The Predators’ Ball (51 page)

Sometimes, as seems to have been true in Fischbach, the actions performed by Milken's machine, in its diverse parts, were complex; sometimes they were brutally simple. Milken's apparent use of Steinberg as a club to gain Wickes's business was an example of the latter. As was the attempted extortion that Staley Continental alleges took place in November 1987—just days before Boesky Day, when Milken's troops had no idea the end was near and so appear to have been carrying on business as usual in “the Department.”

In February '87 Staley filed suit against Drexel, alleging that Drexel had made an “extortionate attempt to force Staley to use it as an investment banker so that Staley could be taken over by a Drexel-Staley Management leveraged buyout group.” The suit was proceeding along its private, civil track, but Drexel executives said that it had obviously aroused government interest, as the SEC in its depositions was focusing intensively on Staley also.

According to one former Drexel executive, Drexel had attempted to court the blue-chip food company Staley as a client in the early eighties, through a contact at Bruxelles Lambert, but had been rebuffed. The Drexel of the mideighties, however, was not so easily discouraged. The Staley suit alleges that Drexel and some of its customers began making purchases of Staley stock in late October '86. On November 3, it says, a representative of Drexel contacted Staley's chief financial officer, Robert Hoffman, and expressed an
interest in establishing an investment-banking relationship. Three days later, the person in charge of accumulating Staley stock at Drexel, Milken's favored salesman-trader James Dahl—also a central figure in the Beverly Hills Savings and Loan suit against Drexel—allegedly told Hoffman that Drexel had acquired approximately 1.5 million shares (more than 5 percent of the company's stock) and might buy more. Dahl is said to have advised Hoffman against Staley's doing a planned common-stock offering.

On November 11, the complaint continues, Dahl suggested a management-led leveraged buyout to Hoffman. He also warned against Staley's proceeding with its planned stock issue with any investment banker but Drexel. On November 13, Staley registered a four-million-share offering with the SEC, with Merrill Lynch and First Boston as lead managers. Dahl allegedly threatened to disrupt the offering, and over the next several days heavy selling forced Staley's stock price down $5. Drexel “sold into our offering,” Staley's general counsel, Robert Scott, told
The Wall Street Journal.

On November 21, Staley withdrew the offering and filed with the SEC for a new issue of preferred stock. Additional costs associated with this revised deal were $70 million—for which Staley was suing Drexel, as compensatory damages. It was also suing for twice that in punitive damages.

At least as provocative as what Drexel did, as alleged in the Staley complaint, is what Dahl said. He allegedly acknowledged that Drexel had not yet filed a 13D, despite the fact that he said the firm owned more than 5 percent of Staley's stock; 13DS, he explained, were “bad for business.” In assuring Hoffman that Drexel was genuinely interested in pursuing a leveraged buyout of Staley with its management, Dahl allegedly explained that “Drexel drew no distinction between debt and equity because companies' life cycles were so short,” and that Drexel could “take Staley private in forty-eight hours.”

In warning Hoffman against Staley's doing the common-stock offering, Dahl allegedly said, “It is very important for us to sit down and talk before you do something that hurts me and before I do something that hurts you.” The equity offering, Dahl allegedly made plain, would hurt Drexel (by diluting the value of its holdings), and if that happened, “the next thing that happens is someone files a 13D at $40 a share and management is thrown out.” Later, after Staley had decided to go ahead with the offering, Dahl
allegedly asked how its pricing would be handled and commented that he would “hate to see Drexel have to sell into the offering.”

This was the Drexel—the brass-knuckles, threatening, market-manipulating Cosa Nostra of the securities world—that its rival investment bankers and corporate targets loved to hate. Drexel was already down, three months into the government investigation, when the Staley suit was filed, but a round of cheers went up in the investment-banking community. Just as rivals had circulated copies of the Green Tree complaint when it had been filed, so now—Drexel executives alleged—Salomon sent its clients copies of the Staley complaint.

