What Really Happened to Michael Milken with Richard V. Sandler

0:04Hello, I'm Anthony Scaramucci, and this is Open Book, where I talk with some of the brightest minds out there about everything surrounding the written word, from authors and historians to figures in entertainment, neuroscientists, political activists, and of course, Wall Street. Sorry, I can't resist. Before we get into today's episode, if you haven't already, please hit follow or subscribe wherever you get your podcasts and leave us a review. We all love a review, even the bad ones. I want to hear the parts you're enjoying or how we can do better. You know, I can roll with the punches, so let me know.

0:38Anyways, let's get to it.

0:47Michael Milken, one of the most innovative financiers of our time and someone I'm proud to call a friend, for decades Michael faced media scrutiny and condemnation surrounding the historic federal investigation against Drexel Burnham Lambert's high yield and convertible bond departments, which he was head of. My guest today, Richard Sandler, was Michael's personal attorney during that time and shares the untold reality behind the prosecution.

1:22I'd like to take a second to recommend my friend Andy Ostroy's great podcast, The Back Room. Every episode is a fun, incredibly honest take on our society and the political situation, along with some brilliant guests. I've been honored to join Andy on the show, and you know anywhere that accepts me with no filter deserves a shout out.

1:48So joining us now on Open Book is Richard V. Sandler. He's an executive vice president, secretary, and a trustee of the Milken Family Foundation. He's the author of the book Witness to a Prosecution, The Myth of Michael Milken. And so full disclosure, I consider Michael Milken a friend. I consider him a mentor. And Richard, just to let you know, when I started my conference business, Michael was nice enough to be my first keynote speaker. And he has spoken at my conference now as a keynote in Singapore, Las Vegas, New York. And I consider him a very dear friend. He's a very special guy. And your book is about the prosecution of Mr.

2:31Milken, which you'll tell us a little bit about. It's a great rendition, but it also explains the miscarriage of justice to a man like Michael Milken. And despite the fact that Mr. Trump and I no longer get along, one of the best things that he did during his administration is pardon Michael. And so that's the backdrop, sir. You wrote an amazing book. It reads like a legal thriller. John Grisham could have written the book, OK, in terms of what happened. But let's let's talk a little bit about your relationship first with Michael and Lowell Milken, and then we'll get into the book. OK, Anthony.

3:06So just once again, thank you for doing this. I think it's an important story, not just for historical purposes of what happened to Michael, but how the system works, how this could actually happen to anybody who really comes within the sights of an ambitious prosecutor who feels that that prosecution could enhance their career. So, you know, and that still happens today. But going back to my relationship, we go back to we were very, very young. Mike's brother Lowell and I are the same age. We met actually in the first grade, as I talk about in the first couple of pages of the book, and have been very, very dear friends.

3:40He's my closest friend ever since. Mike was the older brother. So I would say in the first grade, Mike, two years older, was a generation separated from us. By the time we went to college, we all went to college together at Berkeley. That gap between us had certainly narrowed. And we've been very dear friends also ever since that time. And you work for him now. But I want to go back. We have young viewers and listeners. You and I know who Michael Milken is. We know what he did for corporate America, how he transformed Wall Street, how he created an entire investment class of securities, which were known as junk bonds, are now known as high yielding securities.

4:21But take us back. Tell us about the innovative Michael Milken, some of the things he worked on in college and business school, and then he implemented as a professional on Wall Street. Okay. So Michael was always somebody who was very interested in people. He was interested in the world around him. And you always knew that he was going to try to make a mark in the world to try to make a difference. And when he was an undergraduate at Berkeley, he was very interested in investment and the investment world. He had done a lot of work for his father, who was both an accountant and a lawyer who had clients who were very entrepreneurial, and it interested him.

