Government Securities Case Against Milken Bogs Down

MORE than a month after published predictions that Michael Milken, Drexel Burnham Lambert Group's junk bond specialist, would be indicted for securities-law violations, he has not been charged with a single crime. Sources close to the case say the government may be having trouble getting corroboration of testimony from its key witness, convicted inside trader Ivan Boesky. Many considered Milken's indictment imminent on Jan. 30, the day US Attorney Rudolph Giuliani resigned. Commentators assumed that Mr. Giuliani, as one of his last official acts, would charge Mr. Milken with racketeering and other felonies.

Now, lawyers and Milken's representatives do not expect an indictment for at least two more weeks, because lawyers involved in the case report that the federal grand jury is still interviewing prospective witnesses.

One lawyer involved in the matter speculates the government does not like its current case, which is based on Mr. Boesky's testimony. To buttress Boesky's allegations, the government had forced several Drexel employees to testify before the grand jury. According to individuals familiar with the case, however, the Drexel employees may not be able to directly corroborate Boesky. Instead, the Drexel witnesses are giving the case a different thrust - making it more difficult for the prosecution to put together a coherent case.

The US attorney's office had no comment.

In the meantime, Drexel is still trying to wrap up its agreement with the government. According to company spokesman Steven Anreder, the final details of the agreement are still being hammered out. The agreement must then be approved by federal Judge Milton Pollack and the full Securities and Exchange Commission (SEC). This is likely to take place in the latter part of March.

At the same time, Milken's lawyers are spinning a legal web that conceivably could affect that timetable.

Milken and two other Drexel employees began by challenging the potential assignment of the case to Judge Pollack. Milken's lawyers argued that Pollack's wife stood to make $30 million in a deal that involved Drexel. The judge refused to recuse (withdraw) himself.

Milken appealed the decision, and late last month the Second US Circuit Court of Appeals refused to disqualify Pollack. However, in an unusual twist, four of the court's judges issued a dissenting opinion that sharply differed with the overall decision.

A spokesman for Milken says he will appeal the issue to the US Supreme Court. Drexel, initially part of the lawsuit, is no longer an active participant.

At the same time, Milken has asked the courts to invalidate an out-of-court settlement reached in December between Drexel and the government. In that agreement, Drexel pleaded guilty to six felonies and agreed to pay $650 million in fines and restitution. In addition, the company said it would dismiss Milken and withhold his 1988 bonus, which is expected to exceed $100 million. The Drexel plea is also contingent on settling SEC charges of securities fraud and stock manipulation.

Milken's lawyers contend that the settlement is a violation of his constitutional rights, since it involves the seizure of his property without due process. In its response to Milken last week, the government said he should take the matter up in a civil suit against Drexel. The government maintained Milken's bonus, employment, and pay were not constitutionally protected or supported by a written contract.

Milken has hired Harvard law professor Laurence Tribe, an authority on constitutional law.

If Milken loses his case to have the SEC settlement canceled, his lawyers are expected to appeal, probably all the way to the US Supreme Court.

The legal maneuvering continues to leave Drexel Burnham Lambert Group in limbo. ``By not doing anything, the government is acting to destabilize Drexel employees, which is consistent with its actions for the last two years,'' says a lawyer involved with the case. A Drexel employee, who did not want to be identified, agreed that the uncertainty has left the employees of the firm feeling rudderless.

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