CBS Charges Boesky With Stock Fraud : Claims the Financier Is Manipulating Its Shares to Boost Value

Striking back at what it says is a dangerously overheated market for its shares, CBS on Tuesday charged that its largest stockholder, New York financier Ivan F. Boesky, is manipulating the stock to inflate its value.

In a lawsuit filed in federal district court here, CBS charged that Boesky violated federal margin rules and securities laws in the course of accumulating his 2.6-million-share holding in CBS. It is seeking a court order forcing Boesky to divest all the shares of stock he acquired illegally, enjoining him from voting his shares and requiring him to amend his filing to the Securities and Exchange Commission to declare his true intentions toward the company.

Boesky’s 8.7% stake in CBS makes him the largest single stockholder in the entertainment and communications company. Boesky, who specializes in buying stocks of companies subject to merger-and-acquisition transactions, a practice known as risk arbitrage, was unavailable Tuesday to comment on the CBS action.

Among the CBS charges made in the lawsuit was that Boesky has misled the public and the SEC by claiming that he accumulated his shares in CBS with the intention of being “supportive of management.” In fact, CBS alleges, Boesky has attempted to inflate the value of CBS stock to turn a short-term profit.

$95.50 Per Share

Boesky disclosed his CBS holdings on April 1, indicating that he had paid an average of $95.50 per share. Around that time, CBS disclosed that Boesky had approached the company with an offer to sell his shares back to CBS for $105 each, producing an indicated profit to him of about $24.7 million.

CBS said at the time that it had rejected the offer and declined Boesky’s request to meet with its officers.

One of CBS’ principal allegations against Boesky is that he accumulated much of his stock by borrowing money from leading stockbrokers illegally.

Under federal securities law, investors are allowed to borrow from brokers up to 50% of the value of their stock. But CBS contends that Boesky was able to borrow 100%. The company maintains that he did this under the guise of lending his shares to brokers for their own speculation in the market. Such a transaction would have allowed him to receive cash equal to 100% of the value of his shares.

CBS contends that this method of financing his stock purchases should have been disclosed to federal regulators.

CBS alleges that this practice, as well as others, has artificially inflated the value of its stock and made Boesky and his partners “extremely vulnerable to decreases in the price of CBS stock.” The network believes that this situation may lead to a collapse in the price of its shares.

Boesky is one of several players whose activities have helped generate an active market for CBS stock by promoting the notion that the company is a takeover target.

Among others, Atlanta television magnate Ted Turner has been identified in news reports as contemplating such a takeover.

Among the allegations in the CBS lawsuit is one that Boesky has met with Turner in an effort to encourage takeover speculation.

The notion gained momentum when American Broadcasting Cos. agreed late last month to be acquired by Capital Cities Communications. In addition, a conservative group called Fairness in Media had threatened a proxy fight over the network’s news policies, which it alleges are too liberal.

In composite trading, CBS shares closed at $107.625, down $2.875.