Donald Trump’s recent pardon of financier Michael Milken received condemnation from many, like this tweet from CNN contributor Keith Boykin. Most rehashed the same slogans from decades ago; “financial fraudster,” “face of the insider trading scandals of the 80s,” “junk bond king,” etc. but few actually know or cite any specifics of what he did, or what the background of his case was. Milken was one of the most lauded and hated figures of the 1980s and became an inspiration for Wall Street’s villainous character Gordon Gekko. But his story is misunderstood.

Even the Republicans who defend him typically only focus on his philanthropy, avoiding discussion of his financial dealings. But his prosecution was a travesty of justice and his contributions to the economy were tremendous. The reality is that Milken was one of America’s greatest businessmen and revolutionized the economy benefiting millions. There is so much to his story few know, and the lessons are still crucially important.

The purpose of this article is to give the context of Michael Milken’s financial dealings and the background of his prosecution. It’s not meant to defend his actions after jail, nor is it an endorsement of any of Trump’s other pardons. The information in this article primarily comes from the excellent book Payback by Daniel Fischel, a former dean of the University of Chicago Law School, with intimate knowledge of the case. Much more detail can be found in the book.

Brief Background on “Junk Bonds” and the 80’s Economy

The whole framing of the issues surrounding Milken and Wall Street in the 1980s is loaded with terms like “junk bonds,” “hostile takeovers,” “corporate raiders,” “speculators,” etc. These are all legitimate and healthy economic activities, but the terms are prejudicial to the public, who often have little understanding of what’s going on and are easily mislead into automatically thinking these endeavors are nefarious simply by their name.

In the 1970s, US corporations were becoming aging dinosaurs and the economy was stagnant. The solid growth of the post WWII economic era in the US was facing several challenges, and the existing corporate structure was making them less competitive in the global economy.

Traditionally, corporations in America were smaller and mostly run by their owners, who had a vested interest in their success. However, as they began to grow and raise money from outside investors, professional managers began to run most larger firms. The “owners” of companies were now shareholders, who tended to be diversified in many different companies, and had little vested interest in each particular one. The managers had little incentive to fire themselves, and were typically compensated based on the size of the company, which provided the incentive for companies to grow and acquire smaller firms.

This gave rise to conglomerates, which began to characterize the economic landscape of the 1960s and 70s. Larger corporations gobbled up many smaller entities, even though they often had little expertise in that field. The low interest rates of the time meant that as long as they could make more than their loan obligations, they could stay afloat, and the bigger the company the bigger the manager salaries. For example, Ling-Temco-Vought was a major conglomerate which was involved in aerospace, airlines, electronics, steel manufacturing, sporting goods, meat packing, car rentals and pharmaceuticals! Obviously, such conglomerates were prone to inefficiencies and mismanagement.

Changes in the 1970s

Six economic developments in the ’70s and ’80s turned many of these conglomerates into dinosaurs headed for extinction:

1. Energy- the energy crisis of the 1970s caused a 10-fold increase in the price of crude oil, which many believed would continue. Consumers began changing their behavior, but when energy prices fell in the 1980s, many industries crashed. This required rapid adaptation to compete.
2. Computers- jobs previously needing lots of employees could now be handled by just a few, which could work at decentralized locations. As computer technology increased, every industry had to adapt to the increased efficiency.
3. Global Competition- Unlike the post WWII period, US companies now faced stiff competition from overseas, particularly from Japan and Europe.
4. Deregulation- several industries (oil and gas, airlines, trucking, financial services, telecommunications and broadcasting) were freed up by regulatory changes in the late 70s and early 80s, causing rapid changes in each (cable television, for example).
5. Reagan- his generally pro-business administration relaxed US antitrust policy, which allowed transactions to go forward without intervention on antitrust grounds, as long as they weren’t deemed clearly “anti-competitive.”
6. High yield bonds- rapid growth in this market made it possible for entrepreneurs who otherwise lacked funds to acquire firms of virtually any size, if they could convince outsiders to fund it. These became widely labeled as “junk bonds” but were just high interest loans that reflected increased risk.

