Michael Milken

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Michael Robert Milken

Born July 4, 1946 (1946-07-04) (age 62)
Encino, California, U.S.
Occupation financier, philanthropist
Net worth US$2.1 billion (2007)[1]

Michael Robert Milken (born July 4, 1946) is a prominent American financier and philanthropist who almost single-handedly created the market for high-yield bonds (also called junk bonds) during the 1970s and 1980s.

After he was sent to prison on finance-related charges, his detractors cited him as the epitome of Wall Street greed during the 1980s, and nicknamed him the Junk Bond King. Admirers, 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 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 never convicted of racketeering or insider trading. He was sentenced to ten years in prison, but was released after less than two years.

Milken has also devoted much time and money to charity over the past three decades:

  • He co-founded the Milken Family Foundation in 1982 to support education and medical research;
  • He is chairman of the Milken Institute, which hosts the annual Global Conference, which is attended by more than 3,000 thought leaders and decision makers from nearly 60 nations; and
  • He is the founder of the Melanoma Research Alliance, FasterCures (Center for Accelerating Medical Solutions), and the Prostate Cancer Foundation.

Fortune magazine called him "The Man Who Changed Medicine" in a 2004 cover story about his positive influence on medical research.

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.[1]


[edit] Education

Milken was born in Encino, California to a upper middle class Jewish family. He graduated from Birmingham High School, where his classmates included actresses Sally Field and Cindy Williams.

A summa cum laude B.S. 1968 graduate of the University of California, Berkeley (where he was elected Phi Beta Kappa and was a member of the Sigma Alpha Mu fraternity[2]), Milken received his MBA from the Wharton School at the University of Pennsylvania.

While at Wharton , 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.

[edit] Career

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 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 (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.[3] 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.

[edit] Milken 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. Both these buyers subsequently failed as a result of their junk bond investments. 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 (developer), and 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 (metaphorically holding their noses, perhaps) enter the high-yield market. Notable buyouts financed by Drexel of companies previously thought invulnerable included Beatrice Companies and the cosmetics firm, Revlon.

[edit] Impact on the high yield market

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 LBOs, 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. (In fact, however, Gordon Gecko, played by Michael Douglas, is much closer to the arbitrageur, Ivan Boesky, who eventually precipitated his downfall, than to Milken.)

Amongst his significant detractors have been Martin Fridson formerly of Merrill Lynch and author Ben Stein. (Stein did, however, once write him a letter asking for a job). 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),[4] 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.[3]

[edit] Scandal

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.[4] 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.[4] He often called Drexel's president and CEO, Fred Joseph--known for his strict view of the securities laws--with ethical questions.[3] In a 2009 Investment Dealer Digest article, Joseph said of Milken, "He was the smartest guy I ever worked with. He was the hardest working guy I ever worked with. He is a great credit analyst." 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.

[edit] 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.[4][3]

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.[4]

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.[4] 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 (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.[3][4]

[edit] Indictment

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, 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.[4][3]

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 handlers hired various other attorneys and his case became more difficult.

[edit] Guilty plea

On April 24, 1990, Milken pleaded guilty to six securities and reporting felonies in 1990:[1]

  1. 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.
  2. Selling stock without disclosure of an understanding that the purchaser would not lose money.
  3. Aiding and abbetting another in filing inaccurate broker-dealer reports with the SEC.
  4. Sending confirmation slips through the mail that failed to disclose that a commission was included in the price.
  5. 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.
  6. One count of conspiracy to commit the other five violations.

None of these matters had ever been prosecuted under similar facts. The reporting violations have never been prosecuted before or since as crimes.

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. However, Milken never admitted nor was convicted of insider trading.

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 grandfather--about their investments.[3] 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. Nonetheless, this and other tactics employed by the government in the course of the investigation were the cause of much criticism. For example, some observers suspected that damaging stories (revealing, for instance, the size of Milken's 1986 bonus) appearing in the press (particularly the Wall St Journal) periodically throughout the investigation could only have come from Giuliani's office -- a clear violation of the law.

The case would have been difficult to explain to a jury despite what appeared to be strong direct and circumstantial evidence. Nonetheless, many experts believed that Milken had little chance of acquittal. Some felt 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.[4] Also, it was felt that a jury would have trouble believing that anyone could earn the money Milken earned and do so legally.[3]

[edit] Sentencing

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.

Upon his release, he still had net worth of over $1 billion, despite having paid a total of $200 million in fines and settlements - the highest paid by an individual person according to the Guiness Book of World Records - [1] relating primarily to civil lawsuits. As of 2007, Milken is 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.

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.

[edit] 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 didn't recommend the PSA test, he 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 to indicate 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.[5] [6]

[edit] 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 $58 million to more than 2,300 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 its Global Conference in Los Angeles;
  • Milken Scholars, a program provides outstanding high school graduates with a commitment of four years of college financial assistance, counseling, volunteer opportunities and preparation for graduate studies;
  • Teacher Advancement Program (TAP), 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, the world's largest philanthropic source of funds for prostate cancer research. Milken himself was diagnosed with advanced prostate cancer in the same month he was released from the prison. His cancer is currently in remission.

In 2003, Milken launched the 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 him "The Man Who Changed Medicine"[1] in a 2004 cover story about his positive influence on medical research.

Milken is also a major donor to the Milken Community High School, a private Jewish high school. This donation actually came from the "Milken Family".

In recent years, Milken has been a commencement speaker at the University of California, San Diego and other institutions.

[edit] Footnotes

  1. ^ a b c d "The World's Billionaires: #458 Michael Milken". Forbes.com. 2007-03-08. http://www.forbes.com/lists/2007/10/07billionaires_Michael-Milken_SSM6.html. Retrieved on 2007-05-01. 
  2. ^ UC Berkeley Inter-Fraternity Council: Sigma Alpha Mu
  3. ^ 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. 
  4. ^ a b c d e f g h i 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. 
  5. ^ The Man'S Cancer - Time
  6. ^ The Man Who Changed Medicine - November 29, 2004

[edit] References

  • 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-10: 1559721359.
  • James B. Stewart - Den of Thieves, New York: Simon & Schuster, 1991, (ISBN 0-671-63802-5). NOTE: Stewart won the Pulitzer Prize in 1988 for his coverage of the 1987 stock market crash, as well as his reporting on insider trading scandals.
  • 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). Note: Fischel was Milken's attorney at one time; he is also an economist affiliated with the University of Chicago.
  • Robert Sobel - Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken' (1993), (ISBN 0-471-57734-0). Note: Sobel is a noted business historian.

[edit] External links

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