Trial by Press

INSIDER REPORTINGEmile Zola's journalism helped get an innocentDreyfus out of prison. James B. Stewart andthe Wall Street Journal helped put Milkeninside one. But is he innocent too?

JUDE WANNISKI

T HE Wall Street Journal on October 2 ran an ex-cerpt of James B. Stewart's book on MichaelMilken and Ivan Boesky, Den of Thieves, under

the headline "Scenes from a Scandal." The excerpt pre-sents the thesis that Milken and Boesky, togetherdriven by drooling greed, were conscious partners incriminal schemes to enrich themselves at the expenseof the investing public. The piece took up two full news-paper pages, around a line drawing of Milken designedto prepare the JournaVa three million readers for a pro-file of Evil Incarnate. Although the JournaVB editorsare not conscious of what they have done, the publica-tion of this material in this fashion is the low point inthe newspaper's long and illustrious history. Havingspent 13 years of my own career at Dow Jones publica-tions, six of them at the Journal, on the editorial boardand as associate editor, I'm especially saddened at thiscorruption of journalistic standards.

James B. Stewart, whose book the Journal is trum-peting, is the paper's page-one editor. He is a lawyer bytraining, as is Norman Pearlstine, the paper's executiveeditor, his boss. Stewart's first book. The Prosecutors,was published five years ago as his alliance with fed-eral prosecutors began to flower. It is a celebration ofprosecutors—which speaks to the cast of Stewart'smind. Until very recently, the tradition of Americanjournalism had been in celebration of the defense attor-neys, the Clarence Darrows of the profession who de-fended the criminally accused. Journalism first walkeddown a new path with Watergate. The political prosecu-tions of the Reagan Administration were similarly fedby prosecutorial tidbits to the press. Until Ivan Boeskycame along, the Journal had been cut out of this action.The prosecutors had denied its news reporters thespoonfeeding of raw conjecture dressed up as fact,largely because the paper's editorial page opposed trialby press. Prosecutors did not consider the Journal to bea reliable ally in a witchhunt.

For some time, there has been an intense, often bitter

rivalry between the Journal's editorial pages and itsnews pages. The Journal's editor, Robert L. Bartley,was unable to halt the corrupting influence on the newspages of the witchhunt against Wall Street led by U.S.prosecutor Rudolph Giuliani. Bartley and his associateL. Gordon Crovitz, author of the "Rule of Law" columnand a lawyer in the Darrow tradition, are in a most un-usual position, prevented by institutional constraintsfrom saying anything publicly about the news depart-ment's role in assisting that corruption. But Pearlstineand Stewart do not care what Bartley and his editorial-page writers privately think of them, knowing they areunable to say anything in public.

Deep Throat

T HERE ARE sleazy, envious, openly corruptnewspapermen whom I've known over the years.Stewart is not one of them. Eminently likable,

decent and brilliant in his way, he first came to my at-tention in 1986 as the Journal's mergers-and-acquisi-tions reporter, which became his stepping stone to aPulitzer Prize and the page-one editorship. Stewartdrove the Journal's competitors crazy because he al-ways seemed to get the big M&A stories before theydid. In my 1987 MediaGuide, which rates the nationalpress corps, Stewart was awarded the maximum ratingof four stars. How did he do it? Was bis "DeepThroat"—his most important source of inside news onWall Street—Ivan Boesky? Boesky was even then ma-nipulating the Journal and tbe rest of the financialpress for his own profit. Before he was caught, remem-ber, Boesky was portrayed by the financial press corpsas a fiendishly clever expert in arbitrage. The financialpress also presented him as a cultured intellect, a manof the world, a philanthropist. Michael Milken, whonever, ever socialized with Boesky, an illustrious client

Mr. Wanniski is President of Polyconomics, Inc.

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of Drexel Bumham Lambert, probably believed withthe rest of us what he read in the newspapers, includ-ing the Journal's news pages, about Boesky.