These changes made the landscape ripe (and necessary) for US businesses to restructure. If an entrepreneur saw an inefficiently run conglomerate, there were huge profits to be made by acquiring them and running the company better. Thus, “corporate raiders” would use “junk bonds” as the means to implement “hostile takeovers” to restructure companies who were deemed mismanaged.

However, these were only lucrative if the businesses were inefficiently run and the “raiders” performed better. It would be pointless and disastrous to takeover a sound company. After all, hostile takeovers were financed by high yield bonds, which meant this was a highly risky endeavor if it didn’t pay off. It was only because of the aging dinosaur nature of US firms that so many of these did payoff. This caused an explosion of economic growth in the 1980s and likely saved the country from the stagnation of the 70s. Entire new industries were also funded by these high yield bonds, like cable television, telecommunications and health care technology. Contrary to its detractors’ claims, this bolstered the economy. The stock market tripled and millions of jobs were created in the 80s thanks to this restructuring.

Milken and His Enemies

Michael Milken was one of the pioneers of the high yield bond market, and financing takeovers. He was a financial genius, his ability to get funds together for takeovers and acquisitions were legendary, leading to the restructuring revolution of the 80s. His firm Drexel Burnham became the leading player in this field and began making huge profits, as leaders in any lucrative industry do. However, he was also an outsider, coming from modest means, as were many who succeeded in this new marketplace. This caused much resentment among the entrenched financial elites, both established banking institutions and executive management of major companies. After all, they were being left on the sidelines, and their companies were being restructured out from underneath them. Many of these were well connected and influential in politics, like Nicholas Brady, head of the banking firm Dillon Read, who eventually became treasury secretary under George H.W. Bush.

Corporate takeovers also created contempt among certain workers, particularly unions. Part of the reason for inefficiencies in certain companies were because of unions. While the overall result of restructuring was to create millions of jobs, cases where “corporate raiders” eliminated jobs or cut salaries were widely publicized and created resentment. Anti-capitalist voices on the left jumped on the opportunity to demonize this.

Thus, there became a strong political motive from the right and the left to combat the high yield bond and takeover industry, combined with the ever populist sentiment against rich financiers and Wall Street. This was the environment where Oliver Stone’s Wall Street captivated the culture, and Michael Douglas won an Oscar for portraying Gordon Gekko. Even with the supposed commitment to the free market under Reagan, these forces would not be stopped.

The Financial “Crimes” of the 1980s

There were basically three crimes that Milken and other financiers were charged with by prosecutors in the 1980s; insider trading, stock parking and stock manipulation. These had traditionally been considered minor infractions, and rarely prosecuted.

Insider Trading

For most of American history there was virtually no regulation of insider trading, in fact the courts didn’t even accept the authority until 1968. To this day, the government hasn’t defined what insider trading is, the law is blurry and completely non-objective. The reality is that insiders trade all of the time, and they typically have more knowledge than outsiders. They might have inside knowledge of a CEO’s health problems, or hear that things are going well behind the scenes. When you invest money, you want an “insider” because they know more than you and can better trade.

What’s typically prohibited as insider trading are trades possessing “material” information, which is knowledge of specific undisclosed events like earnings or merger announcements. But there are significant gray areas in the law, and insider trading is not as cut and dry as many think. The first case of criminal insider trading was Chiarella vs. United States, ultimately decided by the Supreme Court in 1980. Vincent Chiarella worked as a financial printer, which printed announcements of takeover bids. Chiarella cracked the code used to conceal the names of the companies, and began trading on inside information on his own, earning about $30,000. He was convicted of insider trading, but the SCOTUS ultimately overturned this, ruling it wasn’t a crime to trade with unequal information, so long as there is no fiduciary responsibility of trust and confidence being broken. While Chiarella was a shady employee who deserved to be fired for dishonesty, he wasn’t a criminal insider trader.