5:02And he studied a book of an analysis of every corporate bond that had been issued over a number of decades and how they had done. And what he saw was bonds were traditionally rated by S &P and Moody's. And if it was a good company or deemed to be a good investment, it got what they called an investment grade rating. And in those days, the only companies that could really access the public markets were large companies that can get investment grade ratings. But if a company got in trouble, they started having losses or other issues, they would get re-rated and they could get downgraded. And if they got downgraded below what was called a triple B rating, they were considered high yield securities.

5:47And because the companies were in trouble, pejoratively, some people started calling them junk bonds. Well, the study that Mike saw when he was in college showed that if you had bought bonds whose ratings went below investment grade, became high yield, you probably did better than if you had just bought investment grade bonds because the discount that these bonds would trade at when they lost their ratings was greater than the amount of defaults there were in these companies. So I don't know how basic we want to get, Anthony, but a bond, unlike a stock, is a contract. It's a loan. It's a promissory note.

6:24Company says, we will pay interest on certain dates and will pay principal on certain dates. And if the company is able to do that, then the person that buys the bond gets paid the full amount. So if you buy it at a discount and the company actually makes all its payments, you will make more than if you bought an investment grade bond at full price that was paying less of an interest rate. So Mike was fascinated by that study. He continued that work in finance when he was in business school at Wharton. And when he came out of business school, he decided he had a number of offers to go to work at a firm called Drexel.

6:58I think it was called Drexel Firestone then, then became known as Drexel Burnham Lambert. And the reason he went to Drexel is Drexel was the top research firm on Wall Street. And Mike believed if you were going to invest in this type of class of security, you needed to do your research. You need to understand the companies you were investing in. You know, I mean, everybody has the same question. So I'm going to ask a little bit differently. He grows this business. It becomes an incredibly profitable business for Drexel. The likes of firms like Solomon no longer with us, but Goldman still with us.

7:33They copy him and they go into these businesses alongside of him and he creates through his ingenuity, these wonderful companies. He makes them leaner. He makes them more efficient. He brings entrepreneurs like Henry Kravis and George Roberts into the mix. He helps out the likes of Rupert Murdoch and Steve Wynn and John Malone. And he has this coterie of people around him and he becomes an extremely powerful man. And you write about him beautifully and you write about him exactly as I know him, by the way. And so I see him as a brilliant thinker. I see him as somebody that has a, he's almost like a renaissance man.

8:14He can tinker at something and look at a problem and whether it's in healthcare or junk bonds or philanthropy, he can figure it out. But he becomes very, very powerful. He's a private guy. He becomes very, very powerful and he becomes a threat to the status quo on Wall Street. And I would say the status quo in corporate America. So if you don't mind, sir, in your own words, describe that threat. Okay. So here you have this guy that has come to Drexel. He's interested in an asset class that most people do not pay any attention to. And he starts trading in this area. He gets Drexel to allocate certain amount of capital to them.

8:52He doubles that in a short period of time. He goes out and he starts talking to investors about his theories on high yield securities and why he thinks they're a good investment. If you do your work and your research, he starts meeting with the companies and he creates a trading operation that is larger than anybody else's in this asset class. It wasn't that they didn't exist and people didn't trade them, but they didn't trade, let's just say, with great volume and great regularity. So now he's created a market. He's probably the biggest market maker. Drexel's the biggest market maker. So they have this idea, if we could make a market and show there's value in securities that do not get high ratings, Why don't we do original issues, which was never done at the time.

9:34In the 1970s, they started financing companies that could not access the public market. That was the revolution that he started. That was the innovation that really changed Wall Street forever with this asset class. So rating agencies rated companies based upon the past. Mike's view of the world was the greatest value are new companies that are going to do well in the future. And if we finance those companies, we do our research, we meet the management, we understand the industries, we could get capital to people, to entrepreneurs, such as you mentioned, to John Malone, to Steve Wynn, to Craig McCaw in the cellular industry, to Ted Turner in communications industry.

