Michael Robert Milken, born on July 4, 1946, is an American financier whose career has been marked by both significant achievements and considerable controversy. He became a prominent figure in the financial world during the 1980s, with some considering him the most powerful American financier since J. P. Morgan. However, Milken's career took a dramatic turn when he was indicted for racketeering and securities fraud in 1989. Despite this, Milken has since reinvented himself as a philanthropist, particularly through his work in prostate cancer research.
Early Life and Education
Milken's journey began in Birmingham High School, where he excelled academically and was the head cheerleader. While in school, he also worked at a diner. His classmates included future Disney president Michael Ovitz and actresses Sally Field and Cindy Williams. In 1968, Milken 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 later received his MBA from the Wharton School of the University of Pennsylvania.
During his time at Berkeley, Milken was influenced by credit studies authored by W. Braddock Hickman. Through his Wharton professors, Milken secured a summer job at Drexel Harriman Ripley, an old-line investment bank, in 1969.
Rise to Prominence at Drexel Burnham Lambert
Upon completing his MBA, Milken joined Drexel (by then known as Drexel Firestone) as director of low-grade bond research. He was also given control of some capital and permitted to trade. In 1973, Drexel merged with Burnham and Company to form Drexel Burnham. Milken 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.
Milken's success was largely attributed to his pioneering work in the high-yield bond market, also known as the "junk bond" market. He recognized the potential of these bonds, which were often issued by companies with lower credit ratings, and built a lucrative business around trading them. Milken's department played a key role in the leveraged buyout boom of the 1980s, providing financing for corporate raiders and companies looking to acquire other businesses.
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The "Highly Confident Letter"
Drexel's corporate finance wing crafted a tool that promised to raise the necessary debt in time to fulfill the buyer's obligations. Most of them were armed with a "highly confident letter" from Drexel. 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
Legal Troubles and Indictment
Milken's success and influence eventually attracted scrutiny from regulators. The Securities and Exchange Commission (SEC) launched inquiries into his activities, which intensified after arbitrageur Ivan Boesky pleaded guilty to securities fraud in 1986 as part of a larger insider trading investigation. Boesky implicated 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.
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 (RICO) 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.
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. 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. Indeed, several money managers were eventually convicted on bribery charges.
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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. In March 1989, a federal grand jury indicted Milken, Lowell Milken, and Bruce L. Newberg on 98 counts of racketeering and fraud.
Plea Bargain and Sentencing
In a plea bargain, Milken pleaded guilty to securities and reporting violations but not to racketeering or insider trading. 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 paid $400 million to investors who had been hurt by his actions. He also accepted a lifetime ban from any involvement in the securities industry. Critics of the government charge that the government indicted Milken's brother Lowell to pressure Milken to settle, a tactic some legal scholars condemn as unethical. "I am troubled by - and other scholars are troubled by - the notion of putting relatives on the bargaining table," said Vivian Berger, a professor at Columbia University Law School, in a 1990 interview with The New York Times. As part of the deal, the case against Lowell was dropped.
In 1990, Judge Kimba Wood sentenced Milken to 10 years in prison. In her sentencing statement, she said: "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 …" Milken ultimately served 22 months in prison.
Philanthropic Work and Prostate Cancer Foundation
Upon his release from prison in 1993, Milken founded the Prostate Cancer Foundation for prostate cancer research, which by 2010 was "the largest philanthropic source of funds for research into prostate cancer". Milken himself was diagnosed with advanced prostate cancer in the same month he was released. His cancer is currently in remission.
The Prostate Cancer Foundation works closely with Major League Baseball through its Home Run Challenge program to promote awareness of prostate cancer and raise money for medical research. In 2003, Milken launched a Washington, D.C.-based think tank called FasterCures, which seeks greater efficiency in researching all serious diseases.
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Milken and his brother Lowell founded Knowledge Universe in 1996, as well as Knowledge Learning Corporation (KLC), the parent company of KinderCare Learning Centers, the largest for-profit child care provider in the country.
Recognition and Recent Activities
On March 11, 2014, President Steven Knapp of George Washington University in Washington, D.C. announced the university was renaming its public health school after Milken as a result of a total of $80 million in gifts, $50 million from the Milken Institute and the Milken Family Foundation and $30 million gift from Viacom chairman Sumner Redstone.
In February 2013, the SEC announced that they were investigating whether Milken violated his lifetime ban from the securities industry. According to Forbes, Milken has given away between 5-10% of his fortune, earning a philanthropy score of 3 out of 5.
In February 2020, President Donald Trump granted Milken a full pardon.
Cultural References
Ayad Akhtar's 2016 play Junk, set during the bond trading scandals of the 1980s, is partly based on Milken's "fall from grace". Milken is referenced by Chris Stevens in Northern Exposure Season 6, Ep. 5 - The Robe (31:29). Milken is referenced in the Futurama episode "Future Stock".