NEW YORK, OCT. 11 -- A two-week legal confrontation began today between federal prosecutors and convicted financier Michael R. Milken, with the fallen junk bond king appearing to win the first round.
At the start of the first public hearings into Milken's character, called to help U.S. District Judge Kimba Wood decide how stiff a sentence he deserves, two government witnesses failed to link Milken directly to any securities crimes beyond the six to which he already has pleaded guilty.
The witnesses said that Milken's old firm, Drexel Burnham Lambert Inc., and the company of fallen arbitrageur Ivan Boesky routinely manipulated stock prices and engaged in other illegal favors for each other in the mid-1980s. But the two prosecution witnesses did not directly pin Milken to those dealings.
The testimony provided only circumstantial evidence to support the government's charge that Milken committed many crimes in addition to the ones that he acknowledged in a landmark plea bargain last April.
At that time, Milken agreed to pay $600 million in penalties as part of a settlement of charges that he was at the center of a major conspiracy to manipulate the nation's financial markets. The hearing that began today marks the first time in the four-year-old inquiry into Milken's affairs that witnesses have testified publicly against him.
Milken's principal defense lawyer, Arthur L. Liman, accused the government of "excessive advocacy" in its effort to obtain maximum punishment. Wood could give Milken anywhere from no time in prison to 28 years, and the hearing is designed to help her get a sense of Milken's character so she can decide what sentence is appropriate.
"I know when somebody has the kind of visibility and celebrity that Michael Milken has, it's easy to say that everything that ever happened at Drexel is his fault," Liman said. "But if we're going to proceed on that basis, then we don't need any hearings."
There were some bright spots for the prosecution. The government's principal witness, former Drexel securities trader Cary Maultasch, testified that Milken had several opportunities to order him to avoid engaging in illicit activities, but had never done so.
In addition, the prosecution's case may be helped substantially by its third witness, former Drexel executive Peter Gardiner, who is scheduled to testify on Monday. He may provide the crucial bit of testimony showing that Milken personally initiated a request to Boesky to manipulate the price of the stock of Wickes Cos. in April 1986.
The Wickes case is the first of three that the prosecution is presenting in the sentencing hearing. U.S. Assistant Attorney John K. Carroll said Milken had swindled the investing public and some of his own customers in the Wickes deal.
"We find no nobility in cheating for a client to earn fees," Carroll said.
Maultasch and the other government witness, former Boesky trader Michael Davidoff, described how Milken's lieutenants at Drexel had asked Boesky to buy large blocks of Wickes stock to artificially drive up the price of Wickes shares. The purpose was to allow Wickes to retire some preferred shares and thus relieve itself of the costly expense of paying dividends on that stock.
Maultasch said Gardiner had asked him to request the favor from Boesky's organization, and that he assumed that Milken was behind the action.
But Maultasch, in response to a direct question from Wood at the very end of the hearing, admitted that he had "no factual basis" to believe that Milken was personally involved in the swindle.
Both Maultasch and Davidoff have cut deals with the government, obtaining light sentences or no prosecution at all for their own crimes in return for helping the U.S. Attorney's Office in its effort against Milken.
Milken showed little emotion as Maultasch, a former colleague, testified against him. Dressed in a gray suit, Milken occasionally shook his head and displayed a tight-lipped grin during the hearing, but spent most of the time listening intently or scribbling dozens of notes on sheets of yellow legal paper.
More than 100 journalists and spectators, including Milken's wife, Lori, and brother Lowell, crowded into a small hearing room at the federal courthouse at Foley Square in downtown Manhattan.
The testimony against Milken included Maultasch's statement that he routinely passed information about stocks involved in takeover deals back and forth between Milken and Boesky's organization. But it was unclear whether that information was illegal because Maultasch said that Milken generally spoke in broad, general terms about the stocks.