Milken Brothers Go to Court to Save Jobs, 1988 Bonuses

NEW YORK —  Lawyers for Drexel Burnham Lambert “junk bond” chief Michael Milken filed papers in federal court Friday in an attempt to save his job and his 1988 bonus, estimated at $200 million.

The lawyers said that the U.S. Attorney’s Office in Manhattan had acted “like a sheriff in the Wild West,” blatantly ignoring Milken’s constitutional property rights when it forced Drexel to sign a plea agreement requiring the firm to fire Milken and withhold nearly all of his compensation for 1988.

The court papers filed Friday also challenge the agreement’s provisions covering Lowell Milken, Michael Milken’s brother, who also is a key employee in the Beverly Hills-based junk bond department.

Drexel on Dec. 21 tentatively agreed to plead guilty to six criminal charges and pay $650 million in penalties. The plea agreement worked out with prosecutors requires Drexel to fire Michael Milken once the agreement goes into effect and to withhold his bonus from last year. It also requires Drexel to put Lowell Milken on unpaid leave of absence if he is indicted and withhold more than half of his 1988 compensation.

Drexel’s accord, however, will only go into effect if the firm successfully completes negotiations with the Securities and Exchange Commission on settling separate SEC civil charges of fraud and insider trading. The talks are said to be continuing.

The Milken brothers are expected to be indicted on federal racketeering and securities fraud charges. But they haven’t yet been formally accused of any crimes, and they deny any wrongdoing.

As reported, even before Friday’s court filing several independent legal experts have said the provisions of the plea agreement on firing Milken and withholding the brothers’ pay were very unusual and may not be on solid legal ground. The prosecutors handling the case so far have declined to discuss their legal reasoning.

On Friday, Jess Fardella, one of the assistant U.S. attorneys on the case, said his office had just received copies of the papers filed by the Milkens’ lawyers. “We haven’t had a chance to review them in any depth,” he said, adding that the government would reply in court documents to be filed by Feb. 21.

U.S. District Judge Kimba M. Wood must decide whether to accept the plea agreement before Drexel formally enters its guilty plea.

In preparing their court documents, Michael Milken’s lawyers enlisted the help of Laurence H. Tribe, a Harvard Law School professor and constitutional law expert. Their argument rests on the Fifth Amendment, which says that individuals can’t be deprived of property without due process of law.

In a legal brief, the lawyers said: “the prosecutor seeks . . . to punish the Milkens through the imposition of multimillion-dollar fines and the deprivation of their livelihoods, without indictment, hearing and trial.”

The lawyers also charge that the plea agreement violates the constitutional separation of powers, which gives only Congress the right to seize property for a public purpose. They charge that it also violates laws that prevent third parties from interfering with contracts. The lawyers note that the Milkens’ employment and pay are determined by contract.

The provisions about the Milkens are believed to have been included in the plea agreement at the insistence of U.S. Atty. Rudolph W. Giuliani, who left office shortly after it was filed. Although it doesn’t specifically name Giuliani, the brief several times compares “the federal prosecutor” to an Old West lawman who doesn’t feel bound by constitutional restraints.

‘Style of Wyatt Earp’

“What may pass for justice in the style of Wyatt Earp does not pass muster under the United States Constitution,” the brief said.

On Friday, Drexel indicated that it wouldn’t fight efforts to rule the provisions unconstitutional. The firm has said all along that the sections affecting the Milkens were included only at the government’s insistence. Steven Anreder, a Drexel spokesman, said: “If a court determines that any of them violate individual rights and are not enforceable, we would be happy to comply with that decision.”

Separate affidavits filed by Michael and Lowell Milken’s attorneys said nearly all of their annual compensation comes in the form of year-end bonuses. The amount of Lowell Milken’s bonus hasn’t been disclosed. But his attorney, Michael Armstrong, said it’s “not as large as his brother’s.”

Michael Milken is also Drexel’s largest individual shareholder. He owns about 6% of the firm’s stock.

The timing of expected indictments of the Milkens and several other Drexel employees remains a mystery. The indictments were thought to have been imminent, but recently several additional witnesses have been called before the grand jury in New York. And sources close to the Milkens’ legal defense say that while indictments may still come soon, it’s also possible that there will be several more months of delay.

The sources said that Giuliani, who is said to have political ambitions including a possible New York mayoral candidacy, had been pressing for a quick indictment. But now that he has stepped down as U.S. attorney, the sources said, the pressure may have eased. The assistant prosecutors involved in the case refuse to comment.