To many who knew Dahl, his alleged comments rang with authenticity. Seeming not only literally but symbolically true, they captured the zeitgeist of the Beverly Hills operation. While these acquaintances of Dahl speculated that he might have been off on an entrepreneurial spree, unauthorized by Milken, they agreed that it was the kind of action that the culture of “the Department” encouraged. One former Drexel employee claimed, “What Jim Dahl is alleged to have said was not the exception [in Beverly Hills] but the norm.”

Moreover, it seems unlikely that Milken, who was obsessed with controlling his people and everything that he touched, who in an SEC deposition several years earlier had spoken about his gradually developed ability to hear everything that went on on his trading floor, would have utterly missed Dahl's machinations in Staley. As one former member of this group declared, “Mike controlled everything. He was like Patton, up on the hill. He saw everything that went on, heard everything.”

Drexel took the position publicly that the suit was “totally without merit.” According to one Drexel employee, the firm's officials to whom Staley complained in November decided that Dahl had said some things that were “inappropriate,” and they hastened to reassure Staley that Drexel would do nothing to destabilize the company. Drexel and Staley were in the midst of executing a standstill agreement, this executive says, when Staley suddenly filed suit. This executive also adds that Drexel was a net buyer, not seller, during the Staley aborted offering; therefore, he states, Dahl was all talk and no action, Drexel did not ruin the stock offering, and there were no grounds for a suit.

Even if Drexel did not carry out Dahl's alleged threats, the
Staley situation exemplified, in this writer's view, conduct that was probably central to the Milken machine and that could be a 13D violation: assembling control of more than 5 percent of the stock but not disclosing it publicly while using it as a threat privately. Milken was the great choreographer. He knew where convertible bonds were and where lots of stocks were, or he could advise clients to buy them and then he could bring their cumulative weight to bear—all without filing a 13D and disclosing that these shares were being used in concert to achieve his end.

From his earliest days as a bond trader, when his fellow bondholders typically were a passive lot, Milken had understood that controlling a position of size in a company's securities, even its debt securities, meant a chance to exert control over that company. He had tried this with Riklis (in Rapid-American) and been well received. He had tried this with Sigoloff (in Daylin) and not been. The Milken who years later reportedly told Sigoloff, in Wickes, that (with the stock that others held but he controlled) he effectively had control of the company, was simply a Milken who had grown far more powerful, who could direct the movement of stocks owned by others—but it was the same Milken.

In addition to looking for evidence of Drexel's having assembled blocks of stock without complying with disclosure requirements, and of its having parked stocks to disguise their true ownership, the government also appeared, during the first few months of '87, to be looking for evidence of the more garden-variety misuse of inside information. Passing inside information about coming deals to favored customers was something for which the SEC had investigated Milken in earlier years, always fruitlessly. According to press reports, the government had subpoenaed both Rodrigo Rocha and Guy Dove, attempting to ascertain whether Atlantic Capital—on tips from Drexel—had invested in common stocks before announced tender offers. If true, this would have given Atlantic Capital added motivations (beyond the high yield of the bonds) for being probably the single largest subscriber to the junk bonds in the 1985 takeovers; it would have had a powerful interest in the deals' going through, since it was a shareholder in the target company, and it would also be repaying the favors of Drexel's tips.

As the investigation continued, the government would become interested in another satellite group with which Milken had done business, the Regan-Thorp entities. James Regan and Edward Thorp
and their associates had been Milken's partners at least since the Treasuries-stripping days of Dorchester Government Securities and Belvedere Securities, and they had been a focus of SEC interest in the 1985 investigation into the trading of Caesars World securities. In December 1987, federal agents would raid and confiscate more than sixty boxes of documents and business records going back to January 1984 from three firms which operated from the same address in Princeton, New Jersey—Princeton-Newport Arbitrage Partners, Englewood Partners and the Oakley-Sutton Management Corporation. According to search-warrant filings, the government was hoping to establish that a network of traders had been involved in a scheme of stock parking. It also sought evidence of improper tax deductions taken on losses that were generated from hedging on trades involving convertible bonds and warrants, according to the court documents. Among those named in the warrant was Bruce Newberg, who had been a trader in convertibles for Milken and was still a member of Milken's group though no longer on the trading desk.

