Question

Michael Milken junk bond scheme

a-The regulations that were violated, the methods that were used by the perpetrators, the findings by the investigating entity, and the eventual outcome?

b - The key lessons and conclusions learned?

Answer 1

Milken and his colleagues at Drexel Burnham Lambert Inc. virtually invented the junk bond market of 1980s where in may companies which were below investment grade were able to sell their bonds. Milken could convince investors that high risk high yield bonds were not junk but a good opportunity. The business grew into underwriting and selling junk bonds for companies that did not qualify as investment-grade issuers. As investors became more confident, more money became available and credit stadards started deteriorating. Companies became more indebted and this helped in more hostile takeovers through LBOs. Milken could find investors for LBOs which increased hostile takeovers of companies with less debt ( this reduced debt was used as a collateral). Meanwhile, Milken was accused of violations of U S Securities laws and SEC started probing on the same. Milken was accused of several charges including insider trading and racketeering. Finally Milken pleaded guilty of following charges and settled for 10 years in Prison and $600 Mn fine. The prison term got reduced to 2 years later. He did not plead guilty for insider trading and racketeering.

Eventual outcome was the prison term and he was banned from securities market for life.

Below are the violations and methods

1) Abetting failure to file an accurate 13d statement with SEC

2) Sending confirmation slip without mentioning commission in the price

3) Abetting in filing inaccurate broker-dealer reports with the SEC

4) Selling stock without disclosure of an understanding that the purchaser would not lose money

5) Agreeing to sell securities to a customer and to buy those securities back at a real loss to the customer, but with an understanding that he would try to find a future profitable transaction to make up for any losses.

Conclusion

• Deterrent effect on white-collar criminals
• strong message to people thatwhite-collar criminals are never so powerful or clever that they cannot be caught
• Greed can lead to high risk and losses