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July|August 2002
Return of the Deadbeat By Amy Benfer
Grave Offense By Emily Bazelon
Milken's Revenge? By Roger Parloff
Language Matters By Michael Erard
Santiago's Aftershocks By David Bosco

Milken's Revenge?

Roger Parloff on the extravagant and ultimately futile libel suit against the journalist James B. Stewart.

By Roger Parloff

James B. Stewart vividly recalls the moment in September 1991 when he learned that trucks carrying his book Den of Thieves had finally left the Simon & Schuster warehouse en route to bookstores. "It was an incredible relief," he says. "I thought, 'I don't care what else happens, because it's going out.'" Until that moment, Stewart had reason to fear that the publication of his book would be stymied by the people he had written about. Den of Thieves was a damning account of the 1980s Wall Street scandals that had resulted in criminal convictions for the high-yield bond impresario Michael Milken, the arbitrageur Ivan Boesky, and others. Milken, in particular, was not known for taking criticism kindly.

A few years earlier, for instance, when the journalist Connie Bruck began work on The Predators' Ball (1988), her own book on the junk-bond king, Milken told her that he didn't want the book written, and tried to buy her silence. ("Why don't we pay you for all the copies you would have sold if you had written it?" he proposed, as she later reported.) When Bruck persisted, Milken allegedly exhorted the chief lawyer of his employer—the now-notorious investment bank Drexel Burnham Lambert—to block the book's publication, though Drexel's lawyer apparently refused. When Bruck's book was finally published, Milken's public-relations firm attempted to discredit it.

Though Den of Thieves made it to the bookstores on time, the book still triggered its share of counterattacks. In the days surrounding its release, lawyers representing two important figures in the book—Michael Milken's brother, Lowell, also of Drexel, and Robert Freeman of Goldman Sachs—wrote to Simon & Schuster, claiming that Stewart had libeled their clients. Soon after, several hostile newspaper ads appeared, including one that accused Stewart of anti-Semitism. (The Anti-Defamation League later denounced that charge for having trivialized the cause of fighting anti-Semitism.)

Milken's defenders argued that Stewart had written a slanted book. They accused him of too
heavily relying on facts learned from informants who had helped build the government's criminal case against Milken and others. Many articles and books were published advancing this pro-Milken hypothesis, at least one of which—Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution, by Daniel Fischel, a University of Chicago law professor and former consultant to Milken—savagely questioned Stewart's fairness and competence.

Den of Thieves certainly hadn't pulled any punches. Characterizing the activities of Milken and Boesky as "the greatest criminal conspiracy the financial world has ever known," Stewart described episodes of fraud, insider trading, and stock manipulation that went beyond the six felony violations of the securities laws to which Milken had pleaded guilty in 1990. Lowell Milken, for his part, was depicted as his brother's "cold and anal" hatchet man.

Despite heated criticism from the figures portrayed in his book, though, the one thing Stewart had little to worry about was losing a libel suit. There are few longer shots in American tort law than betting on a public figure to win a defamation suit against a Pulitzer Prize-winning journalist like Stewart. When writing about a subject of public interest, a journalist cannot be held liable unless he is found to have made false statements with "actual malice"—knowledge of falsity or reckless disregard for the truth. Equally reassuring, Simon & Schuster's lawyers had carefully vetted the book, asking Stewart and his research assistant, Laurie Cohen, to double-check the factual basis of certain key passages.

Still, the likelihood of losing a libel suit was one thing; suffering the inconvenience, expense, and embarrassment of having to defend a lavishly funded suit was another, very real possibility. So Stewart had reason to be relieved that neither the Milkens nor Freeman nor any other major figure in the book did sue, despite all their saber-rattling over the book's release.

In September 1992, however, Michael Armstrong, a former attorney of Lowell Milken's, filed a suit on his own behalf. Armstrong alleged that Simon & Schuster, Stewart, and Cohen had libeled him by portraying him as having encouraged a client named Craig Cogut to lie under oath. In his complaint, Armstrong sought $10 million in compensatory damages and $25 million in punitive damages. The suit caught Stewart completely by surprise, because Armstrong had played such a minor role in Den of Thieves. When the suit was announced, he recalls, "I was hard pressed to remember that Michael Armstrong was even in the book. I had just totally forgotten that whole passage."

Stewart is not likely to forget Armstrong again. The case of Armstrong v. Simon & Schuster took nine years, and ultimately cost both sides a combined total of more than $3.5 million. To enable the courts to judge whether a seven-sentence paragraph about Armstrong in Den of Thieves had been fair and accurate, the parties ultimately generated a 3,134-page, five-volume appellate record. It was not until July 2001 that New York's highest court approved the final dismissal of the suit.

