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Former Junk Bond Customer To Plead Guilty To Criminal Charges

October 22, 1990

NEW YORK (AP) _ A major Drexel Burnham Lambert Inc. junk-bond customer with close ties to Michael Milken has agreed to plead guilty to criminal charges related to dealings with the firm, a federal prosecutor said Monday.

The government was expected to use the plea by Richard Grassgreen, who resigned last week as chairman of Enstar Group Inc., to bolster its case at a pre-sentencing hearing on new allegations against Milken.

The disclosure by Assistant U.S. Attorney Jess Fardella came during the sixth day of testimony on charges that Milken committed an array of crimes beyond the six felony counts to which he has pleaded guilty.

Fardella said Grassgreen will plead guilty to two felony counts for personally receiving fees on financings paid for by Kinder-Care Inc., Enstar’s predecessor. Grassgreen’s lawyer, William Schwartz, did not return a call seeking comment.

Kinder-Care, a Montgomery, Ala.-based day care company, was built largely with money raised by Drexel through the sale of high-yield junk bonds. Grassgreen and Milken had a close relationship and Milken and his advisers often pointed to Kinder-Care as an example of a successful junk bond-financed company.

Details of the charges against Grassgreen were not disclosed. But people familiar with his case said they were related to misappropriating corporate funds and failing to disclose to his board his personal interest in MacPherson Investment Partners, a fund created by Drexel that invested in Storer Communications Inc., another Drexel-financed takeover deal.

The 1985 Storer takeover is one of the main subjects of the special pre- sentence hearing on Milken underway in federal court.

Prosecutors have sought to show Milken misappropriated valuable Storer stock warrants and used them to bribe customers into buying risky Storer securities.

The accusation is part of the government’s attempt to show Milken was a systematic lawbreaker. They want to convince U.S. District Judge Kimba Wood he deserves a severe punishment. He faces 28 years imprisonment.

Grassgreen was expected to testify as a witness at the Milken hearing on Tuesday about the Storer transaction, along with former Drexel chief executive Frederick Joseph. It would be Joseph’s first public testimony against Milken.

On Monday, a lawyer who worked for Drexel said he questioned whether the firm had properly disclosed plans to allocate millions of dollars worth of Storer equity to important clients and Drexel employees.

According to the government’s charges, five Drexel-affiliated investment partnerships acquired 82 percent of certain Storer equity warrants without legally disclosing the interests.

A large block of the preferred stock and the warrants were repurchased by Drexel from a customer, Atlantic Capital, shortly after the Storer deal was completed and in turn sold to MacPherson, one of the Drexel-formed investment partnerships.

It consisted of several Drexel employees and major investors the government claims were given a stake by Milken as gratuities. One-third of the partnership was held by a trust for Milken’s children. The outside parties included Columbia Savings & Loan Chairman Thomas Spiegel, takeover strategist Nelson Peltz and Occidental Petroleum Corp. Chairman Ray Arani.

The government has charged that Drexel client David Solomon was sold an interest in MacPherson to compensate for trades conducted by Drexel to help him generate illegal tax losses, a transaction included in Milken’s guilty plea.

The Drexel lawyer, Craig Cogut, testified that the failure to disclose the 82 percent stake in the Storer raised questions in his mind. ″I was concerned as to whether it was appropriate for individual representatives of clients to receive these partnership interests,″ he said.

Cogut also said that a fund manager who was given a stake in MacPherson in 1987 became concerned whether the investment was appropriate.

But he said he did not discuss the disclosure with Milken. He also said Milken’s brother Lowell handled the bulk of drafting documents and structuring the Storer deal, and that he had very little contact with Michael Milken.

The government dropped criminal charges against Lowell Milken as part of Michael Milken’s guilty plea in April.

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