Flurry of Lawsuits Expected in Wake of Insider Trading Scandal

Insider trading charges filed last week against senior officials of the Kidder, Peabody & Co. and Goldman, Sachs & Co. investment firms are expected to produce a flurry of lawsuits by corporations and individuals who believe that they lost millions of dollars because of the alleged illegal swapping of information.

Unocal is already contemplating a suit against Goldman, Sachs to recover the $25- million fee that the Los Angeles-based energy concern paid for Goldman’s help in resisting a 1984 takeover attempt by Mesa Petroleum, sources said. Securities and Exchange Commission charges filed last week against Robert M. Freeman, head of Goldman’s risk arbitrage operation, allege that Freeman leaked confidential information on the takeover bid to Kidder, Peabody arbitrageurs, who used it to profit when Unocal’s stock rose.

In New York, a group of individual investors have retained attorney Lester Levy to represent them in claims that they lost money in a number of the insider trading deals cited in last week’s charges, Levy said. In some cases, the lawyer said, these shareholders, unaware of forthcoming developments that were known to the financiers, sold their shares just before stock prices rose. In other cases, they bought shares before stock prices fell, Levy said.

The investors “were the victims of the most egregious kind of breach of trust,” Levy said. “You’ve got to be able to rely on investment bankers in these deals.”

Suits may also be brought by companies that believe they were forced to pay more in an acquisition because insider trading drove up the price of the acquired firm’s stock, securities law specialists say.

Martin Marietta, the aerospace company that waged a pitched takeover fight with Bendix in 1982, is “taking a close look at the legal situation,” a company spokesman said.

Prosecutors charged last week that Martin A. Siegel, the former head of Kidder’s mergers and acquisitions department and Martin Marietta’s investment banker in 1982, leaked information on Martin Marietta’s planned takeover bid for Bendix to arbitrageur Ivan F. Boesky, who then bought stock and profited as Bendix share prices rose.

“The number of these suits could be huge,” said Alan Bromberg, a law professor and securities law specialist at Southern Methodist University in Dallas. “It could be a real donnybrook.”

Charged last Thursday with insider trading were Richard B. Wigton, head of Kidder’s risk arbitrage department; Timothy L. Tabor, formerly Kidder’s second-ranking arbitrageur, and Goldman’s Freeman. The three have denied any wrongdoing.

Siegel pleaded guilty last Friday to charges of illegal insider trading and tax evasion.

Neither investment firm has been charged with any crime, and spokesmen for both Goldman and Kidder asserted their innocence again Wednesday. “We don’t anticipate any lawsuits,” the Kidder spokesman added.

As well as the possible civil suits, securities law experts say Kidder, Peabody could also face federal criminal charges by prosecutors seeking to have the company disgorge what they have alleged were “millions” in profits from the trading scheme, plus triple damages.

They say the company may not be able to successfully defend itself against the civil suits merely by proving that it has sought to enforce internal rules against insider trading.

A defense that seeks to establish such a “good faith effort” might help the company deal with claims made under federal securities law, said Helen Scott, a law professor at New York University. But, she added, plaintiffs may also sue under tort law, which provides that the company is responsible for “anything the employees do, if it’s within the scope of their regular duties.”

Under such laws, “the trucking company is liable for the truck driver who runs somebody over, even if the driver was speeding,” Scott said.

She noted that the SEC can also bring a variety of disciplinary actions against securities firms and can even require them to halt trading or underwriting activities.

In 1968, for example, the SEC briefly halted the activities of two Merrill Lynch offices after the firm was found to have tipped off institutional customers that Douglas Aircraft, then an institutional client, was about to report a sharp drop in earnings, Scott said.

She added that it is “highly unlikely” that the SEC would require any long-term halt to the investment firms’ activities, however.

Defensive Measure

Bromberg said companies that have been victimized by insider trading schemes may file suits to avoid shareholder lawsuits contending that they have squandered company assets. “It may be the best way to avoid a lot of heat,” he said.

He speculated that General Electric may even sue the Kidder, Peabody executives who sold the investment firm to GE last year. GE could contend, Bromberg said, that former Kidder shareholders failed to disclose knowledge of insider trading violations “that turned out to be enormous potential liabilities.”

General Electric “will look pretty foolish if liabilities from (the insider trading cases) give GE a big loss,” he said. “From a strictly legal point of view, there’s big advantages in a preemptive legal strike.”

Several companies have recently brought lawsuits because insider trading allegedly drove up prices they paid in the stock market.

Litton Sued Adviser

Litton Industries last August sued Shearson Lehman Bros., former Shearson investment banker Dennis B. Levine and others, claiming that insider trades drove up the price Litton was required to pay for Itek Corp. by $30 million. Shearson Lehman, which acted as Litton’s investment banker in the acquisition, has contested the claim.

Last December, FMC Corp. sued Boesky, Levine and others, claiming that their insider trading had added $225 million to the price the Chicago firm had to pay for its own stock, which it repurchased in a recapitalization.

The outcome of the suits is not yet clear, attorneys said.