Anatomy of a Scandal: How Alleged Insider Trading Operated : Four Cases Illustrate Prosecutors’ Far-Ranging Charges of Wrongdoing
Federal prosecutors this week have weighed in with a new round of insider trading charges, rounding up high-level officials at some of Wall Street’s most prestigious firms. Four of the allegations of insider trading are detailed here.
Storer Communications was a debt-ridden company in 1985, unpopular on Wall Street because it often fell short of its own predictions. The Miami-based company had incurred debt of $785 million to build cable TV systems, but the investment was not yet paying off.
On March 19, dissident investors led by Coniston Partners, a New Jersey investment firm, vowed to try to gain control of Storer at a shareholders’ meeting set for May 7, proposing to liquidate the company. The news electrified Storer’s stock, causing it to climb $5.75 to close at $70.125 that day--or more than double its 52-week low of $31.25.
Over the next seven weeks, Storer’s management scrambled to defend itself. When it failed to stop Coniston in the courts or regulatory agencies, Storer’s chairman said on April 15 that the company was considering merger partners and the possibility of recapitalizing the company or taking it private.
By April 19, reports were circulating that Kohlberg Kravis Roberts & Co. was readying a proposal. KKR was being advised by the investment banking firm of Kidder, Peabody & Co.
On April 22, KKR made an offer for the company, but was spurned by Storer. A storm of protest ensued, and four days later, Storer accepted KKR’s slightly sweetened offer, valued by analysts at about $87 per share.
Before the deal could close, however, a higher bid materialized on July 16, made by Comcast, another cable TV operator. On July 30, Storer accepted a newly sweetened offer from KKR that included $91 in cash. KKR ultimately won the bidding.
Federal prosecutors now contend that a Kidder, Peabody insider passed along information about KKR’s “confidential plan to take over Storer” to Robert M. Freeman, then head of Goldman, Sachs’ risk-arbitrage department.
Government lawyers now charge that Freeman had been buying Storer stock “in or about April” on the basis of takeover rumors. He used the Kidder, Peabody inside information to “determine an appropriate price” at which to sell call options in the Storer stock, to hedge his position, the government contends.
Freeman indicated he was trading for his own account, according to the complaint.
Ivan F. Boesky, the arbitrageur who has settled separate insider trading charges, held some Storer shares in mid-1985. He was believed to own Storer stock at the time of the May proxy fight, but was not required under federal rules to disclose his holdings until he controlled more than 5%. On July 19, Boesky disclosed that his group held 9.6% of Storer’s shares. The documents revealed that 60 days earlier, his group held just under 5%. The Storer sale was consummated on Dec. 5, and Boesky notified the SEC later that month that he had disposed of all his shares.