To clarify, it’s always been considered criminal to breach a fiduciary relationship in regards to insider trading. For example, a CEO has a fiduciary relationship with the company’s shareholders and it would violate that to trade on inside information contrary to the company’s interest (like short selling if they knew bad news). Or, it would be criminal for a money manager with fiduciary responsibility to investors to trade on information that would harm them. In other words, insider trading with a victim is a legitimate crime, but without a victim it’s not.

In a separate SCOTUS case in 1983, Dirks vs SEC, the court further established this, and that the subjective notion of “trading on equal information” or “damaging public confidence” were not criminal insider trading. Raymond Dirks was a securities analyst who got wind of an insurance company defrauding its policyholders. He independently verified this and notified his clients, many of whom sold their shares. He actually tried to expose the fraud to the government, but was instead charged and convicted of insider trading. However, the SCOTUS ruled that since he didn’t receive a personal benefit (instead actually benefited his clients), he acted lawfully, despite providing insider information to investors. In fact, Dirks showed that insider trading could be beneficial and righteous.

The government’s response to these Supreme Court decisions was to undercut it with SEC’s Rule 14e-3, which made it unlawful to trade any security relating to a tender offer if one is in possession of “material information” that is non-public. Despite the SEC not having the authority to enact such a law (they are an enforcement agency, not a lawmaking one) it became used in future prosecutions, along with the “misappropriation theory” which held that if there was a fiduciary responsibility anywhere in the vicinity of an insider trade, it was criminal.

These changes gave the government wide discretion and powers to prosecute “insider trading.” Essentially they could go after almost anyone they wanted, as receiving tips, rumors and inside information were standard practices of the industry. Additionally, Congress hiked the penalties for insider trading in 1984 and 1988 (while still not defining the practice). In a populist atmosphere of anger against “Wall Street excesses” and “the decade of greed” this set the stage for ambitious prosecutors to go after those like Milken.

Stock Parking

Like insider trading, stock parking has never been properly defined in securities law. Stock parking is when one purchases securities on the behalf of another, with the understanding the stock will be purchased back at a later date. It’s done in order to conceal the identity of the buyer, and is a widespread practice. Investors will often want to disguise their identity if buying large amounts of stock, as it signals to others that there is a bargain to be had (or conversely a disaster to avoid). The same practice occurs in other markets as well. Art experts often send agents to bid at auctions for them, as they don’t want others to know they are interested. The agent then transfers ownership in an understood relationship. There is nothing inherently wrong or criminal about it.

However, stock parking can be used to evade the mountains of SEC regulations, which can make one in technical violations of the rules. But the nature of the “crime” is hard to prove as these are not written contracts, typically oral and informal. There is nothing compelling either side to stick to the parking agreement except good will in future dealings. Often traders do it as favors, in exchange for help in the future. Most importantly, stock parking typically has no victims and harms no one.

The ambiguous and benign nature of stock parking means it was traditionally viewed as a minor violation and seldom pursued by regulators. It was a slap on the wrist type of infraction. But in the frenzied climate of the 1980s it became one of the government’s favorite methods of prosecution, and despite it being standard practice in trading, all of a sudden no penalty was too severe. The absence of victims or harm inflicted notwithstanding.

Stock Manipulation

Again, there is no coherent definition of stock manipulation in securities law (a reoccurring theme here). It’s commonly understood to be conduct intended to cause stocks to trade at “artificial prices” and distorting markets by “interfering with the free play of supply and demand.”

Certain stock manipulation should be regarded as criminal as it’s fraud. For example, if an underwriter “paints the tape” by recording transactions at high prices that aren’t occurring, they are fraudulently misleading people into thinking there is demand, and manipulating the stock to artificial levels. This sort of fraud has always been considered unlawful, and rightly so.

However, none of the big stock-manipulation prosecutions of the 1980s involved this type of manipulation. Instead, they were cases not of actual fraud, but where traders were alleged to have traded with “manipulative intent.” Essentially, this is attempting to criminalize the state of mind of traders, which is a dangerous use of the law. And the concept of “artificial prices” becomes completely non-objective as there’s nothing to define what an artificial price is. After all, if a trader short sells a stock how do you prove if they had “manipulative intent” to drive down the price artificially vs “good intent?” What even is an “artificial price” in the context of the stock market, provided no fraud is involved? None of these questions had proper legal answers.

