Muni experts look at Michael Milken’s role in taxables and high-yield munis

About 33 years after former junk bond king Michael Milken pleaded guilty to multiple counts of securities and reporting violations, Richard Sandler, his personal attorney and a childhood friend, has published a book on the investigation to “set the record straight.”

“I can’t change the fact I wrote it now, rather than years ago,” Sandler said of his book, “Witness to the Prosecution: The Myth of Michael Milken,” published in August.

“Back then, other books were coming out, and it would have been like fighting a tidal wave,” Sandler said. “But as time went on, the lies never stopped. I knew the truth and I was going to write it.”

Michael Milken speaks at the Milken Institute’s Global Conference in May 2022. Childhood friend and one of his defense attorneys in his 1980s-era security fraud case penned a book about his prosecution.

Bloomberg News

Sandler, a partner in the law firm of Maron & Sandler, is executive vice president, secretary and trustee of the Milken Family Foundation, which he has served since its formation in 1982.

Milken, pardoned by then-President Donald Trump in 2020, is now a philanthropist, best known for the Milken Institute conferences and for raising funds for prostate cancer research.

In the 1980s, he was the junk bond king, a financier who claimed to be democratizing access to capital for the 99% of companies unable to tap that financing, and for creating a financial revolution that continues to this day, according to Sandler’s book.

The high-yield corporate bond market grew from $70 billion in the late 1970s to over $2.2 trillion dollars in 2022. Milken “created an industry that gave new businesses and investors the opportunity to create value by financing companies that were too small to access the markets,” Sandler said.

“He was influential in corporate,” said Dean Lewallen, who retired in 2019 as an AllianceBernstein senior vice president and high-yield municipal credit analyst. His leveraged buyout technique made Drexel Burnham Lambert and him a ton of money, and it’s still used today, Lewallen said.

Though Milken is best known for working with corporate debt — and considered instrumental in making it possible for small to mid-size companies to take on debt to start or grow their companies — his firm, the now-defunct Drexel, was perhaps the first to introduce taxable municipal bonds, at least according to a 1986 New York Times article.

The article credited Drexel and its high-yield and convertible bond department, which was started by Milken, with the creation of taxable municipal bonds.

But Triet Nguyen, vice president of strategic data operations for DPC Data and author of “Investing In the High Yield Municipal Market,” said there were few ties between the financial instruments Milken created and what arose in high-yield munis in the 1980s.

The securities fraud indictments of Milken and other Drexel executives, combined with media coverage of the charges, put the company out of business. As part of his plea agreement, Milken paid $200 million in fines, another $400 million to investors and spent nearly two years in a federal prison. He also agreed to a lifetime ban from any involvement in the securities industry.

“I was working at Putnam Investments when the whole thing unfolded,” Nguyen said. “The corporate high-yield boom was maybe mid-to-late 1970s into the 1980s. I think the high-yield muni market started exploding in the early 1980s.”

“There were only a handful of players in high-yield munis [back then],” Nguyen said.

Stephen Heaney, who retired as co-head of Stifel Financial’s municipal bond group in 2019, also said “he did not think Milken or the junk bond market had any influence on the growth of the high-yield muni market.”

“The true high-yield market, the nursing homes, assisted living, waste to whatever projects, etc., came into being after the 1986 Tax Act, as bankers and borrowers pushed the boundaries of what could be financed,” Heaney said. “This also coincided with the explosion of tax-exempt mutual funds in the late 1980s and early 1990s.”

The funds “needed paper, any kind of paper, and the high-yields attracted a lot of attention,” Heaney said.

The two markets have different dynamics, according to Nguyen.

“Milken’s model was to leverage the company’s cash flows,” he said. “That was the M.O. On the muni side, it was more a hodgepodge of fallen angels, or munis that had been downgraded, some state and local governments, of course. And also, it was really the market of last resort. The project that could not get done in different markets, could get done in ours.”

“A lot [of high yield muni deals] have commodity risk. You still see a lot of projects not working out, like the pellet-to-energy deal,” Nguyen said, referring to the $250 million in green bonds issued by the Industrial Development Authority of Sumter County, Alabama, for Enviva, a wood pellet company that filed an EMMA notice in November saying it may not be able to make its bond payments.

The one overlap Nguyen pointed to with corporate bonds is that early on there were a lot of investor-owned munis down south that were below investment grade.

And they boomed around the same time, with high-yield mutual funds targeting munis simultaneous to when corporate high-yield funds took off, he said.

“When I started in the early 1980s, high yield was 11% to 12% on tax-exempt,” Nguyen said. “That clearly was the attraction. It was a bit of a wild west. It was probably the same on the corporate side.”

