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Two Teachers Sue Junk-Bond-King Milken, KKR

October 9, 1991

SEATTLE (AP) _ Two schoolteachers on Wednesday sued imprisoned junk-bond king Michael Milken and leveraged-buyout pioneers Kohlberg Kravis Roberts & Co. over the investment of Washington and Oregon state employee retirement funds.

The lawsuit claims KKR and Milken conspired in misappropriating investments from Washington and Oregon, whose pension funds had about $2 billion invested with KKR. It alleges violations of fiduciary duty and of the Racketeer Influenced and Corrupt Organizations Act and the Investment Advisers Act.

The lawsuit said KKR secretly gave Milken warrants that enabled him and associates to acquire valuable equity in newly acquired companies at a fraction of their true value.

″The value of these warrants ... exceeds $1 billion. Because Oregon and Washington each account for about 10 percent of KKR’s pools, those states’ pension plans would be $75 million richer today if KKR had acted in accordance with its fiduciary duty to its limited partners,″ the suit said.

Alan Dershowitz, an attorney for Milken, called the allegations ″ludicrous″ and said the states’ pension funds profited from the investments.

He characterized the lawsuit as ″another clear-cut example of the irresponsible piling on of meritless lawsuits″ against Milken.

KKR released a statement dismissing the lawsuit as ″baseless and frivolous.″ It said the states’ relationships with KKR had been ″extremely beneficial to pension fund members.″

In a leveraged corporate buyout, the buyer pays for the company with borrowed money, frequently junk bonds, and repays the loan with the acquired company’s assets, future earnings or a combination of the two.

At least five leveraged buyouts were financed in part with the states’ money, the lawsuit said - those used to acquire Beatrice Co., Pace Industries, Motel 6 Corp., Safeway Stores, Inc. and Storer Communications.

KKR’s release said the firm had generated ″over $2 billion in profit for the people and the states of Washington and Oregon through several investment funds during the past 10 years.″

The lawsuit is the latest in a series of legal troubles for Milken. Once a high-rolling financier, he helped build the now-collapsed Drexel Burnham Lambert Inc. investment bank into a trading powerhouse for high-risk securities known as junk bonds.

Milken is serving a 10-year sentence in a California prison after pleading guilty last year to six felony counts involving illegal securities trading. He also agreed to pay the government $200 million in fines and $400 million to set up a fund to compensate defrauded investors.

Milken has also been sued by Drexel Burnham and a host of other corporations and individuals who claim they lost money due to his dealings.

The $1 billion lawsuit was filed in U.S. District Court by attorneys Steve Berman of Seattle and Jeffery Squire of New York on behalf of Hal Buttery, a Washington high school teacher, and Linda Whitmore, who teaches at a junior high in Oregon.

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