Over the course of the proceedings, Armstrong tried to learn who Stewart's sources were for the disputed paragraph. But he also sought information that would expose the confidential sources for much of the rest of the book, and this alarmed Stewart. "It was a scary thing," says Stewart. "This was a book where a number of sources had shown tremendous courage and risk in willingness to provide information, and I don't doubt that [commercial] vengeance would have been pursued against them if we had revealed their names."

To justify the unusual scope of his demands, Armstrong argued that delving into Stewart's relationship with government sources—though plainly irrelevant to the paragraph at the heart of the lawsuit—would help him establish the bad faith of Stewart's entire journalistic mission. "We believe," explained Eugene Licker, Armstrong's lead lawyer, when deposing Stewart in 1997, "that Mr. Stewart and Ms. Cohen were used by the United States government to reveal the information they wanted to reveal, not in an evenhanded manner, and that that use of a reporter and an author who allow themselves to be used would constitute malice."

Robert Cusumano, one of the trial lawyers for Stewart and the other defendants, sensed something brewing—something bigger than a squabble over the content of a single paragraph. "It became clear," he says, "that Armstrong and his lawyers were fixing for a big, protracted war." He remembers thinking, "They're not going for the quick kill here. They're pursuing this other agenda."

But what agenda, and whose? From the moment the case was first filed in 1992, Cusumano suspected that Armstrong could not be paying his own way. In 1996, Cusumano won a court order forcing Armstrong to reveal how he was financing the suit, and Armstrong turned over documents showing that the money was coming from Lowell Milken in the form of a loan. The initial amount was $500,000, but the figure had been periodically adjusted upward until the total reached $1.6 million, at which point Milken stopped paying.

The loan was a sweet deal for Armstrong. Under the terms of this particular loan, if he lost the case, he'd owe Milken nothing. If he won, he would refund Milken the principal plus 12.5 percent interest, and keep the rest for himself. What was Milken getting out of the bargain? Milken loaned the money for the suit, Armstrong explains, because "he was a friend, and it was the right thing to do, and because it was a business opportunity."

But it was surely a dubious business opportunity, given the long odds of winning the case. To Stewart and his team, there was little mystery about why Lowell Milken would underwrite Armstrong's lawsuit. "I always thought the Milkens were the shadow party in interest here," says Stewart. "I always thought this was, at root, some effort [by the Milkens] to get me...and, maybe more important, to discourage other reporters from aggressive reporting on the Milkens." Certainly, if Milken had wanted to punish Stewart or his sources, there were plenty of reasons for him to fund a suit by Armstrong rather than bring his own. By using Armstrong as a proxy plaintiff, Milken would avoid the invasive and time-consuming depositions and requests for documents to which parties are subject in any major defamation suit. (Stewart readily admits that he would have welcomed the opportunity to use the legal process to question the Milkens, who had declined to be interviewed for his book.) Armstrong's team insists, however, that he sued only to serve his own interests. "We had no hidden agendas, no secret mission," asserts Eugene Licker. "We were there to make the book more accurate."

If Armstrong or the Milkens had hoped to use the suit to expose, embarrass, and punish Stewart's sources for the book as a whole, the effort largely failed. Justice Lewis Friedman of the New York State Supreme Court—the trial-level court in New York—generally ruled that evidence gathered in the suit had to focus tightly on the paragraph in question. Though Friedman put to rest Stewart's larger concerns, and though Simon & Schuster paid for Stewart's lawyers, Stewart still endured the humiliations and distractions of being a defendant. Like anyone with a huge potential liability—$35 million, in his case—he faced some hurdles in obtaining mortgages while the suit was pending.

And there was always the remote possibility of losing. Stewart and Cohen had solid sources for the paragraph that Armstrong was challenging, but they had no assurance that those sources would hold firm when drawn into the crucible of litigation. "When push comes to shove, are they going to change their story on you?" asks Stewart. "There were plenty of times I thought that if, by some unjust twist of fate, I lose this case, I am wiped out."