The several-year investigation, and resulting indictment of Milken, was disillusioning for Sandler, a young attorney at the time, who worked for Milken’s Foundation.

In 1986, the Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York began investigating Milken and his firm.

“It was disillusioning, because 90% of people will assume that someone who is under investigation must have done something wrong,” Sanders said. “And if they were indicted, they really did something wrong,” but he knew Mike, and how seriously he took his responsibilities to his clients.

In the federal system, the prosecutor is also the investigator, so they are invested in the case, even before the prosecution starts, he said. He compared federal to local prosecutions that are investigated by the police, and then tried by the district attorney.

In the book, Sandler quotes John Carroll, one of the prosecutors involved in Milken’s case, as saying that in high profile cases, they are pressured by higher-ups to win. One of the problems is that “they never stop to think, what if we are wrong?”

Sandler asserts that then-U.S. Attorney for the Southern District of New York Rudy Guiliani’s political ambitions compelled him to aggressively pursue Milken and others during the wave of indictments for insider trading that started with corporate raider Ivan Boesky.

It was Milken’s and Drexel’s ties to Boesky that landed them on the SEC’s radar, according to Sandler’s book, though Sandler notes Milken did not plead guilty to insider trading, nor was he involved in insider trading.

Boesky pleaded guilty to one count of conspiracy to commit violations of the federal securities laws and admitted he had used insider information provided by investment bankers Robert Wilkis and Ira Sokolow, who were also indicted.

Boesky received a reduced sentence for cooperating with the SEC and informing on others, including Milken.

The Drexel department Milken ran grew from 35 employees in 1978 to over 200 employees in the mid-1980s. The department had well over 1,000 customers, traded in 7,000 separate issues of securities and could execute as many as 1,000 trades each day while carrying a trading position approaching $4 billion, according to the book.

Sandler cited the extent and breadth of Milken’s business, and the fact he only pleaded guilty to irregularities in five transactions, as evidence that they were exceptions to how he generally conducted business.

“In three transactions to which Michael pleaded guilty, involving Ivan Boesky, Boesky was a willing buyer of the securities, and that it was only after his complaints to Michael that Michael agreed to make good on losses,” according to the memorandum described in the book.

“I honestly wish it was someone else who wrote the book — someone who was more objective, with a more balanced view” Nguyen said. “His impression of Mike was a little too biased. He thinks the guy didn’t do anything wrong. You get a sense in the book that the flow of information was sketchy. But I find it hard to believe Mike Milken was blame free.”

But Nyugen added, “Did he deserve to be singled out like that? Probably not.”

Sandler makes no pretense of being objective. He’s very upfront about his connection to Milken extending back to grade school.

Their wives were sorority sisters at Berkeley and remain close friends, and their children are friends.

“In 1983, we began working together, and we still work together to this day,” Sandler wrote. “In short, we know each other very well.”

If Milken gets the credit for creating leveraged buyouts, “then he also gets the blame for what happened,” Nyugen said. “The secondary effect was all these banks loaded upon these risky securities. As time went on, the quality of the deals went down, because you have a new sector and everyone is competing for deals.”

The early deals that Milken did were really good, but when the sector took off, other firms using LBOs didn’t practice the same due diligence and a lot of the companies went bankrupt, Nyugen said.

It’s ironic that Giuliani, used RICO (Racketeer Influenced and Corrupt Organizations Act) in the case, which is now being used against him, Nguyen said.

Giuliani is facing 13 charges alleging that he attempted to overturn the 2020 election in Georgia as part of a sweeping racketeering indictment involving 19 defendants.

Inspiration for the book
For more than a decade, Sandler has taught a seminar at Stanford that focuses on Milken’s prosecution. He created the seminar after a friend suggested teaching a course might motivate him to write the book he had long planned.

But it was the spare time at the height of the COVID-19 pandemic lockdowns that provided the impetus.

The book offers an alternative narrative to “Predator’s Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders,” written by journalist Connie Bruck, who has covered business and politics for the New Yorker since 1989.

“Though Michael did plead guilty to six felonies, there was no chance he believed he was violating the law when he engaged in the five transactions that became the subject of the plea — especially since none of those activities caused any loss or damage to anyone,” Sandler writes. “Nor had any of those activities previously been the subject of a criminal prosecution. Unlike others who pleaded and cooperated with the prosecutors, Michael never made or received illegal payments and always paid his taxes.”

“I was hoping to correct the record,” Sandler said. “I was hoping it might be taught in business schools, where [students] might be reading Predator’s Ball. I don’t expect the other books to disappear, but hoped a more accurate description of Michael as a person would also be there.”

He has already heard from a professor at Columbia-Fordham that he plans to assign the book to his class.

“So far, it has been gratifying that people seem to think the book is worthwhile,” Sandler said.

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