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Drexel's collapse may weigh heavily on fate of Milken

With the sudden demise this week of Drexel Burnham Lambert, the last important plot element still to be worked out in this Wall Street drama is the fate of the firm's former junk bond chief, Michael Milken. Indications are that federal prosecutors have become eager, perhaps desperate, to settle the mammoth criminal case pending against Milken. But the collapse of Drexel after a bankruptcy filing by its parent company Tuesday may make Milken less willing to plead guilty and thus be seen to accept blame for a debacle that ruined his old company and threw thousands of former colleagues out of work, people associated with the case said.

Milken, through his creative use of high-yield, high-risk junk bonds, was largely responsible for the huge success that Drexel enjoyed in the 1980s. "If he pleads guilty, he's going to have to bear the mark of the guy who took Drexel down," a lawyer involved in the case said.

Milken denies violating any laws. But complicating his position are family pressures, stemming from the fact that his brother, Lowell, also is under indictment. Any plea agreement presumably would include at least reduced charges against Lowell, and possibly the dropping of charges altogether. And Michael Milken's chances of acquittal in a trial have been damaged by the fact that many of his former close associates at Drexel have agreed to testify against him.

Milken's lawyers and federal prosecutors are keeping the status of negotiations a closely held secret. Until a few weeks ago, the U.S. Attorney's Office in Manhattan was threatening to bring a long-promised new indictment in the case. It would replace the 98-count racketeering and securities fraud indictment pending since last March against Milken, his brother, Lowell, and a former Drexel trader. It would contain additional charges and name more defendants.

Deadlines were set and then pushed back. And now, suddenly, there is eerie silence. The government is still officially committed to bringing a new indictment, but at least outwardly nothing is happening. Prosecutors have stopped predicting to defense attorneys when it will be filed. "It just seems to have drifted off into never-never land," another lawyer in the case said.

Sources say that both sides have held talks about the possibility of Milken pleading guilty to perhaps five felony counts. Thorny issues include the charges against Lowell, the amount of the substantial financial penalty Milken inevitably will have to pay, and whether the government will give up its demand that Milken testify against others. The two sides then retreated to their respective camps to consider each other's proposals.

A spokesman for Milken would not confirm that any talks had been held at all. He also refused to speculate on how the collapse of Drexel might affect the outcome of the criminal case.

The prosecutors also would not comment about developments this week.

But former prosecutors as well as private lawyers associated with the case say there is mounting evidence that the government wants to settle. The strongest indication they point to is that although the government completed preparation for the new indictment at least two months ago, it hasn't been filed. If the government were fully committed to going forward with the case, prosecutors could simply have made a final offer to Milken's lawyers and set a final deadline for filing the new indictment.

Former colleagues of the two assistant U.S. attorneys handling the case, John Carroll and Jess Fardella, say there are a variety of reasons for wanting to settle, not the least of which are personal. After doing virtually nothing else for the last three years, the two prosecutors are said to be tired and anxious to bring the case to an end. Former colleagues say Carroll has let it be known for at least a year that he wants to leave the U.S. Attorney's office and go into private practice.

"I just think these guys are ready to move on with their lives," one former prosecutor said. If a new indictment is brought, the pretrial phase of the case could drag on for another year, followed by a trial that would last for months.

In a brief telephone conversation Friday, Carroll said: "I will stay through the conclusion of the case, whether it ends tomorrow or three years from now." He refused to say if he is eager to leave the U.S. Attorney's office. "My personal druthers are irrelevant," he said.

In addition, there are all the usual reasons why prosecutors want to settle cases: An acceptable plea agreement is often a better alternative to a lengthy, costly trial that the government could lose. Legal experts say that even if Milken ultimately is convicted of numerous felony counts his sentence probably wouldn't be much more severe than what he would get if he pleads guilty to just a few felony counts. "He's probably still going to jail for the same amount of time," one lawyer said.

Finally, prosecutors may be concerned that some of the blame for the collapse of Drexel is falling on them. Drexel and Milken were prosecuted on the belief that Milken's junk bond operation had repeatedly violated securities laws by engaging in insider trading, stock market manipulation and securities fraud. But the pro-business Wall Street Journal editorial page, and other critics, have argued that the company was driven out of business by the prosecution.

These critics charge that the government unfairly made use of its RICO weapon _ the Racketeer Influenced and Corrupt Organizations Act _ as a bludgeon to force the company into pleading guilty to lesser counts last year. As a result, these critics argued, Drexel went into an inexorable slide when it lost its good reputation and was subjected to severe penalties without a chance to clear its name in court.