Drexel Bumham Lambert in these glory years didmost of the M&A deals on Wall Street because ofMilken's financial prowess. (Ironically, in those veryyears the record indicates Milken opposed hostile take-overs and tried to discourage Drexel from participatingin them.) Stewart makes it appear as if Milken andBoesky were in constant contact, scheming and plot-ting. Those who worked with Milken have indicatedBoesky was considered something of a nuisance, callingMilken a dozen times for each return call he got.Boesky's source of inside information from Drexel wasnot Milken. It was Dennis Levine, an ambitious youngman who was no financial genius but who had ready ac-cess to enough of Drexel's inside doings to make him agoldmine of information. Stewart himself reports thatwhen Levine hinted to Boesky he might like to come towork for him, Boesky reminded Levine that he was too

important to him at Drexel. In due course the fedswould collect Levine. but he was much too small a fryto earn Ivan Boesky the sweetheart deal he got fromthe feds, a sojourn at a federal country club. So Boeskytold the feds Milken was his source, and Stewart,stunned that his pal Boesky turned out to be a crook,was only too ready to beUeve Milken was the evil gen-ius who led Boesky astray. In his book, Stewart clearlyviews Boesky, a man he knew well, as a victim ofMilken, a man he never met. By contrast, Dennis Lev-ine, who knew both men, has written that Milken wastaken in by Boesky.

Stewart himself was taken in by both Boesky andGiuliani. In my 1988 MediaGuide, published long be-fore I met Michael Milken, I reduced Stewart's ratingprecisely because we felt his early reports on the WallStreet scandals were overstepping the bounds of tradi-tional journalistic standards. "He pushed a little toohard for our tastes," we wrote, "seeming as if he wantedto hasten indictments in the dealmaker scandals. . . .

Author of a new book. The Prosecutors, Stewart seemedto be going to trial by press, a breach of journalisticstandards that he shares with his editors."

With Stewart as point man in the press corps, Giuli-ani's campaign against Milken worked like a charm.Now, with Milken sentenced to ten years in a federalpenitentiary, almost everyone in the nation who doesnot know him personally believes him to be the MasterCrook of the 1980s (while those of us who know him be-lieve him to be a victim of our epoch). Boesky, now afree man, is viewed as merely a pawn.

Stewards Just Cause

W HEN Stewart was named page-one editorlate in 1988, he persuaded the JournaVsnews editors that seeing that Milken did not

somehow escape the wheels of justice was a Just Cause.For the following two years the newspaper routinelyran unsourced news stories by other reporters under

jrosfndicai, 10 51 Stewart's direction, alleging felonious activ-ity by Milken involving insider trading,stock manipulation, and bribery.

For three years, the government wrestledwith the beans Boesky had spilled, trying tocome up with airtight felony counts. Failingon quality, they went for quantity instead, fi-nally delivering a 98-count indictment to thecourt. At the same time, the Journal trainedits news guns on the very concept of "junkbonds," inviting a temporary decimation ofthat market and fueling the congressionaldemands that something be done. A longstring of savings-and-loan companies, forcedby the federal bailout law that resulted tosell what had been their most profitable as-sets, went into federal receivership, addinghundreds of billions of dollars to the federaldeficit over time. (Had they been allowed toretain their junk-bond portfolios, the profits

would have helped offset the mammoth losses in theirreal-estate portfolios, the real reason for their failure.)Again, the JournaVs editorial-page writers maintaineda piquant counterpoint to these grotesque proceedings,but were barred from pointing out that their brethrenon page one had been part of the problem here aswell—by nurturing the idea that high-yield bonds, theconcept born in the evil mind of Michael Milken, wereunworthy financial instruments.