Additionally, manipulation often backfires. The Hunt brothers infamously tried to manipulate the silver market in the late 1970s and lost most of their vast billions in inheritance. Presumably, manipulation should only be a crime if the manipulator benefits at the expense of others. But this was not used as a criteria for the government, only the vague assertion of manipulative intent in regards to trading. High profile traders like John Mulheren began being prosecuted for buying shares to “manipulate” stocks by 1/8 of a point. The evidence was typically vague, hearsay testimony.

Again, the ill-defined statutes gave prosecutors wide powers and discretion to go after whomever they chose. The blurry nature of distinguishing manipulative vs non-manipulative trades made it possible to try, and often convict, anyone they chose to pursue.

Rudy Giuliani Leads the Witch Hunt

The increasingly subjective nature of defining these financial “crimes” combined with increased penalties and public anger at Wall Street excesses created a ripe environment for an ambitious prosecutor to make a name for themselves. That person was Rudy Giuliani, who left his position as associate Attorney General of the US in 1983 to became US Attorney for the Southern District of New York. While he stoked a public reputation for being a tough cop who was cleaning up Wall Street, in reality Giuliani was a pawn for the Wall Street establishment. Remember, the established financial institutions despised the upstart high yield and takeover industry and sought their destruction. Top officials from Dillon Read, Lazard Freres and other establishment investment banks became some of Giuliani’s biggest campaign contributors in his subsequent run for mayor.

Giuliani took full advantage of the vagueness in these statutes, and targeted many big players in the junk bond and takeover industries, trampling their civil liberties along the way, often in outrageous fashion. These financiers had few defenders in the media or society, so there was little public pushback, and much acclaim. Eventually, many of the high profile Giuliani-led convictions were overturned by the 2nd Circuit Court due to the government’s improper behavior, but by that time Rudy was famous and had left to pursue his political ambitions.

Ivan Boesky

To be fair, there were legitimate financial criminals during the 1980s, some of which were prosecuted by Giuliani. Investment banker Dennis Levine, who spent a short stint at Drexel, and Ivan Boesky, one of the top takeover arbitrageurs on Wall Street, were two such cases. However, both of these corrupt men received favors in exchange for helping the government. Even worse, Boesky was actually allowed to pull off one of the biggest insider trades of his career while assisting the prosecution!

Boesky’s crime was essentially agreeing to pay Levine for insider tips (who unethically stole them from Drexel), giving him a percentage of any gains he received from trading on them. The government’s case was actually quite weak, but as the prosecution aggressively closed in on him, Boesky leveraged his only trump card, his willingness to assist the government in their quest against Drexel and Milken. For example, he agreed to wear a wire in conversations with Milken. Boesky’s help never resulted in providing any criminal evidence or really anything of value, but he was now able to trade on the inside knowledge that Drexel and Milken were going to be prosecuted.

Thus, he was able to sell his large position in planned Drexel takeover stocks before the public announcement of his guilty plea. Once the public figured out what was going on, these stocks tanked, as investors realized that Drexel would be targeted and likely unable to work their magic in these deals. Boesky ended up making $200M in insider profits, while paying a $100M fine, loudly touted by Giuliani. The government’s position was ridiculous and hypocritical; on one hand they claimed Boesky broke the law and hurt investor confidence, on the other they let him profit from insider trades which actually hurt the public. Also, ironically it was Drexel who was the victim of Levine. He stole confidential information and sold it to Boesky, hurting the firm’s reputation and clients. Ultimately, it was Drexel who should have sued Levine for damages.

Martin Siegel and the “Giuliani Three”

Siegel was another legitimate criminal, who’s dealings were shocking in their brazenness, even to Wall Street. He would actually receive suitcases full of cash from Boesky in their infamous meetings at the Plaza Hotel, like something out of a movie. Even if he could escape insider charges, at a minimum he was guilty of tax fraud, and he knew it. Siegel was eager to make a deal. Unlike the mobsters Giuliani was used to, these Wall Street criminals had no stomach for jail and easily rolled over.

