The choice facing Michael Milken as he contemplates at least 3 1/2 years as a federal convict demonstrates the damage done to American standards of justice by U.S. District Judge Kimba Wood's Draconian sentence.

The dethroned junk bond king is given the choice of displaying himself to the public as either Gordon Liddy or Ivan Boesky. The Liddy option would have him emulate the hand-in-the-flame Watergate conspirator by spending years in prison rather than ratting on accomplices. The Boesky option would have him take the Wall Street shark's fast route to freedom by singing like a canary.

Milken's decision is a nightmare if his protests that he knows of no such criminals are truthful. But Judge Wood, after saying his crimes require longer sentences than more heinous offenses because they are harder to detect, told him that "cooperation" with the government would diminish the startling 10-year sentence. That represents a perversion of the American justice system that appals many distinguished lawyers, including some of Wood's colleagues on the federal bench.

Critical fellow members at the bar see the sentence as a metaphorical rejection of the 1980s for excessive accumulation of wealth. Wood's imitation of the hanging judge was celebrated by the news media consensus. One excited journalist nominated Wood for the next Supreme Court vacancy.

That elevation of the 46-year-old former Manhattan corporate lawyer is highly improbable, despite her sudden national exposure in her first major case since Ronald Reagan sent her to the district bench in 1988. She is one of the nonconservatives who slipped into a decade of Reaganite judicial appointments. Her husband, Time political writer Michael Kramer, describes her as a moderate-to-liberal Democrat. GOP Sen. Alfonse D'Amato, facing a tough go for reelection in 1992, wanted to use his patronage for New York's district judges to name four women. He apparently could not turn up that many qualified Republican female lawyers in the Big Apple.

Lawyers were first surprised by Wood's decision to hold a pre-sentencing hearing to consider serious government charges against Milken that were not pursued when he pleaded guilty to six lesser charges. Kafka would have been impressed by the procedure. Milken could not call witnesses. His principal accuser, the non-credible Boesky, was kept away by the government and so could not be questioned.

Even so, news accounts of the hearing agreed that the prosecution failed to make its points. That is one reason Wood's sentence surprised everybody.

In her pre-sentencing comments, Wood arrived at the ingenious explanation that Milken committed "only subtle crimes" because he thought they were "unlikely to be detected." In an analogy that stunned lawyers, she cited people "unwilling to rob a bank" who would cash Social Security checks mailed to them by mistake because "they are not likely to be caught doing so."

Accusing Milken of "stepping just over the wrong side of the law in an apparent effort to get some of the benefits of violating the law without running a substantial risk of being caught," the judge argued that a substantial sentence was needed to deter others. She then cited as a model for Milken the abominated Boesky, who, because he talked and implicated others, was sentenced to only three years (of which he served less than two) for egregious insider trading and bribery.

Thus Milken, described by associates as in a state approaching a nervous breakdown, faces a choice more common to totalitarian societies than his own. He promised in his plea bargain only to tell the truth. But within that boundary, he can try to cut his prison time by implicating others in offenses that, he wrote the judge, he "never dreamed" would be felonious.

The strong suspicion that the '90s, without Milken and the credit afforded by his junk bonds, will now provide fewer jobs for Americans need not be debated here. What cannot be denied is the transformation of a legal system to jail the premier financier of the '80s.

The implications of Kimba Wood's justice: Lesser crimes warrant harsher penalties than greater ones in order to remove temptation from potential transgressors; not only will "cooperation" win a lighter sentence but failure to finger others will result in much stiffer sentences than normal; in light of the government's difficulty in convicting defendants accused by Boesky, it is not necessary for a "cooperative" canary to be truthful, but only to sing.