NEW YORK — Michael Milken, the man who created the market for junk bonds, abandoned a longstanding claim that he is not guilty of financial fraud and agreed Friday to plead guilty to six felony counts, sources said.
In a settlement that will end all other criminal prosecution of him, the former head of Drexel Burnham Lambert's junk bond operations in Beverly Hills also agreed to pay $600 million in financial penalties, people involved in the case said. The amount is believed to be by far the largest financial settlement ever by an individual in a criminal case. The settlement also resolves civil charges filed by the Securities and Exchange Commission.
The decision by Milken, 43, to settle was heavily influenced by a concession made in recent days by prosecutors: They agreed to drop all charges against his brother, Lowell, a former top aide to Milken at Drexel, sources said. Michael, Lowell and former Drexel trader Bruce L. Newberg were named in a 98-count racketeering and securities fraud indictment pending sinceMarch, 1989. It was not clear how the agreement will affect Newberg.
The settlement, which apparently will bring to an end the largest criminal securities fraud investigation ever undertaken by the federal government, is not expected to be announced officially until early next week. Lawyers were said to be still resolving minor details. Officials at both the U.S. Attorney's Office in Manhattan and the SEC refused to comment on the agreement, which will not go into effect until Milken enters his plea.
A Milken spokesman also declined to comment.
Before committing himself to the settlement, Milken waited until virtually the last minute under a deadline set by prosecutors. Sources said he was told that he had to agree by Friday afternoon. Otherwise, a grand jury immediately would return a long-threatened "superseding" indictment that would have contained many additional felony charges and named additional defendants. Milken finally sent word that he would go along at mid-afternoon, the sources said.
"Today was the drop-dead date," a lawyer involved in the case said Friday.
Prosecutors had prepared to make good their threat by ordering the grand jury hearing the case into court on Friday, sources said. The grand jury normally meets only on Tuesdays and Thursdays.
It was not clear how much prison time, if any, Milken will have to serve, although legal experts said it is very likely that he will be incarcerated. In the federal court system, prosecutors are not allowed to plea bargain on prison sentences, which are always left up to the judge. But the settlement is understood to include a promise that prosecutors will recommend that any prison sentences on the six counts be served concurrently. Legal experts said that the probable upper limit of a prison sentence would be five years.
The agreement enables both sides to avoid what would have been an extremely lengthy and complicated trial. Sources close to Milken declined to comment immediately on his state of mind or the final chain of events that led to the agreement. The accord caps months of on-again, off-again negotiations behind the scenes between Milken's lawyers, the U.S. Attorney's Office and the SEC. The superseding indictment originally was to have been filed last fall.
Former prosecutors said the government's actions in the case, in which they allowed months to pass even though all evidence had been gathered for the superseding indictment, suggested that the government was unusually eager to settle the case. Jess Fardella, one of the lead prosecutors in the case, refused to comment Friday.
Milken, however, was extremely reluctant to admit guilt and accept legal responsibility for a chain of events that included, among other things, the collapse of Drexel in February, when the firm's parent company filed bankruptcy proceedings. Drexel itself had agreed to plead guilty to six felony counts in December, 1988, and pay $650 million in penalties. That accord set the firm on a decline from which it never recovered.
Milken's own legal advisers were said to have been divided on whether he should settle.
Other criminal defense lawyers in New York said, however, that Milken's chances of winning in a trial were doubtful. About a dozen of his closest former colleagues and customers had agreed to testify against him in exchange for immunity from prosecution. Nearly all of the criminal securities fraud cases that had gone to juries in New York in the last two years ended with guilty verdicts. And Milken's defense lawyers were known to have been afraid that his wealth might have prejudiced jurors against him. He is said to have earned more than $1 billion at Drexel between 1983 and 1987, including $550 million in a single year.
According to the sources, the six counts to which Milken has agreed to plead guilty will not include any racketeering or insider trading charges. They declined to specify, however, what the six counts are.