Kidder to Pay $25.3 Million as Insider Penalty
In the most expensive insider-trading settlement by a major securities firm in Wall Street history, Kidder, Peabody & Co. said Thursday that it will pay $25.3 million in fines and penalties to settle federal charges that it profited from illegal trading based on tips from a top stock trader at another securities firm.
The second firm, which was not named by the government, is understood to be Goldman, Sachs & Co., which has denied any involvement in the trading scheme.
The Securities and Exchange Commission charges settled by Kidder include an accusation that the firm had participated in an illegal stock trading arrangement with Ivan F. Boesky, the former stock speculator whose $100-million settlement of SEC insider-trading charges last year remains the only such penalty larger than Kidder’s.
Overstating Net Worth
The arrangement with Kidder allowed Boesky to overstate his trading company’s net worth in reports to the SEC, and thus allowed him to trade more stock than the law permits.
That charge was something of a surprise. Although Wall Street has spent months expecting Kidder to settle charges that it joined in insider trading with Boesky and an employee of Goldman, Sachs, there had been no previous indications that Kidder might be accused of participating with Boesky in a so-called “parking” arrangement. It is known, however, that the SEC is investigating Boesky parking arrangements with several brokerage firms.
“Parking” is an agreement in which an investor sells securities to a brokerage firm with the understanding that he will repurchase them at a later date; the arrangement is illegal to the extent that it allows the investor to make misleading reports to the authorities of his holdings or financial condition.
SEC documents filed Thursday in federal court here accuse Kidder of making at least $13.7 million on illegal insider trades in six companies subject to takeover speculation from 1984 through April, 1986. The money represents profits from stock purchases in some cases; in others, Kidder avoided losses by selling shares or options in advance of negative public disclosures.
Kidder will repay, or “disgorge,” the $13.7 million-plus and pay an additional $11.6 million in fines. The disgorged money will go into a fund to repay claimants who can show that they were financially injured by the illegal trades.
The agency did not specify how much profit Kidder made on its parking arrangement with Boesky. SEC documents do say that Kidder at one point in 1985 held at least $10.3 million in the stock of Unocal Corp., a California oil company, on Boesky’s behalf.
Halting Risk Arbitrage
In settling the charges without formally admitting or denying them, Kidder agreed to withdraw from risk arbitrage trading until it can comply with recommendations of an outside consultant hired to examine its procedures for adhering to stock trading laws.
Risk arbitrage, the speculation in stocks of companies that are likely takeover targets, has been the focus of most recent insider-trading charges, including Thursday’s. A Kidder spokesman said the firm has already begun to withdraw from that business and now has a minimal investment of “a couple of million dollars” in arbitrage trading.
Thursday’s settlement represents a comprehensive attempt by the brokerage firm and its parent, General Electric Co., to free themselves of civil and criminal liability from the activities of Martin A. Siegel, a former top executive at Kidder who has pleaded guilty to selling inside information to Boesky and swapping illegal tips with Robert Freeman, a top trader at Goldman, Sachs. Freeman has denied participating in the scheme.
No Criminal Prosecution
Also, executives of Kidder and GE, which owns 80% of the firm, reached an agreement with U.S. Atty. Rudolph W. Giuliani to avert criminal prosecution of the brokerage firm. Giuliani said Thursday that he has decided not to prosecute Kidder, partly because GE has already imposed a major shake-up in Kidder’s top management, which included the resignation of its chief executive, Ralph D. DeNunzio.
GE spent $600 million for its Kidder stake in mid-1986, after Siegel left the firm and the legal violations had ceased.
Giuliani cited also “the negative effect that charges against the firm would have on Kidder’s thousands of innocent employees and the firm’s legitimate activities.”
At the same time, GE announced that it would add $100 million in subordinated debt capital to Kidder’s books, bringing its total capital to about $750 million.
The company said the contribution, which follows the creation of a $500-million credit line for the firm last year, “reflects the confidence GE has in Kidder, Peabody’s business prospects and its employees.” GE shares were the ninth most active on the New York Stock Exchange on Thursday, falling 12.5 cents a share to $53.50.
