Milking Milken


Since Michael Milken's indictment in 1988, his case has elicited an attitude of "condemn first, ask questions later." So it's not surprising that the justifications for Milken's 10-year sentence had an ex-post-facto quality. A Los Angeles Times reporter I know first told me Milken definitely got what he had coming, then said he'd have to get back to me with the reasons for that assertion.

George Will, waving his hand dismissively, declared on This Week with David Brinkley that Milken deserved his sentence because he was guilty of "grand larceny." Will did not elaborate, and neither did most news accounts. The denunciations of Milken were broad and nebulous because they were really about who he was, not what he did. His detractors insisted on seeing his case is a morality play or object lesson, rather than the story of one individual. To many he was greed personified, never mind that his lifestyle hardly fit that image. To the prosecutors and the judge who sentenced him, he was a rich and powerful person who had to be punished severely to make a point. In their determination to put on an impressive display of equal treatment before the law, they guaranteed that Milken would be treated unequally.

Federal prosecutor Jess Fardella argued that Milken's sentence "must convince the public at large that individuals of great wealth and power do not receive special treatment at the bar of justice." Literally, this means socioeconomic status should confer neither an advantage nor a handicap. But the prosecutors—and, as it turned out, federal Judge Kimba Wood as well—were worried about only half of this principle.

A more subtle perversion of justice was also at work. Treating like cases alike requires getting beyond superficial differences and discerning the essential similarity between pocket picking and electronic embezzlement, between burglary and investment fraud. Theft is no less a violation of rights when it is subtle or complex. But neither is subtlety or complexity in itself an indication of wrongdoing. This fallacy seemed to be at the heart of the popular reaction to Milken's crimes.

To someone who is not familiar with financial markets, there's something inherently suspicious about a guy who can make $550 million in one year through means that are not instantly understandable. But as Michael Lewis, author of Liar's Poker and no fan of high-flying Wall Street types, conceded, "No more than a few of those dollars can be traced to Milken's crimes."

In any case, it's difficult to believe that the average person could summon much indignation at the particulars of the six counts to which Milken pleaded guilty. For the most part, he helped clients avoid taxes or withhold information from the SEC. This involved buying and selling securities in certain calculated ways and failing to complete forms required by the SEC.

The most serious infraction was Milken's failure to tell shareholders in an investment fund that they were being charged indirectly to cover the fees of Drexel brokers selling shares in the fund. This is the only crime that clearly involved imposing a cost on third parties without their consent.

Still, Milken acted wrongly in breaking the rules of the exchange. Whether or not the federal regulations are valid exercises of government power, Milken had agreed to abide by them. Violating reporting requirements was therefore a breach of contract. Such breaches, however, are properly handled as civil matters. Milken had already been banned from trading, and he had agreed to pay $600 million in fines and restitution. Why send him to jail?

Wood acknowledged that the goals of individual deterrence, punishment, retribution, and rehabilitation could be served without a 10-year prison term. But she argued that the sentence was necessary for the sake of "general deterrence"—to discourage others from doing what Milken did. "Crimes that are hard to detect warrant greater punishment in order to be effective in deterring others from committing them," she said.

In other words, deterrence is a function of both the magnitude of punishment and the likelihood of being caught. The lower the likelihood of being caught, the harsher the punishment has to be to maintain the same level of deterrence. But the value of deterrence cannot be judged without considering the severity of the crime. Otherwise, we would execute people for littering.

Wood herself characterized Milken's crimes as "skirting the law, stepping just over to the wrong side" and "cutting legal and ethical corners." Perhaps Wood should have set aside her general-deterrence calculator and asked: Is this the kind of thing a person should serve 10 years in prison for?

The fact that violent criminals, including murderers, serve less time is not directly relevant, but it should have given Wood pause. Furthermore, Milken's sentence is disproportionate even within the context of white-collar crime. His prison term falls outside the boundaries of the more than 75 sentences imposed on defendants in Wall Street cases during the last decade. For example, Ivan Boesky, who admitted to buying stolen inside information, received a three-year sentence and is out on parole.

Those who applauded Milken's sentence talked a lot about "sending a message." Given her emphasis on general deterrence, this was clearly Wood's intent. When a case hinges on such vague considerations, rather than the actual conduct of the defendant, justice fails. Milken tried to tell Wood this in a letter before he was sentenced. "I've never sought notoriety," he wrote. "I am a person, not a symbol."