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.
Speculator Ivan F. Boesky made $28.3 million in profits on the 1984 takeover of Los Angeles-based Carnation Co. by Nestle S.A. of Switzerland because he was tipped to the deal by Siegel, the SEC contends.
In the spring of 1984, the agency’s complaint says, Carnation hired Kidder, Peabody as an adviser in connection with Carnation being sold. At the time, Siegel was a vice president and director of Kidder.
Siegel, who was secretly being paid by Boesky for inside information, soon learned that Dwight Stuart, a member of the founding family and a large shareholder, was interested in selling his Carnation stock, the complaint alleges.
From April through June, 1984, the complaint says, Siegel disclosed that information to Boesky. Siegel, the SEC charged, knew Boesky would proceed to buy Carnation stock.
On Aug. 7 and again on Aug. 21 that year, when the New York Stock Exchange asked Carnation about the stock’s price movement, the company said there were no corporate developments that would account for the rise.
During this time, the SEC alleged, Siegel met with Boesky and encouraged him to continue to buy Carnation shares. On Sept. 4, Nestle began a $3-billion offer for the company and Carnation’s stock price rose. The firm’s stock price soared from about $57 on June 28 to $83 a share 10 weeks later. Boesky ultimately sold his 1.7 million shares for a total profit of $28.3 million.
Ernest T. Kaufmann, a Los Angeles lawyer representing Carnation shareholders in a class action suit filed in 1984 against the company, commented Friday: “We suspected all along that there was a leak. The pattern of trading indicated it.”
He said the case is pending in U.S. District Court here and that the discovery phase has been “substantially completed.”
The SEC issued a report in July, 1985, stating that Carnation made false and misleading public statements the previous August in responding to inquiries about the surge in its stock price. The SEC did not file a complaint against Carnation, which consented to issuance of the report on its private investigation of it without admitting or denying the statements made in it.
The SEC used the report to warn U.S. companies in general that they cannot falsely deny that an important development is under way.
