NEW YORK -- The former chief executive of Drexel Burnham Lambert Inc. took the stand yesterday against the man who made him and his firm rich, Michael Milken, and suggested that the fallen financier lied and violated company rules in connection with a 1985 investment partnership.
Frederick Joseph, now vice chairman of bankrupt Drexel, was followed on the stand by Richard Grassgreen, until last week the chief executive of Enstar Group Inc., a financial-services and retail company formed in 1989 out of Kinder-Care Inc., the nation's largest chain of child-care centers. Mr. Grassgreen told the court he had been granted immunity from prosecution after agreeing last week to plead guilty to two felonies related to the case.
The testimony came during the second week of hearings called to determine whether Milken's actual malfeasance extended beyond the six specific instances to which he admitted in April.
As recently as two years ago, Mr. Joseph was Milken's most aggressive promoter and Kinder-Care was among Drexel's most heavily promoted clients.
Looking pale and grimacing often, Mr. Joseph entered the court from a back door and seldom glanced at his former associate a dozen feet away.
Attorneys led Mr. Joseph through a dense legal thicket of questions seeking to establish whether an entity called MacPherson Investment Partners, run by Milken, was an appropriately disclosed, routine fund for the Milken family and Drexel clients, or a secret vehicle providing inappropriate riches for Milken's family and bribes to outside executives.
Mr. Joseph said he had never heard of MacPherson until 1988, when he was "troubled" because it apparently violated firm rules restricting employees to in-house accounts. He said he became aware of its participants, who included a number of investment managers who purchased securities from Drexel for their own operations, only last week.
After complaints about the inclusion of investment managers registered in 1988 by executives at a mutual fund company, Mr. Joseph said, he asked Milken and was told none was involved.
Investors in MacPherson profited from Storer Communications Inc. warrants and other investments that appreciated almost immediately, suggesting they were given especially sweet deals.
"We had a policy that you could not give favorable treatment to employees of institutional investor accounts," Mr. Joseph said. "I think it violated that rule."
Mr. Grassgreen said his crimes stemmed from his use of Kinder-Care resources to back Drexel-sponsored hostile corporate raids. The Drexel fees were retained for his benefit and that of his predecessor, Perry Mendel, he said.
Moreover, Mr. Grassgreen said Milken allowed a Grassgreen-Mandel partnership to acquire a personal investment in lucrative Storer Communications Inc. warrants after Mr. Grassgreen purchased through Drexel $5 million in less valuable securities in Storer for Kinder-Care's own accounts.
The warrants were initially issued, prosecutors said, to help sell the preferred stock, but Milken allegedly split the two securities, reserving the more lucrative warrants for himself and a select group of others.
Mr. Grassgreen said that Milken, when asked whether the warrants could be purchased for Kinder-Care, said, "No, it's for you and Perry [Mendel]."
Mr. Grassgreen said he received about $500,000 from his dealings with Drexel but hadn't declared the money as income or paid taxes on it.