Michael Milken
Michael Robert Milken is an American financier. He is known for his role in the development of the market for high-yield bonds, which led to his reputation as the "Junk Bond King", and his conviction and sentence following a guilty plea on felony charges for violating U.S. securities laws. Milken's compensation while head of the high-yield bond department at Drexel Burnham Lambert in the late 1980s exceeded $1 billion over a four-year period, a record for U.S. income at that time. With a net worth of $6 billion as of 2022, he is among the richest people in the world.
Milken was indicted for racketeering and securities fraud in 1989 in an insider trading investigation. In a plea bargain, he pleaded guilty to securities and reporting violations but not to racketeering or insider trading. Milken was sentenced to ten years in prison, fined $600 million and permanently barred from the securities industry by the U.S. Securities and Exchange Commission. His sentence was later reduced to two years for cooperating with testimony against his former colleagues and for good behavior. Milken was pardoned by President Donald Trump in February 2020.
Milken is a co-founder of the Milken Family Foundation, chairman of the Milken Institute, and founder of medical philanthropies funding research on melanoma, cancer, and other life-threatening diseases. A prostate cancer survivor, Milken has devoted significant resources to research on the disease.
Early life and education
Milken was born into a middle-class Jewish family in Encino, California.He graduated from Birmingham High School where he was the head cheerleader and worked while in school at a diner. His classmates included future Disney president Michael Ovitz and actresses Sally Field and Cindy Williams. In 1968, he graduated from the University of California, Berkeley with a BS with highest honors. He was elected to Phi Beta Kappa and was a member of the Sigma Alpha Mu fraternity. He received his MBA from the Wharton School of the University of Pennsylvania. While at Berkeley, 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.
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 as director of low-grade bond research. He was also given control of some capital and permitted to trade. Over the next 17 years, he had only four down months.Drexel merged with Burnham and Company in 1973 to form Drexel Burnham. Despite the firm's name, Burnham was effectively the sole survivor; the Drexel name came first only 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, and he became the merged firm's head of convertibles. He persuaded his new boss, fellow Wharton alumnus Tubby Burnham, to let him start a high-yield bond trading department—an operation that soon earned a 100 percent return on investment. By 1976, Milken's income at the firm, which had become Drexel Burnham Lambert, was estimated at $5 million a year. In 1978, Milken moved the high-yield bond operation to Century City in Los Angeles.
High-yield bonds and leveraged buyouts
By the mid-1980s, Milken's network of high-yield bond buyers had reached a size that enabled him to raise large amounts of money quickly.This money-raising ability also facilitated the activities of leveraged buyout firms such as Kohlberg Kravis Roberts and of the so-called "greenmailers". Most of them were armed with a "highly confident letter" from Drexel, a tool Drexel's corporate finance wing crafted that promised to raise the necessary debt in time to fulfill the buyer's obligations. It carried no legal status, but by that time Milken had a reputation for being able to make markets for any bonds that he underwrote. For this reason, "highly confident letters" were considered to reliably demonstrate capacity to pay. Supporters, like George Gilder in his book Telecosm, state 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."
Despite his influence in the financial world during the 1980s,, Milken is an intensely private man who shuns publicity; he reportedly owned almost all photographs taken of him.
Later career
Milken and his brother Lowell founded Knowledge Universe in 1996, as well as Knowledge Learning Corporation, the parent company of KinderCare Learning Centers, the largest for-profit child care provider in the country. Michael Milken was chairman of Knowledge Universe until it was sold in 2015.He invested in K12 Inc., a publicly traded education management organization that provides online schooling, including to charter school students, for whom services are paid by tax dollars, which is the largest EMO in terms of enrollment.
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.Milken's 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. Milken often contacted Fred Joseph, Drexel's president and CEO, with ethical questions; Joseph was known for his strict view of the securities laws.
On the other hand, several of the sources James B. Stewart used for Den of Thieves told him that Milken often tried to get as much as five times the maximum markup on trades that was permitted at the time.
Harvey A. Silverglate, a 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."
Ivan Boesky and an intensifying investigation
The SEC inquiries never advanced beyond the investigation phase until 1986, when arbitrageur Ivan Boesky pleaded guilty to securities fraud as part of a larger insider trading investigation. As part of his plea, Boesky implicated Milken in several illegal transactions, including insider trading, stock manipulation, fraud, and stock parking. 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 except through his lawyers. It turned out that Milken's legal team believed Drexel would be forced to cooperate with the government at some point, believing that a securities firm would not survive the bad publicity of a long criminal and SEC probe.For two years, Drexel insisted that nothing illegal had occurred, even when the SEC sued Drexel in 1988. Later that year, Giuliani began considering an indictment of Drexel under the powerful Racketeer Influenced and Corrupt Organizations Act. Drexel management, concluding that a financial institution could not possibly survive a RICO indictment, immediately began plea bargain talks. However, talks collapsed on December 19, when Giuliani made several demands that went beyond even what those who believed an indictment would destroy the firm were willing to accept. For example, Giuliani demanded that Milken leave the firm if indicted.
Only a day later, 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. It also included several managers of money market funds who had worked with Milken in the past. It appeared that the money managers bought the warrants for themselves and did not offer the same opportunity to the funds they managed. Some of Milken's children also received warrants, according to Stewart, raising the appearance of Milken self-dealing.
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 existence had not been known to the public at the time—seriously eroded Milken's credibility with the board. On December 21, 1988, Drexel entered an Alford plea to six counts of stock parking and stock manipulation. It allowed Drexel to maintain its innocence while conceding that it "was not in a position to dispute" the allegations made by the government. As part of the deal, Drexel agreed that Milken had to leave the firm if indicted.