The latest settlement with authorities represents another black eye for Kidder, which has suffered a long string of regulatory embarrassments. In February, for example, the New York Stock Exchange fined the firm $300,000 over charges that it had repeatedly misused customer securities as collateral for its own borrowings; similar charges had been brought in 1985.
Kidder figured also in one other celebrated insider-trading case--the 1984 charges against former Wall Street Journal reporter R. Foster Winans, who was convicted of tipping the firm’s top stockbroker to the content of stories about to appear in the newspaper.
May Face Lawsuits
The settlement may also expose Kidder to lawsuits from companies whose securities it allegedly traded illegally and from their shareholders. One such lawsuit was filed April 14 by Unocal, one of the stocks that Siegel and Kidder allegedly traded on an illegal tip from Goldman, Sachs’ Freeman. The lawsuit names Goldman, Kidder, Siegel, Freeman and others as defendants.
Ronald L. Olson, Unocal’s attorney in that case, said Thursday that he had not yet seen the SEC complaint but that his understanding of it “suggests there is some substance to what we have alleged.” However, a spokesman for Kidder said that its lawyers believe “there are substantial legal questions regarding the validity of such suits to begin with.”
One important question raised by the settlement is its impact on Giuliani’s efforts to prosecute Freeman and two other Wall Street traders implicated by Siegel--Richard B. Wigton, Kidder’s top stock trader, and Timothy B. Tabor, a former assistant of Wigton.
Freeman, Wigton and Tabor were arrested last Feb. 12 and charged with assisting Siegel in his illicit trading. But the government was forced to withdraw its indictment last month amid signs that the prosecutors’ case had begun to fray. Giuliani has said that a broader indictment of the men is imminent.
Although the SEC charges do not mention either Freeman or Goldman, Sachs by name, they suggest for the first time that the regulatory agency is satisfied with evidence suggesting that Freeman, at least, participated in illegal trading with Siegel. When asked Thursday about the impact of the SEC charges on the case against the three men, Paul Curran, Freeman’s defense lawyer, said: “None whatsoever.”
Public Relations Gain
Another lawyer familiar with the defense case noted that the Kidder settlement would not be admissible in a trial of the three men. “From Giuliani’s perspective, I’m sure this is a public relations plus,” the lawyer said. “But this settlement looks like a business judgment on GE’s part. Kidder is really not in a position to speak to anyone’s guilt.”
In a statement issued from its New York headquarters, Goldman, Sachs again expressed faith in Freeman’s innocence. The outcome of any trial, it said, would turn on “a jury’s assessment of the credibility of Martin Siegel, who has pleaded guilty to two felonies.” Goldman noted that Kidder had made its settlement “without agreeing to any government version of the facts.”
According to the SEC’s court documents, Kidder’s illicit trading included the purchase or sale of stock or options in at least six companies whose corporate plans it had learned from a Goldman employee.
Four of the six were represented by Goldman, Sachs in acquisition negotiations or corporate finance matters. These were Continental Group, which was the subject of a 1984 takeover bid by Diamond Land; General Foods, which was acquired in 1984 by Philip Morris; Unocal, which was vigorously defending itself from a takeover bid by T. Boone Pickens Jr. in 1985, and R. H. Macy, the subject of a 1985 leveraged buyout by management.
Goldman represented the suitors of the two others: St. Regis Corp., which was acquired in 1984 by Champion International, and Houston Natural Gas, which was acquired in 1985 by InterNorth.
Tips by Kidder Alleged
The SEC charged also that Kidder, presumably through Siegel, passed Goldman, Sachs secret information about deals on which it was working. The SEC did not identify any of the stocks subject to those tips, however.
The “parking” charge arises from Boesky’s request that Kidder buy some of his holdings in a number of companies. His motive was to avoid violating the minimum net worth requirements imposed under SEC rules on his main corporate vehicle, Seemala Corp. This parking was illegal to the extent that it allowed Boesky to evade SEC rules on accurately reporting his own securities positions or net worth.