In the end, faced with new threats from the prosecu-tors that he and his brother Lowell would soon face an-other carload of felony counts in a variety of geographi-cal jurisdictions and would, be in the courts until theywere old men, Milken caved in. He agreed to plea-bar-gain when the feds said they would allow his brother towalk away a free man. To avoid a trial with materialthey knew was questionable, the prosecutors had toallow Lowell Milken his freedom, for he made it plainhe would not plea-bargain—even on felony charges thatcould theoretically have salted him away in a federal

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slammer for several hundred years. And MichaelMilken's plea of guilty to six felony counts was strikingin that none of them involved insider trading, stock ma-nipulation, or bribery—the triad of unsourced allega-tions that Stewart had been running in the Journal'snews pages for years. The six counts involved only tech-nical violations of the security laws, none of which, onclose examination, would seem to warrant more thanthe equivalent of a parking ticket. By my reckoning,none of the counts involved the loss by the investingpublic of a dime, much less billions.

In a post-sentencing proceeding to determine howmuch these felonies cost the investing public, U.S. Dis-trict Judge Kimba Wood could stretch logic only enoughto fmd $318,000. Milken's High Yield Bond Departmenthad been charged for commissions paid to Drexel sales-men who sold shares of a fund managed by a Drexel ch-ent. In order to recoup those commissions, Milken hadagreed with Drexel's client, whose own customers hadnot paid commissions to the salesmen, to adjust theprices of securities purchased by the client throughDrexel, by fractions of a point within the bid/askedspread, until the $318,000 figure was reached. This waslogical. It didn't really cost the investing public any-thing. And it would have been legal if Drexel's clienthad made the appropriate disclosures to its own cus-tomers. I could sympathize with Judge Wood when sheidentified the $318,000 as the public's loss. Having sen-tenced Milken to ten years in prison, it would have beenawkward if she had been forced to announce that hehadn't stolen a dime from anyone.

Guilty as Not Charged

B EFORE sentencing Milken, however. JudgeWood had invited the prosecutors in specialcourt hearings to go beyond the harmless

"crimes" to which Milken had confessed and present thebest evidence they had against him on the accusationsthat had never been brought into court as formalcharges but had got wide public attention via the leaksto the Journal. The purpose was to help Judge Wood,when sentencing Milken, to determine if the crimes towhich he had confessed were or were not part of abroader pattern of criminality. The proceedings wereknown as the Fatico hearings- For four weeks last Octo-ber, the federal prosecutors took their best shots—onetrying to prove Milken manipulated stock, one trying toprove he engaged in insider trading, and one trying toprove he committed bribery. In each attempt, the gov-ernment failed miserably. Judge Wood sentencedMilken to ten years in prison, followed by three yearsof full-time community sei-vice, even while acknowledg-ing the prosecution had indeed failed to prove its case.

For instance, in the attempt to prove stock manipula-tion—a charge based on information supplied to themby Boesky—the government lawyers discovered theywere looking in the wrong place. Milken's lawyers dem-onstrated that wbile it appeared someone at Drexel wasinvolved, Milken not only was not trying to drive up the

price of Wickes Co. stock, as the government alleged,but his department had been serious sellers of the stockduring the period in question. Judge Wood concludedthat the government witnesses had failed to show thatMilken was even involved in the Wickes transaction.The judge also found that the government failed toprove its charges in the bribery case, involving war-rants of Storer Communications.

The attempt to prove insider trading went especiallyawry. The government had as a key witness an em-ployee of Milken's junk-bond department, James Dahl,who swore before a grand jury that Milken advised himto buy up Caesar's World bonds fj'om Drexel's own cus-tomers at a time when Drexel had inside knowledge ofimpending financing developments that would makethe bonds more valuable. To the government, this wasa smoking gun. It turned out, however, that Dahl hadconfused several events, and when the true facts beganto emerge, even he was not so sure that his version wascorrect. Here's what happened.

