AN extraordinary proceeding is underway in federal court in New York to determine a sentence for junk bond financier Michael Milken. Mr. Milken, who has come to personify the free-wheeling financial deal-makers of the '80s, was indicted 18 months ago on 98 counts involving racketeering, insider trading and assorted securities frauds. In April, he entered guilty pleas on six counts, the government dropped all the other charges, and he agreed to pay $600 million in fines and restitution. He also faces a maximum of 28 years in prison on these charges.

The sentencing judge in New York has broad discretion to fix his penalty. Defense attorneys naturally plead that he has suffered enough, that he is a family man and a philanthropist and that a little community service with drug offenders would be about right. Prosecutors want a stiff sentence, in part so that Mr. Milken will be motivated to cooperate in other prosecutions if his sentence is reduced and, in part, we suspect, to make an example of him. To this end, the government is now presenting evidence in court about all sorts of offenses it believes Mr. Milken has committed, including those charges that were dropped back in April. While it is certainly proper for the judge to hear testimony before sentencing that goes to a defendant's character, in this case the process resembles a mini-trial on the charges that were dropped. The judge cannot sentence him for these offenses, but the evidence presented could persuade her to go for 28 years instead of probation. It doesn't seem fair to us that such a disparity is possible on the basis of charges for which Mr. Milken has not been tried or convicted.

None of this would be happening if Mr. Milken's crimes had been committed after Nov. 1, 1987, instead of before that date. Under sentencing guidelines now in force in federal court, the judge would have much less discretion, and there would be little incentive for the prosecution to go to such lengths to persuade her to be severe. The guidelines provide a narrow range of sentence based on the nature of the crime and such factors as whether the defendant is a first offender. Character evidence would only influence a decision to sentence at the top or the bottom of that range -- seven years or five, for example. The guidelines also avoid the conflict that exists in the Milken case between those who want a long prison term to demonstrate that the government is being tough on all financial swindlers from the S&L crooks to the stock manipulators and those who demand leniency because the defendant is a nonviolent white-collar offender who has been humiliated and embarrassed enough.

It is because her options are so broad that the judge is subject to pressures from both extremes. The guidelines are far more rational and fair because they eliminate the possibility that another first offender convicted of exactly the same crimes as Mr. Milken could be sentenced to 28 years in prison while he gets community service -- or vice versa.