10:16These people could not access the markets before. And he's now created a market. And the competitors on Wall Street that you talked about, some of them tried to get into the business. Some of them try to just downplay the business. You know, we're above this. This is not, these are junk bonds. We're not going to do this. But what happened was as he became more and more powerful and others could not compete with him, they looked at him as a disruptor. They looked at him as a competitor. And when he started financing individual entrepreneurs who thought they could create value in some established companies that they thought were trading below what their value was.

10:53He then became a threat to the Wall Street established firms who had large clients that the Drexel clients were thinking of acquiring. So he became very, very well known. But as you said, he's very media shy. He's very private. He just wanted to do his work, finance his companies, make a difference and did not talk to the media. And meanwhile, he wasn't making friends on Wall Street because when traditional firms would do financings or do stock deals. They put together a large syndicate and everybody would benefit. Everybody get a piece of the syndicate. Everybody would issue some securities. Drexel didn't put together any syndicates because nobody else really knew how to sell these bonds or understood them as well.

11:34So he was looked at somewhat as an outlier because he wasn't sharing with others and others really didn't understand his business and put him down. But he was creating a whole new industry. And when you mentioned Henry Kravitz and George Roberts, you know, they were sort of the forebearers of the what is now known as private equity. And that whole business developed because he was able, Mike Milken and Drexel Burnham were able to finance these individuals who are in the marketplace looking for value for companies. And now they could get financing where they could never get it before. OK, but he's he's wreaking havoc.

12:10He does. He does one other thing, by the way, then I think you'll agree with me on this because Michael has said this to me because of his relative privacy. He's not close to politicians. He's not engaging the political community. So he's an unknown to them. And result of which, when the Department of Justice rains down upon him, he doesn't really have a lot of connectivity into Washington or the processes of Washington. And so I don't know. I think that hurt him. And And I think I think he said that to me once that you've got to make sure that people understand who you are, which helps you in life.

12:46Let's go to Friday. It's November the 14th, 1986. You're sitting at your desk and you were going to leave early for your son Nicholas's birthday. A client of the firm, Ivan Boski, who is famous to you and me because we're old guys now, you and me, Richard, but not famous to some of the young people that listen to this call. Well, Ivan Boski is a very rich arbitrageor in the mid 80s, and he is a very well-known man in the mid 80s on Wall Street. He's running a risk arbitrage fund. But it's Friday, November 14th, 1986. He pleads guilty to securities fraud. What happens after that, sir? So as you say, somebody comes in and says, did you see the tape?

13:31It's one o 'clock in the afternoon, four o 'clock in New York. The market is just closed. And it was announced that Ivan Boski He was paying, I believe, like$100 million to the SEC or to the U.S. attorney or some combination thereof and was going to plead guilty to something related to insider trading. At the same time, I get a phone call that there are federal marshals serving subpoenas downstairs, both SEC subpoenas and grand jury subpoenas from the Southern District of New York Justice Department office. And I didn't really know what to do or what to make of it at the time. It was a little shocking.

14:05Drexel had done a financing for Boski, who, as you said, was the most revered and respected arbitrageur at the street at the time that prior March. I was involved in working on that transaction. We had entities that invested in that transaction and we're all getting subpoenas. And what we figured out very quickly is we have to know what we don't know. And this is a world none of us ever thought we were going to be involved in. And we had to identify attorneys that lived in this world and figure out what did we need to do. And it was Friday afternoon. We got gathered together, had a meeting, and somebody had mentioned, I think Mike had mentioned, that he had been introduced to Edward Bennett Williams by a mutual friend some months earlier.

14:46Edward Bennett Williams, who probably most of the listeners are too young to remember, was certainly the most respected criminal defense lawyer, defense lawyer of his time. He had quite a presence in Washington. Unlike Mike, as you said, Anthony, he was the owner of the Baltimore Orioles. He formed the firm of Williams and Conley, which still exists today. And we got Ed on the phone and started talking about what do we need to do? And could we meet with him the following week? And Ed made one comment to me, I'll never forget when I sent him and faxed him. In those days, you had to fax things to people.