In the early months of the investigation, however, it had not seemed plausible that it would continue for over a year without producing indictments. Nearly every Friday in March and April of 1986, Wall Street gossip had predicted that the Milken and Drexel indictments would be announced at the market's close—gossip fueled, of course, by press reports which purported to spell out the government's impending case against Drexel in great detail.

While those reports were not borne out within the six months following Boesky Day, other events had occurred. Boesky, to the surprise of few on the Street, had offered up Martin Siegel. On February 13, Siegel had pleaded guilty to two felony counts of tax evasion and conspiracy to violate securities laws, and also agreed to pay $9 million in civil fines. The insider trading with Boesky to which he pleaded, however, had occurred while he was at Kidder, before he went to Drexel.

Siegel, in turn, had offered up Robert Freeman, head of the arbitrage department at the impeccable Goldman, Sachs; Richard Wigton, head of arbitrage at Kidder, Peabody; and Timothy Tabor, former head of arbitrage at Merrill Lynch. These three men were arrested the day before Siegel took his plea, and they were charged with being part of an information-swapping conspiracy. But by May their indictments had been dropped.

On March 20, Boyd Jefferies, chairman of Jefferies Group, the Los Angeles-based brokerage firm that had become a major force in takeovers, pleaded to two felony counts of securities-law violations, and settled related charges with the SEC relating to market manipulation and to parking stock in a scheme with Boesky.

By April 1, the opening day of the 1987 Predators' Ball, it seemed to many Drexel employees and their clients that the government's drumbeat was almost deafening. Freeman, Wigton and Tabor had been arrested without warning, Wigton led from his Kidder office in handcuffs, and the nightmare of some at Drexel was of Milken being arrested onstage at the Predators' Ball. The conference drew a record crowd, some probably out of curiosity but many out of loyalty.

Fred Joseph appeared ill and suddenly aged. Other Drexel executives were depressed and fatigued. Cary Maultasch looked especially haggard. Maultasch was the Drexel official, formerly in Beverly Hills but now based in New York, who according to sources quoted by Stewart and Hertzberg handled all Milken's personal trading and, at the end of each day, destroyed computer printouts of his trades in a shredder. The mood at the Polo Lounge, where for the first time Engel's “girls” were absent, was wakelike. (“It's because of the First Amendment,” one Drexel executive explained sourly, referring to press reports.)

Milken alone looked well. He did not introduce as many of the client presentations as he had done in years past, having accepted the view of Joseph and others that for the good of the firm he should recede somewhat at this conference lest he soon have to recede forever. But when he mounted the stage at the Beverly Hilton during the closing gala, his loyalists, over two thousand strong, gave him an ovation that seemed as if it would never end.

I
N THE SIX MONTHS
that followed Boesky Day, Drexel was a reminder of the old adage that the higher they rise, the harder they fall. The heights that Drexel's executives had scaled had been so dizzying, and their descent was now so sudden, that some felt themselves on a roller coaster.

Many at Drexel looked for the root of their downfall, outside. The press—mainly
The Wall Street Journal,
which, shortly after Boesky Day, had begun to describe in increasingly greater detail Milken, Drexel, and Milken's takeover machine as targets of the investigation—was one scapegoat. The government, as personified chiefly in the SEC and the U.S. Attorney's Office, one or both of which was presumed to be leaking to the press, and secondarily in a newly aroused Congress, was another. America's corporate elite, those Business Roundtable types who had fought the hated Drexel and their arriviste clients on every possible front (in Congress, in court, at the Fed) and lost, but who now saw a chance to reverse that rout, was a third. And Drexel's investment-banking rivals on the Street, who had marshaled much of corporate America's attack on the upstart firm but in the end had decided to play its game, were yet a fourth. The more conspiracy-minded at Drexel saw combinations of the four, in unholy league.