Settlement Returns $1 Million To Pension Fund Junk-Bond King May Have Looted $100 Million, But His Investments Have Boosted State Fund With 30 Percent Return

About $1 million is to be returned to Washington’s publicemployee pension fund from Michael Milken, though the dethroned junk-bond king was once accused of defrauding the fund to the tune of $100 million.

The settlement did not resolve questions about how much potential investment was lost due to Milken’s wrongdoing, said Jim Parker, director of the state Investment Board.

Milken helped finance some corporate takeovers for the board and its investment partners in 1984 and 1986.

The board, which manages the $20 billion pension fund for state and local government workers, alleged that Milken held onto lucrative stock warrants that should have gone instead as investment profits to the pension fund.

But it hasn’t been established how much income the state’s pension fund should have received, Parker said.

“That may be one of those eternal unknowns,” he said.

Parker said it’s not important to calculate the loss because the 1984 and 1986 leveraged buyout investments that Milken helped finance have proven to be highly profitable, bringing the pension fund a 30 percent return.

The investments were orchestrated by Kohlberg, Kravis and Roberts, the Wall Street firm that pioneered the use of public pension funds to take over companies through leveraged buyouts.

Because of the high profits, the board is not complaining about its $1 million share of a global settlement involving dozens of competing claims against Milken, a convicted felon who was a central player in Wall Street’s biggest trading scandal.

“Our board is viewing it as a positive,” Parker said.

The board includes legislators, state agency directors and government workers who depend on the state for their pensions.

The Investment Board never expected to get much from Milken because it was competing with about 70 parties for a $400 million pool of settlement money, said Rafael Stone, one of the private attorneys who handled the case for the board.

Most of the claims were as large as the board’s, he added.

One problem was that the board had no clear documentation that Milken was not entitled to keep the stock warrants, Stone said.

Warrants are certificates that allow the bearer to buy stock at below-market prices, and are often issued by a company as a bonus to early purchasers of that company’s stock.

When Kohlberg, Kravis and Roberts set up the buyout deals, it intended for the warrants to go to buyers of the junk bonds used to finance the deals.

But the financing documents did not make it clear whether Milken and his firm had the right to determine where the warrants went, Stone said.

Washington Education Association President C.T. Purdom, a board member who represents teachers, said he is satisfied that the board’s attorneys did what they could to recover the Milken money.