With Siegel’s newfound assistance and feeling invincible, Giuliani arrested takeover arbitrageurs Timothy Tabor and Richard Wigton of Kidder, and Robert Freeman of Goldman Sachs. However, the government had no case against them. Giuliani attempted to stall, but the judge denied the request and the indictment was dismissed. Giuliani publicly claimed he had more evidence and they would be later charged with new evidence, but this never materialized. Siegel falsely incriminated the three men to get a deal for himself. Based on his “cooperation” his judge sentenced him to just two months in prison. The precedent had been set; if you were an actual criminal, best to cooperate with the government and get a good deal.

Princeton/Newport

With the criticism and dissension after the “Giuliani Three” episode, Rudy redoubled his efforts. He found David Hale, who was recently fired from a small trading firm named Princeton/Newport. He received immunity in exchange for cooperation with the government, claiming he knew of a stock parking scheme between Drexel and Newport. In December 1987, 50 armed federal marshals burst into the offices of Princeton/Newport and seized documents and records.

Prosecutors again fell flat, as Hale’s credibility was suspect, being a disgruntled former employee who wanted to save himself. The government wasn’t even interested in Newport. They admitted they only wanted their cooperation to get Drexel, but would steamroll them if they refused to cooperate. Newport called their bluff and refused to help.

Giuliani and RICO

Frustrated, Giuliani now escalated things further, and this is where he really abused his prosecutorial power. He indicted four officers of Newport and one in Drexel with violating the Rackateer Influenced and Corrupt Organizations Act (aka RICO). RICO was an already controversial law aimed at prosecuting organized crime. It allowed the government to freeze assets of mafia members prior to conviction. When passed, Congress made clear it was to be used only to fight organized crime’s infiltration of business. Giuliani’s use of RICO was a radical departure from precedent and most people’s understanding of constitutional protection under the law.

Using RICO, Giuliani froze Princeton/Newport’s assets. Their clients and backers, including the Harvard University endowment fund, were terrified and pulled their money out of the firm. The effects were devastating and shortly after the firm was forced to liquidate and close.

Not only had Giuliani pioneered the criminalization of insider trading, stock parking and manipulation, he escalated that into claiming these practices amounted to “racketeering activity” that justified RICO. With this logic, he was able to launch massive bombs at any firm, no matter how trivial the conduct. Like many of Giuliani’s convictions, Princeton/Newport’s was eventually thrown out by the 2nd Circuit, but the damage had been done. Reputations and the company were destroyed. The Justice Department subsequently intervened and made it impossible for other prosecutors to use RICO in this way, a clear slap at Giuliani.

Drexel and Milken’s Demise

In September 1988, the SEC sued Drexel Burnham for securities fraud. Their 183 page suit revealed a surprisingly weak case. Their key allegation was that Milken and Boesky entered into a “secret arrangement” (which was just stock parking) in 1984 where both would purchase and sell securities on behalf of the other. This eventually led to a payment from Boesky to Drexel of $5.3M cash, which the SEC claimed was “falsely described” in an invoice as payment for consulting services.

The case rested on flimsy ground. If this supposed agreement (which was unwritten) were just a routine reciprocal accommodation to preserve a good client relationship, there would be no wrongdoing. It hinged upon the testimony of Boesky, who was now an admitted felon and had shaky credibility given his reciprocal deal with the government. And even if it were true, there was no evidence anyone was harmed by this stock parking agreement. In fact, in the entire suit there were no alleged victims. Only the opposite, Milken did what he could in all cases to help his clients.

The suit was actually quite anticlimactic given it’s buildup. However, most of the press, like the Washington Post, labeled it as “the most sweeping securities fraud case against a major Wall Street firm in the agency’s history.” The New York Times reported the accusations were “stronger than expected.” The public had no knowledge otherwise, and this became the conventional wisdom to this day.

Drexel Pleads Guilty

Despite the headlines, Giuliani knew the case was weak. But he still had his secret weapon, threatening RICO charges. He realized he needed more than Boesky’s testimony, so he threatened other Drexel employees with RICO prosecution and several were willing to cooperate in exchange for immunity.

