American society," says Columbia's Coffee. "It is that the abuse of responsibility by those in high places will be dealt with harshly." The government hopes to make the threat of harsh sentences for white-collar felons the pointed lesson of Michael Milken's fall.

With reporting by Bernard Baumohl and Thomas McCarroll/New York