In June of 1983, a sales meeting was set up by Drexelat Caesar's World, a meeting Milken attended longenough to make his pitch. Coincidentally, a Drexel cli-ent wanted to sell Drexel $6 million of Caesar's Worldbonds. Milken bought $3 million of those bonds forDrexel's profit-sharing account before the meeting, butthe government saw only the actual transfer onDrexel's books, which occurred after the meeting. Thisseemed suspicious. It turned out, however, that whileDrexel's books reflected the purchase on the day it wasmade, the transfer had been delayed because Milkenneeded Drexel's permission to place the bonds inDrexel's profit-sharing account. That permission camedays later.

The government's suspicions did seem confirmedwhen Dahl told the feds that immediately after themeeting, Milken urged the Drexel salesmen to buy Cae-sar's World bonds. But no other salesmen rememberedsuch exhortations. The clincher came when Milken'slawyers produced one of Dahl's customers who had soldDahl his Caesar's World bonds at the time. The clientremembered^and produced a contemporaneous memoconfirming—that Dahl had called to sell him Texas In-ternational, not to buy Caesar's World. He sold thebonds only to raise the cash to buy Texas International.When Dahl was shown the memo on the witness stand,his memory was refreshed as to the swap, and he saidhe would not dispute that version of the event.

Stewart must have been stunned by Dahl's memorylapse, but he takes no note of this in the material fromhis book in the October 2 Journal. Indeed, in his entirebook, Stewart makes barely a mention of the Faticohearings, which were the only proceedings at which thegovernment's witnesses were exposed to cross-examina-tion by Milken's lawyers. These hearings exoneratedMilken on all three of the central charges Stewart hadbeen pressing. On the day the Fatico hearings ended,I called Milken and told him the last small shadowof doubt I had had been expunged by the hearings;"You've now been vindicated by history."

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It would have been helpful to the Journal's readers ifStewart had told us something about Dahl's refreshedmemory in the Fatico hearings. He ignores it. Instead"Scenes from a Scandal" opens with a dynamite scene,which attempts to leave no doubt that Milken andBoesky were fellow crooks.

The Fatal Phone Call

IT IS a Friday morning in January 1985. The tele-phone rings in Boesky's office. It is supposedlyMilken calling. Witnesses in Boesky's office observe

him listening but saying almost nothing. When hehangs up, he shouts orders to buy Diamond Shamrockand sell Occidental Petroleum. He is clearly trading oninside information of a deal between Occidental Petro-leum and Diamond Sham-rock, known to Drexel Burn-ham because of Milken's rolein financing the deal.

In Stewart's account, on theother end of the telephone wesee Milken doing the talking.An employee of Drexel is sit-ting next to Milken as he tellshis secret partner, Ivan Boe-sky, to buy Diamond Sham-rock on information not avail-able to the investing pubhc. Itis a blatant felonious act ofinsider trading. Tbe employeeat Milken's elbow is JamesDahl.

The page-one editor of theWall Street Journal, the mostimportant business newspa-per in the world, goes on to tell us there was a secretarrangement between Michael Milken and Ivan Boeskyto split, fifty-fifty, all the ill-gotten gains from their se-cret trading, which had been witnessed on both ends oftheir long-distance telephone scheming by various em-ployees who happened to be sitting around.

Yes, long-distance telephone scheming. Milken is inLos Angeles and Boesky is in New York. This detail isthe fatal fiaw in Stewart's stoi-y; indeed, it accounts inlarge measure for why the federal prosecutors chose notto drag this dynamite story into the special pre-sentenc-ing hearings. Records presented by Milken's attorneysproved conclusively tbat the three-hour time differencebetween New York and L.A. meant the Diamond Sham-rock info was officially public knowledge when Boeskywas supposedly ordering purchase of the company'sshares on inside information. According to sign-insheets presented in evidence, Milken could not haveknown about the deal until sometime after 9:07 A.M.Pacific time, Friday, January 4, 1985. By then, tradingon Shamrock and Oxy stock had been suspended. ButStewart does not relate that in his account. Nor doesStewart report that Boesky had accumulated a largeposition in Diamond Shamrock in the months prior to

this deal wdth Oxy, and hence that his interest long pre-ceded any merger talk.