With this ammunition, Giuliani demanded Drexel plead guilty or face a RICO indictment. Additionally, he demanded Drexel cooperate in the case against Milken. This bitterly divided the firm. Most who knew and worked with Milken in California were opposed to such a deal, while the older executives based in New York favored a deal. Initially, the board stuck by Milken and voted unanimously to reject Giuliani’s deal, but after Giuliani called on the phone directly and threatened RICO the next day, the firm caved and voted 16-6 to approve the deal, shortly before Christmas of 1988.

Drexel (who was a corporate entity not a person) pled guilty to 6 felonies and paid $650M in fines. They also agreed to fire Milken and his brother Lowell, and subsequently cooperate against Milken. The executives naively thought the firm would be able to continue functioning by playing ball, but the firm became a quasi-government agency and had to report to an oversight committee. Few recognized that these “felonies” were minor hypertechnical violations that no one had ever thought constituted crimes before, and the firm suffered irreparable harm.

Drexel began to die a slow death. Their reputation was ruined, and without Milken’s genius, they were unable to finance takeover endeavors like before. They reported an operating loss of $40M in 1989, and ended the year half its former size, shrinking from 10,000 employees to 5,200. By February 1990 it declared bankruptcy. Ironically, Drexel executives hoped that it would be saved by Nick Brady, its former establishment competitor at Dillon Read, now Treasury Secretary under Bush. However, the financial establishment reveled in Drexel’s demise. Giuliani, meanwhile, had accomplished what he set out to do, which was not to pursue justice but make a name for himself. He left to pursue his political career, leaving others to conduct the Milken prosecution.

Milken Pleads Guilty

When the government released the 98 count indictment of Michael Milken, there was little new substance, the allegations primarily consisted of his supposedly unlawful dealings with Boesky. However, it did make sure to reveal his reported earnings on page 2, which were loudly trumpeted by the media. His compensation in 1987 was over $550M, which shocked the nation. Even though it was never alleged his compensation was attributable to criminal activity, it became a de facto proof of guilt in the media and public. No one cared why or how he earned that money, nor did they care he lived quite modestly with his family in the same house he bought in 1978, unlike so many glitzy Wall Street types. His staggering wealth symbolized “the decade of greed” and he needed to be brought down.

However, the government’s case was still quite weak. It rested almost entirely on his relationship with Boesky, and the 2 1/2 year investigation had produced next to nothing. Yet, Milken eventually abandoned his legal fight due to a few factors.

His lawyers began to lose confidence he could win. After Princeton/Newport lost (at this time it hadn’t been reversed on appeal) they realized that it was difficult to convince jurors to objectively look at the law when there was so much animosity toward rich financiers. In that case, the prosecutor was even allowed to tell the jurors not to worry about specific tax law but to convict based on a feeling of “sleaziness.” These tactics would likely be used in spades against Milken.

Even if he was acquitted, he faced the real possibility of further charges by both the federal and state governments, many of who wanted a piece of him for the same reasons as Giuliani. At the same time, the savings and loan crisis was emerging, and while Milken was falsely accused of that too (for more detail on that, read Payback) it meant endless legal battles on the horizon. Generally it’s thought that the wealthy can game the legal system by buying good lawyers. Which is true, unless the wealthy person is a prime target that the government wants to get. In that case, no amount of money can withstand the relentless power of prosecution, and in the case of Milken it was clear the government would not relent. Additionally, the public opinion during the “decade of greed” was not favorable to someone who was the face of junk bonds, even a solid defense guaranteed nothing.

The government also targeted his brother Lowell, who also worked at Drexel, despite him having nothing to do with Michael’s supposed crimes. Milken was a well known devoted family man, very loyal. Even though Lowell told him not to plead guilty, the thought of his brother being prosecuted weighed deeply on him, as did the negative publicity on his children and wife. When the FBI came to interview his 92 year old grandfather, he was at his breaking point.