The task in Armstrong v. Simon & Schuster was to determine the precise nature of Armstrong's dealings with his client Craig Cogut, and to decide whether Stewart had fairly characterized those dealings in the paragraph that straddles pages 396 and 397 of the hardback edition of Den of Thieves. In the mid-'80s, Cogut was an attorney at a small law firm that almost exclusively served Drexel Burnham Lambert and the Milkens. In March 1986, Cogut was present in Lowell Milken's office when Milken got a phone call from a group of accountants who were going over the books of Ivan Boesky's arbitrage corporation. In that call, as well as three others they made to Milken that day, the accountants inquired about a $5.3 million payment that Boesky's company had made to Milken's firm. According to Boesky, who later cooperated with federal investigators (and in 1987 pleaded guilty to a single felony count), the $5.3 million was intended to settle accounts for a variety of illegal activities that Boesky and Michael Milken had engaged in together.

What had Lowell Milken said to the accountants? By early 1987, federal investigators were eager to know the answer to this question. If Lowell had lied on the phone, assuring the auditors that the payment had been for lawful consulting work, he could be charged as a co-conspirator in Boesky and Milken's crimes. Cogut had heard parts of at least one of Lowell's telephone conversations with the accountants. In January 1987, Armstrong, who then represented both Cogut and Lowell in the criminal investigation, interviewed Cogut about what he had heard. At the time an admirer of the Milkens, Cogut told Armstrong that, contrary to the investigators' theory, Lowell had expressed ignorance on the phone, telling the auditors that he had no firsthand knowledge of what the payment had been for.

About a year and a half later, when prosecutors notified Armstrong that they were planning to indict Lowell—they believed that he had, in fact, lied to the accountants—Armstrong began preparing a written presentation to U.S. Attorney Rudolph Giuliani, urging him to reconsider. In September 1988, Armstrong drafted an affidavit for Cogut's signature, which he planned to include in his presentation to Giuliani. In drafting it, Armstrong relied on his recollection of what Cogut had told him many months earlier about Lowell's conversation on the phone.

But when Cogut read Armstrong's initial draft of the affidavit, he felt it contained inaccuracies. The affidavit implied, for instance, that Cogut had heard all of the conversation between Lowell and the auditors, but Cogut insisted that he had actually heard only part of it. In addition, Cogut's memory of the now two-and-a-half-year-old incident was hazier than the draft implied. To Cogut, his own interest in avoiding a possible perjury indictment suddenly seemed at odds with Armstrong's interest in exonerating his other client.

Describing Cogut's feelings when Armstrong approached him with the affidavit, Stewart wrote the following passage:

...Cogut had become uneasy about his attorney's possible conflict of interest. Lowell's interests were too close to Mike Milken's. Cogut's concern had increased when, earlier in 1988, Armstrong came to him with an affidavit he had prepared for Cogut to sign. Its intent had been to exonerate Lowell, based on assertions of fact by Cogut. Cogut read it over and had only one problem: the facts weren't true. He angrily refused to sign, and began looking for new lawyers, eventually hiring Los Angeles lawyers Tom Pollack and Ted Miller.

To this day, Armstrong insists that nearly every aspect of that paragraph is wrong. There was no conflict of interest, he says, because "as far as we knew, Craig was one of Michael and Lowell Milken's most enthusiastic supporters." Armstrong points out that he encouraged Cogut to hire the lawyer Thomas Fitzpatrick to ensure that Cogut would have someone looking out exclusively for his interests. He also claims that Cogut did not fire him, as the passage implies. And most crucially, he insists that the affidavit was true: Far from "angrily refusing" to sign it, Cogut did sign it.

But after years of the legal discovery process, the facts that came to light cut against Armstrong at nearly every turn. Yes, Armstrong urged Cogut to retain Fitzpatrick, but the fact that he did so suggests that he sensed the potential conflict of interest. Evidently uncomfortable relying solely on the advice of Armstrong and Fitzpatrick, Cogut retained the two additional lawyers in Los Angeles to advise him on the affidavit. Critically, Cogut testified that as the affidavit went through multiple drafts, he felt that Armstrong was reluctant to make important changes he was demanding. Armstrong, on the other hand, thought that Cogut, a careful corporate lawyer, was being excessively legalistic, backing away from what he had told Armstrong in January 1987.

On the evening of September 27, 1988, still dissatisfied with what was then the fifth draft of the affidavit, Cogut telephoned Armstrong to ask for more changes. Cogut's wife was secretly listening in on another line. According to the testimony of both Coguts, in the course of that phone conversation, Armstrong said something that left them aghast. "Mr. Armstrong," Cogut testified, "had told me as I was agonizing over being precise, words to the effect...'It says "affidavit." It's not really an affidavit. You don't have to worry about anything. I'll talk to Rudy [Giuliani] and I'll put it in the right context. And he'll understand it's not really an affidavit.' "

The Coguts were not parties to the suit, so neither of them had any apparent motive to slant testimony in Stewart's favor. But Armstrong flatly denies the Coguts' accounts. "I have speculated about what I might have said to him," he says. "I have a standard speech that I give to people. I say, Look, you can swear to it even if you don't remember it fully, as long as you say in the affidavit that you can't remember it fully. Now it may have been that I didn't do it as articulately as I could have. I certainly never said anything as silly as, Oh, don't worry, it's not really an affidavit."

