Let's Make a Deal

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But Drexel's very success led to its comeuppance. As in a Greek tragedy, the company seemed to suffer from an overabundance of hubris that concealed a fatal flaw. In Drexel's case, it was Milken's growing appetite for power and control. The turning point came in November 1986 when Ivan Boesky, a notorious Wall Street speculator, pleaded guilty to a single count of securities fraud and agreed to pay $100 million to settle SEC charges that he had used insider information to buy and sell stock. Boesky, who is serving a three-year term in a minimum-security prison in Lompoc, Calif., agreed to identify others who had joined his schemes. The trail led to Drexel and its wunderkind, who allegedly used a complex network of contacts to manipulate securities prices.

During the nearly two years that the Government spent preparing its case, Drexel defiantly declared its innocence and launched a major advertising campaign extolling the civic virtues of its junk bonds. Joseph claims that the two-year federal probe cost Drexel $1.5 billion in lost revenues and an additional $175 million in legal and advertising fees. Since November, the firm has bargained for an agreement that, as chairman Robert Linton put it, "would not make us look like a bunch of thieves."

Negotiations appeared to collapse last Monday, when Drexel's board of directors voted against a settlement. Joseph boasted that his staff had sifted through 1.5 million Drexel documents without finding any incriminating evidence. A former lightweight boxing champion at Harvard, Joseph insisted that the best defense against a heavy punch is "to come back at your opponent smiling."

But the blows kept furiously raining down, and Joseph's smile began to fade. When the board voted that Monday, Giuliani had already turned three close Milken associates into Government witnesses by granting them immunity from prosecution. The knockout power of an indictment under the 1970 Racketeer ! Influenced and Corrupt Organizations Act was also greatly feared. Charges under RICO, developed to prosecute the Mafia and other organized criminals, would allow Giuliani to tie up much of Drexel's $2.3 billion of capital -- including the fortunes of the firm's 1,700 employee stockholders -- throughout a lengthy trial.

Meanwhile, a fierce struggle raged inside the firm. On one side stood Milken's supporters, many of them younger executives who worked in the Beverly Hills office where Milken has been based since 1978. The leading loyalists included Leon Black, Drexel's mergers-and-acquisitions chief who works in New York, and Peter Ackerman, Milken's top assistant. Arguing that the California group was responsible for 90% of Drexel's profits over the past decade, both threatened to leave the company if it reached a settlement that might harm Milken's defense. They were opposed by older executives, mostly in Manhattan, who feared losing the firm's accumulated net worth if RICO charges were brought.