Eventually, the government offered Milken a deal to plead guilty to 6 felonies and pay a $600M fine. In exchange, all charges would be dropped against his brother and he would face no further prosecution. Milken was deeply torn, but ultimately chose to accept the deal.

What Did Milken Plead Guilty to?

Of the six felonies, four involved his dealings with Ivan Boesky, and the last two involved another money manager named David Solomon.

• Count one was a general conspiracy allegation that Milken, Boesky and another money manager named David Solomon agreed “to engage in a series of unlawful securities transactions.” Counts 2-4 involved stock parking transactions pursuant to this conspiracy.
• Count two was for aiding and abetting Boesky’s filing of a false 13(d) statement, which is a form used to disclose when one buys more than 5% of a company’s shares.
• Count three was for “inducing” the Boesky organization to purchase MCA stock “for the purpose of concealing from the market that Golden Nugget was selling its MCA common stock.”
• Count four was for Drexel buying shares of Helmerich & Payne Corporation from Boesky with the assurance that Drexel would be guaranteed against loss.
• Count five involved Milken “unlawfully failing to disclose” an internal accounting adjustment between his department and a Solomon fund. Essentially, Drexel created a high yield bond fund for Solomon, and their fee was never recouped. So Milken and Solomon agreed to adjust transaction prices within the bid-ask spread between the two entities slightly in Drexel’s favor to even out the transaction.
• Count six was for Milken “aiding and assisting” Solomon’s filing of a false tax return in 1985. Solomon wanted to generate short-term capital losses that year to offset some gains and reduce his tax liability. Milken helped by selling him two investments, then buying them back at a much lower price. Milken then promised to find him profitable investments in 1986.

The SEC immediately proclaimed this guilty plea showed Milken “stood at the center of a network of manipulation, fraud and deceit.” The reality was that it only showed Milken plead guilty to minor rules violations which were never even considered crimes in the past, and it turned out the evidence was weak to non-existent even for the crimes he pled guilty to.

Unlike most felonies where the harm to a victim is obvious, there was no alleged victim, nor could the government ever point to anyone harmed by these actions. Most involved doing favors for a client, or mutual favors done between two willing players and were relatively small. The tax fraud charge was just silly, as Solomon did generate a real loss, which he had every right to claim on his taxes. Given the minor nature of these “crimes,” Milken had every reason to expect a light sentence.

The Fatico Hearing and Sentencing

Judge Kimba Wood presided over his sentencing and invoked a seldom used procedure called a Fatico Hearing, which had both sides present evidence about the crimes to help her decide sentencing. While the charges were quite weak and unsubstantiated, Milken’s lawyers faced a Catch 22. Since the hearing was not about innocence or guilt (Milken was already guilty) they wanted to convey that their client took responsibility and was sorry for his crimes to receive a lighter sentence. But they also wanted to point out that what he pled guilty to were trumped up and not real crimes. This made it almost impossible to make a strong case for either, as both would undercut the other. The best thing in Milken’s favor was over 500 letters submitted on his behalf highlighting his character, family devotion and extensive charitable activities.

But the government’s presentation was also weak. Even though this wasn’t a trial about innocence or guilt, it was their opportunity to show just how terrible a criminal Milken was and the extent of his crimes from their multi-year investigation, unshackled by having to prove it beyond a reasonable doubt to a jury. It was time to show the world the “face of insider trading fraud.”

Their first accusation was that Milken manipulated Wickes stock, but the government provided no witnesses that could link Milken to the alleged manipulation. In fact, two traders testified Milken never asked them to manipulate the stock, or any other stock. The best they could do was get one witness to say Milken pointed to his screen and said, “Peter, Wickes six and one-eighth.” Which was supposedly a cryptic instruction. But this witness was about to be indicted for perjury and was helping the government in exchange for immunity. Also, on the same day of the supposed manipulation, this same trader made a large sale of Wickes to one of Milken’s top clients. Why would he be selling when trying to manipulate the stock upwards? Even the judge concluded the witness wasn’t credible, and this was the best witness they had!