Stewart does report that on the following Monday,Diamond Shamrock's board unexpectedly rejected thedeal. He writes: "Told of the development, Mr. Milkengrabbed the phone, called Mr. Boesky, practicallyscreamed: Tbe deal didn't go through. We've got to getout of the position.' " In fact, if James Dahl overheardanything, it would have been this Monday call, and itwould have been perfectly lawful. Dahl told the govern-ment simply that he overheard Milken on the telephoneadvising Boesky how best to unload his position in Dia-mond Shamrock. Dahl said nothing about who placedthe call, let alone that Milken grabbed the phone andstarted screaming. Dahl never told the government nortestified that he heard the dynamite phone call on the

previous Friday with whichStewart opens his article. In-deed, Milken claims that Dahlnever sat next to him at anytime.

The "Scenes from a Scandal,"reported by the Journal, sim-ply did not take place. Indeed,the government knows thisscene could not have takenplace as described, which iswhy it did not drag this deadcat into the Fatico hearings.

I How can Stewart have gotten^ it so wrong? More than a year£ after the feds found the Dia-I mond Shamrock story to be aJ red herring, it is the lead evi-® dence of Michael Milken's evil

-junk bonds." empire in tbe Wall Street Jour-nal. Did the U.S. Attorney's office simply forget to in-form Stewart that its original surmise did not pan out?Did Stewart's research assistant get mixed up on thetimes and dates? Did the Journal ask anyone in Mil-ken's comer to explain the sinister phone call? If theyhad done so, they surely would have learned what youare learning here.

What about the fifty-fifty deal between Boesky andMilken? How was Boesky going to pay Milken bis halfof the millions they were making on tbe sly, but over-heard? Stewart tells us in his book, on page 322, thatthe government "gained the cooperation" of CharlesThumher, the chief accountant of Drexel's junk-bonddepartment, in order to find out. Thurnher had kept alist of the trades involving the Boesky organization. Yetby Stewart's own account, Thurnher's cooperationdidn't help the government much:

Like Boesky, Milken had kept his employees largely intbe dark. Milken had never told Thurnher why he was bav-ing him to do various things, so he was of little use in figur-ing out Milken's motives and state of mind. Thurnher testi-fied at one point that Milken hadn't even asked him to keepthe list; on another occasion, he said Milken had describedthe list as "all a bunch of bulls-t."

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But suppose part of the secret deal was to have therecords kept on Boesky's end? An accountant namedMooradian did indeed confess to juggling the books forBoesky, but said nothing of an interface with Milken.The government also targeted Michael Davidoff, Boe-sky's head trader. But as Stewart reports on page 319of his book: "Davidoff was of little use on theDrexel-Milken front, since he knew nothing about thesecret arrangements beyond some of the trading heoversaw."

For three years, the Wall Street Journal waited tohear Ivan Boesky, or at least a Boesky associate, spillthe beans on Michael Milken. Yet when Judge Wood atlast tells the feds to take their best shot in the pre-sentencing hearings, the only witness they call who hasanything to do with the Boesky organization is MichaelDavidoff, who Stewart acknowledges doesn't know any-thing! What's going on? Although the stories as de-scribed here have been available from governmentsources for a year, the Wall Street Journal still printsthe original raw accusations leaked to Stewart byRudolph Giuliani three years ago.

The Ox-Bow Connection

A REPORTKR for the New York Observer calledme recently. He was doing a profile of Stewartand wanted to "get a dissenting view." The re-

porter said he had interviewed many journalists whoknew Stewart and his work, and all of them said hewas a scrupulously careful reporter, above reproach.How did I explain that?