15:22This is a copy of the subpoena. He says, I know this subpoena from the Southern District of New York references a statute known as the racketeering statute, the RICO statute. And he says that was never intended for a case like this. But I'm not surprised because the U.S. attorney for the Southern District from New York, a guy named Rudolph Giuliani, is the biggest piece of political meat I have seen since Tom Dewey. And it rang with me because Tom Dewey was the former U.S. attorney for the Southern District of New York, went on to become governor of New York and eventually ran for president of the United States.

15:56And he said that Giuliani had that same political ambition and would use that statute and use Mike's notoriety or anything else he could to enhance his political career. But, you know, we should stay calm through the weekend. Nothing's going to happen overnight. Let's meet next week and talk about what we can and can't do. OK, so I'm going to say something to you and I want you to react. OK, read your book. This is what I think. And you're going to say to me, I'm right or wrong. OK, Michael, in order to commit insider trading, you have to have a tip or and a tippy. And so you have to I have to pick up the phone and say, Richard, I have inside information that Apple computer is going to buy Walt Disney tomorrow.

16:42And I have this information and I'm an insider and I know it. Then you go out and you purchase call options or the stock of Walt Disney days before or hours before the announcement and you make money off the announcement. And this is a form of manipulation. This was stuff that was barred in the Securities Acts after the 1929 stock market crash. But if I'm Michael Milken and I look at the balance sheet of something like a company like Chris Craft and I say, OK, you know, this is a media company and it may be an interesting acquisition for Rupert Murdoch. And so, you know, what I'm going to do is I'm going to buy some Chris Kraft and then I'm going to call Rupert Murdoch and I'm going to suggest to him to potentially buy Chris Kraft.

17:28And if he decides to do it and I help him finance it, that's obviously not inside information because there's no tip board, no tip B. There's just a good research analyst in the name of Michael Milken, who's a resourceful guy. What did I miss, sir? Have I missed something? No, I think if Mike did that, okay, he would need to disclose to Mr. Murdoch in this case that, look, I think it's a good thing. I own some of the stock. He'd have to give full disclosure, at which point if there was an interest by Mr. Murdoch or anybody else, then Chris Craft would go on the restricted list, what's called a restricted list of Drexel, and neither Mike or anybody else could trade further in the security.

18:13So I think what you're missing is he would never do that because you wouldn't buy something and then lock yourself up and not be able to trade it. Okay. You would probably, in his case, with his business being what it was, if he thought it was a good idea, what he would really be looking for is the business of Drexel would be to finance the acquisition of Chris Craft and to have Murdoch as a client, you know, And they would make their fee on financing, not on buying the stock in advance of doing that, because that probably gets into a gray area that they never would want to get into. OK, so what did Michael do and what did Michael get accused of doing?

18:49OK, so one of the things about insider trading is one of the things Michael did is he financed people that did buy other companies. So he financed in your in your example, you know, he would finance the person that wanted to buy Chris Craft or he would finance KKR that would want to buy something like Nabisco, okay? Right? They did that. They wrote a whole book about that. So he would finance the people that were buying companies. So he actually had access to tremendous amounts of inside information because he knew which companies were looking at other companies. He's not allowed to trade on that, never would.

19:26He just financed that. So the difference between that and what it turned out Mr. Boski did, Mr. Boski would go to people on Wall Street that would work on those kind of transactions. And he would buy the information from them, knowing that company A was looking at company B. He would buy the stock of company B. He would pay the people that gave him the information who also were violating the law, literally in bags of cash, and make hundreds of millions of dollars trading on these securities, having the information that you're not supposed to be able to trade on. Okay. So you know he didn't do anything wrong.