In another accusation claiming Milken enriched himself by manipulating stock warrants, the government again failed to prove their case, and again could point to no victims of Milken’s supposed crimes. Their last accusation was even weaker and dealt with Milken purchasing Caesars World bonds with insider information. The SEC had investigated the same transaction back in 1985 and decided against filing even a civil enforcement action. No new evidence had come forward since, but the government felt they needed to accuse Milken with insider trading and it was the best they could do. Which was pathetic considering this was the man involved in almost all of the mega-transactions of the 1980s.

The Fatico hearing exposed the government’s case as a bust. They had no strong case for any of their accusations, despite Milken being the supposed financial criminal of the decade. They never even called Ivan Boesky, their supposed star witness who they granted a deal and allowed to make money on actual insider trading in exchange for cooperation against Milken. The press should have exposed the government’s ineptness, but instead did the opposite.

Just before sentencing, Barron’s ran a story insinuating Milken should be sentenced, not for his crimes, but for the excesses of the 1980s. Part of the article read,

“Mr. Milken lent his considerable guile to every dubious investment activity of the Eighties…He did by any means, often as not foul, push leverage to Corporate America until it grew insatiably addicted, with ruinous results. He trivialized the financial environment. He was Mr. Greed of an historically greedy epoch, for analogs to which one must go back to the Gilded Age or the Twenties.”

This was the common sentiment among the public and press. No one was really interested in the actual crimes or evidence. Milken was the symbol of 80s greed, and must pay. Even in this charged climate, few expected anything more than five years, many thought just three, but Judge Wood shocked everyone by sentencing Milken to 10 years in prison in November of 1990. This was in addition to a $600M fine. The sentence was later reduced to 2 years, after Milken cooperated with the government in other areas, but Milken ended up paying over $1 billion to resolve the claims against him. Combined with Drexel, almost $2 billion was spent, despite there being no victims.

Aftermath

While in prison, Milken developed prostate cancer, which he announced publicly upon his release. He was driven out of business and banned from the securities industry by the SEC. He henceforth became “the face of insider trading scandals of the 80s,” a “noted financial fraudster” and the “junk bond king” (which was true, but usually meant as a pejorative). Few were aware of any specifics, these simple characterizations fit the desired narrative, and stuck. It was only after Fischel’s book Payback in 1995 that the public had any chance to read what actually happened. But even this book was overshadowed by more popular anti-Milken bestsellers like Predator’s Ball and Den of Thieves. The narrative was set, and seldom challenged.

As the takeover industry was targeted and decimated by the government, the economy stalled and resulted in the 1990 recession. The reality is that takeovers were already past their peak and would have likely declined even with Milken for the simple reason that there were fewer opportunities. Many of the lucrative and inefficient companies were already taken over, and the threat of hostile takeovers incentivized every corporation to operate more soundly. But the result of the government’s crusade was ultimately to crush and obliterate the entire takeover industry.

Milken was very involved in philanthropy and charity during his rise at Drexel, but following his prison release it was where he focused most of his efforts. He’s been particularly involved in cancer research and education charities. It’s this philanthropy that his defenders today typically point to, while most ignore the tremendous benefits his financial innovations made to the US economy in the 1970s and 80s, allowing US companies the means to restructure, innovate and continue to be the dominant player in the global economy.

Ironically, Rudy Giuliani later became one of Milken’s defenders, and reccommended his pardon to four presidents, finally successfully with Trump. Of course, he publicly bases this on Milken’s charitable work, and not on the sham prosecution. But clearly he no longer feels that Milken is or was a criminal akin to a mob kingpin, which the government claimed during the prosecution.

The legacy of Michael Milken will most likely always be dominated by the narrative of an insider trading financial fraudster, but for those who take the time to learn about economics and the case itself, a different reality emerges. Michael Milken was one of America’s best and important self-made businessmen, a financial genius who revolutionized corporate America, mostly for the better. His prosecution was grossly unfair, and amounted to trumping up charges previously never even considered crimes as serious felonies. No victims were proven and no one was seriously claimed to be harmed by Milken, while countless clients, co-workers and companies benefited. His pardon, while it doesn’t really change anything today, is just.