Dissatisfied with the multiple drafts of the affidavit, and suspicious of Armstrong's ability to look out for his interests, Cogut "effectively sat down in consultation with other lawyers from start to finish," as he testified. He rewrote the affidavit in words he "was comfortable with." Armstrong then drew up a final draft incorporating most of Cogut's changes, which Cogut signed on September 28. Thus it was true, as Armstrong claimed, that Cogut had ultimately signed an affidavit, but it was an affidavit that, in the view of Cogut and his attorney Pollack, differed in important ways from the one Armstrong had originally urged him to sign.

"Was I angry when this was all over? Yes, I was furious," Cogut testified in late 1997. "For all practical purposes, I ceased to use Mr. Armstrong's firm as my lawyer... . It had become clear to me through the course of the affidavit preparation that I could not rely on them to represent me adequately....Mr. Armstrong had pressured me to significant degrees to say things beyond what I was comfortable saying."

In September 1999, after reviewing the vast record, New York State Supreme Court Justice Barry Cozier dismissed the case, finding that Stewart had not acted with "actual malice." Though Cozier could have stopped there—since that finding alone was enough to dismiss the case—he notably ventured a step further, finding that the passage had also been "substantially true." An appellate panel affirmed the dismissal in February 2001, concurring that there had been no actual malice. That July, the New York State Court of Appeals, the highest in the state, refused further review, ending the case.

In light of Armstrong's outside funding for the case and the decisive loss he endured, it is sensible to question, as Stewart does, Armstrong's good faith in bringing the suit and Lowell Milken's motives in funding it. It is also worth noting, however, that in several hours of interviews for this article, Armstrong never expressed anything other than what seemed like sincere rage about the disputed paragraph. While it is hard to believe that Armstrong would have sued without the benefit of Lowell Milken's largesse, Armstrong gives the unmistakable impression of feeling genuinely wronged by Stewart. The more time one spends with Armstrong, however, the more one suspects that the focus of his fury is not the implication that he tried to suborn Cogut's perjury. Rather, what seems to infuriate Armstrong is a subtler implication, one that is probably invisible to most readers of Den of Thieves and that would not be grounds for a libel action: Stewart hints that Armstrong was guilty of an embarrassing and costly tactical miscue.

Armstrong seems irked by the suggestion that his insensitive treatment of Cogut during the drafting of the affidavit prompted Cogut to defect from the Milken camp—a development with catastrophic consequences for the whole defense team. According to Stewart, two months after the affidavit incident, Cogut warned Fred Joseph, the C.E.O. of Drexel, of possible wrongdoing by Michael Milken. That warning, in turn, likely contributed to a decisive break between Joseph and the Milkens, and precipitated Drexel's agreement in December 1988 to a corporate guilty plea. That plea, it can be argued, ratcheted up the pressure on Michael Milken to a point where he finally had to capitulate and plead guilty as well.

Eugene Licker, Armstrong's lawyer, contends that Stewart distorted the facts about Cogut because he "wanted to tell the story of a dramatic act, of somebody who is in the inner circle, and who leaves the inner circle." But it's unquestionable that Cogut left the inner circle: He testified, after all, as a government witness against Michael Milken at Milken's presentencing hearing in 1990. Though Licker concedes this, he insists that telling what he believes is the true, more gradual story of Cogut's disenchantment would not have served Stewart's needs as an author: "It would not have been as sexy, would not have had impact, would not have sold as many books."

Notwithstanding the protests of Armstrong and Licker, Stewart's telling of the story allowed readers to draw an inference that seems eminently plausible: that Armstrong committed a professional misstep with unforeseeably dire costs for the whole Milken team. In any event, after enduring nine years and more than 3.5 million dollars' worth of scrutiny, Stewart's passage turned out to be not only "substantially true," but—if the Coguts' testimony is credited—a more charitable account of Armstrong's conduct than the facts might warrant. Armstrong's suit, in turn, looks all the more like what Armstrong insists it never was: an instrument of Lowell Milken's revenge.


Roger Parloff is an attorney, a columnist for The American Lawyer, and a writer whose work has appeared in Fortune, The New York Times Magazine, and Brill's Content.

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