I asked if he was familiar with the 1943 Henry Fondamovie The Ox-Bow Incident. In this Western classic, aposse of ranchers and ranch hands is assembled to pur-sue some cattle thieves. They catch a group of men, whoinsist they are innocent but who are in possession of afew head of cattle with a local brand. The ranchers holda trial on the spot. All but Henry Fonda cast "guilty"votes and the thieves are lynched. As the ranchersmake their way home, they are met by one of their fel-lows, whose brand the stolen cattle carry. He tells themthat he had in fact sold a few head to a group of menwho were heading west to start their own ranch.

The ranchers in The Ox-Bow Incident did not con-sider themselves a "lynch mob." They did not seem irra-tional, inflamed, bigoted, swept by emotion and angryself-righteousness. They felt strongly enough about jus-tice in this new country to go through the motions of atrial by jury on the stump, and even to permit prayersat the executions. The problem, as with Stewart andthe JournaVs news pages, is that they had made uptheir minds.

Neither Giuliani nor Stewart had ever met Milken.But they knew he was a crook. They knew the type.

In his Journal article, Stewart tells us: "As early as1982, Mr. Milken was making $45 million a year, buthis aides were struck by how obsessed he was with en-hancing his wealth and power. Chatting with Mr. Win-nick one day, Mr. Milken looked at the view across Cen-

tury City and West Los Angeles to the coast and asked,'What do you think it'd cost to buy every building fromhere to the ocean?'"

That's real greed, isn't it? But many of Milken'sfriends remember this as a comment he made in thoseyears whenever someone complained that the Arabswould soon own all of Los Angeles, and then the wholecountry. It is a rhetorical device I've heard him use ina more recent context when the topic was the Japa-nese buying up all of America. It becomes a silly fearonce you spend a moment putting a price tag on anyserious stretch of real estate. Milken made the pointnumerous times, both in speeches and in casual conver-sation. Yet one man—Winnick—misunderstands thecontext, tells the story to Stewart, and it becomes theofficial version.

Aha! But didn't Milken in 1985 repeatedly complainto Drexel's Chief Executive, Fred Joseph, that he wascheated out of a $15,000 fmder's fee? Stewart uses thisanecdote to put the finishing touches on his evidence ofMilken's drooling greed. And in a billionaire, worryingabout a comparatively small sum would be real greed.But those of us who know Milken to be compulsivelygenerous can recognize this story of a trivial record-keeping error as heing mock serious, similar to a stand-ing joke among regular golf partners that one of themwas cheated on a $5 Nassau. Stewart also tells theJournaVs readers that by 1986 Milken had hegun wear-ing "French-cuffed shirts" and demanding to be servedon "china" instead of his usual paper plates. Here,Stewart is scrambling to paint Milken as Boesky. Iwould bet the only time Milken has ever worn aFrench-cuffed shirt is to a black-tie dinner, and almostevery black-tie dinner he has attended has been a char-ity dinner he was supporting. He might ask for his foodon a dinner plate instead of paper, but he would neverthink of asking for "china." He is obhvious to the trap-pings of social prestige. For many years prior to his im-prisonment, he spent at least one afternoon a weekteaching a math class to disadvantaged children at oneof the "Help Schools" he and his foundations supportedin Southern California. But Stewart had found to hisdismay that Ivan Boesky was a criminal, and if youknow one Boesky, you know them all.

Mike Milken is not a Jay Gould type or a DiamondJim Fisk type or an Ivan Boesky type, poised to makea killing in the market through connections. Milken'slife and work had been in the tradition of an AndrewMellon, a John D. Rockefeller, an Andrew Carnegie, anA. P. Giannini, those great men of our nation's businesshistory who each saw a different way of combining cap-ital and labor to produce great leaps in human produc-tivity—thereby enriching the lives of all mankind.Milken's wealth grew incidentally, and he gave much ofit away in a vast network of charities. Yet for all that,Michael Milken, who has become my friend during thisordeal, is in prison. He will stay there a long time, un-less the people who put him there—most particularlythe editors of the Wall Street Journal—realize what aprofound mistake they have made. D

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