Michael Milken

Michael Milken
Michael Milken
Born Michael Robert Milken
July 4, 1946 (1946-07-04) (age 65)
Encino, California, U.S.
Conviction(s) Securities fraud
Penalty 2 years in Federal prison, $200 million in fines, $400 million in restitution
Status released January 1993[1]
Occupation Entrepreneur, financier, philanthropist

Michael Robert Milken (born July 4, 1946) 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.[2]

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.[3]

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.[2]

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.[4] 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.[5] Much of that wealth comes from his success as a bond trader; he only had four losing months in 17 years of trading.[6]



Milken was born to a Jewish family in Encino, California.[7] He graduated from Birmingham High School, 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.[8] 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.


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.[6] 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.

The high-yield market and the 1980s buyout boom

History of private equity
and venture capital

Early history
(Origins of modern private equity)

The 1980s
(LBO boom)

The 1990s
(LBO bust and the VC bubble)

The 2000s
(Dot-com bubble to the credit crunch)

v · d · e

By the mid-1980s, Milken's network of high-yield bond buyers (notably Fred Carr's Executive Life Insurance Company 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 "greenmailers." 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),[9] 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.[6]


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.[9] 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.[9] He often called Drexel's president and CEO, Fred Joseph—known for his strict view of the securities laws—with ethical questions.[6] On the other hand, several of the sources James B. 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.

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.”[10]

Ivan Boesky and an intensifying investigation

The SEC inquiries never 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 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.[6][9]

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.[9]

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 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.[9] 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.[6][9]

Indictment and sentencing

In March 1989, a federal grand jury indicted Milken on 98 counts of racketeering 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.[6][9]

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.[5] Three of them involved dealings with Ivan Boesky to conceal the real owner of a stock.[10]

  • Aiding and abetting another person's failure to file an accurate 13d statement 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.[10]

  • 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.[11]

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.[12][13] 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.[14] 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.[6]

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.[15]

Milken's sentence was later reduced to two years from ten; he served 22 months.[1]

Prostate cancer

In January 1993, Milken received the results of a PSA 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.[2][16]

Philanthropic activities

In 1982, Milken and his brother Lowell founded the Milken Family Foundation 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 Institute, 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 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.[2]

Notes and references

  1. ^ a b Case Studies in Business Ethics Al Gini, Alexei M. Marcoux
  2. ^ a b c d Daniels, Cora (2004-11-29). "The Man Who Changed Medicine". Fortune (Time Inc.). http://money.cnn.com/magazines/fortune/fortune_archive/2004/11/29/8192713/index.htm. Retrieved 2009-07-28. 
  3. ^ http://www.time.com/time/magazine/article/0,9171,976246,00.html Time Magazine article on his early release from prison, dated August 17, 1992
  4. ^ Eichenwald, Kurt (April 3, 1989). "Wages Even Wall St. Can't Stomach". New York Times. http://www.nytimes.com/1989/04/03/business/wages-even-wall-st-can-t-stomach.html.  "Surely no one in American history has earned anywhere near as much in a year as Mr. Milken."
  5. ^ a b "The World's Billionaires: #488 Michael Milken". Forbes.com. 2010-10-03. http://www.forbes.com/lists/2010/10/billionaires-2010_Michael-Milken_SSM6.html. Retrieved 2010-12-13. 
  6. ^ a b c d e f g h Kornbluth, Jesse (1992). Highly Confident: The Crime and Punishment of Michael Milken. New York City: William Morrow and Company. ISBN 0688109373. 
  7. ^ [1]
  8. ^ UC Berkeley Inter-Fraternity Council: Sigma Alpha Mu
  9. ^ a b c d e f g h Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine. ISBN 1556112289. 
  10. ^ a b c Three Felonies A Day: How the Feds Target the Innocent, Encounter Books, 2009. Chapter Four: Following (or Harassing?) the Money
  11. ^ Moscow-Pullman Daily News, Feb 20, 1991. "Losses from Milken less than estimated"
  12. ^ New York Times, 1991-09-12, "Drexel Sues Milken, Seeking Repayment"
  13. ^ New York Times, 1992-02-18. "Milken to Pay $500 Million More In $1.3 Billion Drexel Settlement"
  14. ^ New York Times, May 6, 1990. "Tactics in Wall Street Cases Troubling Some Lawyers"
  15. ^ Stewart, James B (1992). Den of Thieves (reprint ed.). Simon and Schuster. p. 517. ISBN 067179227X. http://books.google.com/books?id=xNHIpVJgcHgC&pg=PA517&lpg=PA517&dq=%22When+a+man+of+your+power+in+the+financial+world.%22#v=onepage&q=%22When%20a%20man%20of%20your%20power%20in%20the%20financial%20world.%22&f=false. 
  16. ^ Time, Jun. 24, 2001. "The Man's Cancer"

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. Stewart - Den of Thieves, New York: Simon & Schuster, 1991, (ISBN 0-671-63802-5).
  • Ben Stein - 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 Sobel - Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken' (1993), (ISBN 0-471-57734-0).
  • Michael Lewis. (1989). Liar's Poker: Rising through the Wreckage on Wall Street. New York: W.W. Norton. ISBN 0-393-02750-3. 

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