20:02I know he didn't do anything wrong. They expand the prosecution, include this thing called RICO, and then they make accusations against Michael's father and Michael's brother. Tell us what happens when this unfolds. Okay. So just to make it clear, they made accusations against Michael's brother. Michael's father had passed away from cancer many, many years before this had happened. But Michael's brother, Lowell, who I'd mentioned earlier, dear, dear friend of mine, I was working with both of them at the time, had worked with Mike at Drexel. So Ivan Boski comes in. And as part of the process, which I said is one of the reasons I wrote the book, so people understand the process.

20:41Part of the process is if somebody is found out to have violated the law and is willing to plead to something, they could lessen their penalty, the sentence that they get by cooperating with the government and giving the prosecutors information about others who they say violated the law. They can help the prosecutor make other cases against other people and they get leniency for doing that. So when Ivan Boesky pled guilty, he also made a deal with the government that he would only have to plead to one regulatory violation, even though he might have done a number of things. And that in exchange for that, he would be a cooperator and help them make cases against others.

21:22And he did. And he gave them a number of other people who pled guilty to similar things and told them that one of the people that he could help them make cases against was Michael Milken. And the SEC at that time had been hearing complaints about Michael Milken from others on Wall Street, from large companies, from politicians, as you mentioned. Jealous, jealous competitor. Right. And so he was he was certainly on the radar screen of the SEC at the time as somebody that was doing something different. Look, Mike was a disruptor. We all know what happens with disruptors. People are constantly investigating them.

21:56Elon Musk is a disruptor. OK, Mark Zuckerberg is a disruptor. Bill Gates was a disruptor. OK, all these people, you know, throughout history get investigated a lot because they change the way business is being done. Mike created an industry within an industry, clearly the most important and innovative financier of our generation. And people were very jealous. So when it came to the attention that maybe they could do something to Mike Milken, which would make a lot of people on Wall Street happy, the lights went off and they decided they were going to come after Mike. And, you know, Boski was going to be the main witness and they were going to start this investigation, which they did.

22:35Mr. Giuliani, who my understanding is probably never heard of Michael Milken until this case hit the headlines. But the day the next day in the newspapers, the top headline of The New York Times was the Ivan Boski made this deal with the government. And that got Mr. Giuliani's attention. And then the rumor started that Michael Milken was somehow involved in this investigation. and the media, a media frenzy really incurred for the next several years. Okay. So Mr. Giuliani, years later, it's 33 years since Mr. Milken was prosecuted. He eventually accepts a plea deal because he wants to, well, let me rephrase it because you say it better than me.

23:19Why did he accept the plea deal? So, you know, let's go back to your prior question. When they started the investigation, issued the subpoenas, they also issued one to his brother. OK, his brother did very almost no business at all with Boski. He actually didn't even like doing business with him. He really was not involved in these situations, but they were able to bring more pressure on Mike by including his brother in the investigation and eventually in the indictment. And the line prosecutor, the young prosecutor who was in charge of this case when they brought the indictment and who was in charge when we eventually agreed to the plea deal later admitted to me in a class that I taught at Stanford Law School that they probably should never have brought an investigation or certainly an indictment against Lowell Milken, that they really didn't have a great case and that they did bring it.

24:09He was encouraged to do this by his superiors. This is a prosecutor talking to bring pressure on Mike, or is I think the term he used to give them more leverage against Mike. So now here we have case starts at the end of 1986. in 1989. Well, the beginning of 1989, Drexel, Mike's employer, who had been fighting charges itself, settled with the government. And as part of that settlement, agreed that they would get rid of Michael Milken, even though Mike had not been even indicted yet. Mike and his brother get indicted. The government case keeps changing from what it is. They can't make an insider trading case.

24:47It's not what he did. And they couldn't make that case. But they did indict him first for that. Then they indicted for a number of other kinds of regulatory issues. And they started giving potential witnesses immunity, which we can get into if you want to, what that means. But yeah, no, we I mean, people generally know what that means. They they tell witnesses you may have done something wrong, but you're going to go after the big fish and we're going to give you immunity. We're going to not prosecute you for your wrongdoing. Exactly. And what certainly has an effect on a person's memory or what they want to do, because they have two choices.