Haft-Drexel Buying Link Seen by SEC : Investigation Centers on Staley Stock Sale

New York Stock Exchange investigators looking into possible manipulation of the stock of a midwestern food company by the investment firm Drexel Burnham Lambert last year concluded that Washington’s Haft family was probably “acting on instructions” from Drexel when it purchased a large block of the food company’s stock.

The food firm, Chicago-based Staley Continental, had charged in a lawsuit that Drexel engineered heavy trading in its stock so that Staley would use Drexel’s services. After looking into trading of the stock, the NYSE investigators said in a confidential memo to the Securities and Exchange Commission that “it appears that Drexel Burnham was responsible for creating activity” in it.

But the investigators said they weren’t able to determine whether the Hafts were “acting on behalf of Drexel” when they bought 600,000 shares of Staley stock from Drexel and sold it back three days later. The Hafts vehemently disputed the NYSE’s statement. Robert B. Hirsch, a lawyer for the family, termed the exchange’s conclusions “outrageous” and said the NYSE had never contacted the Hafts for information or documents. Drexel also has denied the allegations. The NYSE memo said investigators did not contact Drexel or the other parties because of the continuing SEC investigation.

Robert Haft, president of the Dart Group, emphasized that his decision to buy and sell the Staley stock was not dictated by Drexel. “We made our independent judgment and went forward and did sell the shares,” he said in an interview.

The NYSE’s memo, sent to the SEC on Sept. 23, was based on a probe of allegations made against Drexel in a lawsuit filed by Staley. Staley charged that Drexel manipulated its stock in an attempt to force the company to accept a takeover and hire Drexel as its investment banker. Portions of the NYSE memorandum were read into the court record in the Staley lawsuit last month.

In addition to discussing the allegations raised by the food company, the memo said there was a possibility of insider trading and “stock parking” violations in the trading of Staley stock. In a stock parking arrangement, an investor seeks to conceal ownership of stock by placing shares he owns with someone else.

Robert Haft and his father, Herbert Haft, were not named as defendants in Staley’s lawsuit. The family, which controls Landover, Md.-based Dart Group, runs the Crown Books and Trak Auto retail chains and founded the Dart Drug chain before selling it in 1984. The transactions in Staley stock probed by the NYSE include trades conducted by a Haft family partnership, called Morgan Partnership, which handles its affairs separately from Dart Group.

The Hafts are one of several Drexel clients, including Thomas Spiegel of Columbia Savings & Loan in Beverly Hills, CenTrust Savings Bank in Miami and Liberty Service, an unidentified entity, which traded large amounts of Staley stock during the period in question, according to the memo.

Records in the lawsuit show that the Hafts purchased the 600,000 Staley shares from Drexel-- worth about $21 million--on Nov. 11 and sold them back to Drexel at a loss on Nov. 14, the day after Staley announced a proposed stock offering. Robert Haft said Drexel urged him to hold the Staley shares on Nov. 14, the day the Hafts sold their Staley stock.

The NYSE memo said these trades gave “the impression that the stock was not truly being purchased or sold but was in fact being shifted from one account to another. . . . It appears that Drexel Burnham was responsible for creating activity in Staley stock.” The memo said “it seems highly probable” that the Haft partnership was “acting on instructions” from Drexel. However, the NYSE acknowledged, “We were not able to determine if the CenTrust Savings, Liberty Service or Morgan Partnership (Haft) accounts” were acting on behalf of Drexel.

The NYSE memo said that it had cut short its investigation of the Staley stock trading, before examining all of the relevant data, at the request of the SEC and the Justice Department, which have their own Drexel probes under way. The SEC has been looking into the Staley trading--as well as an attempted takeover bid for Safeway Stores last year by the Hafts--as part of its wide-ranging investigation of Drexel and Michael Milken, head of the firm’s Beverly Hills junk bond department, sources said.

Hirsch, the Haft’s attorney, acknowledged that the SEC had asked questions about the Hafts’ trading in Staley stock, but said that the Hafts denied any wrongdoing and had cooperated fully with the SEC.

The allegations probed by the NYSE arose from an attempt by Staley in November, 1986, to raise money by selling stock to the public. Shortly before this stock offering was to take place, trading volume in Staley stock increased dramatically and the price of the stock fluctuated. During the week of the planned stock sale, the price of the company’s stock declined, and Staley was forced to withdraw its offering, which was handled by Wall Street firms other than Drexel.

‘Extortion’ Alleged

In its lawsuit filed earlier this year, Staley blamed Drexel for the failed offering. Staley claimed that during a series of conversations between one of its executives and James Dahl, an official in Drexel’s junk bond department, Dahl tried to “extort” Staley’s management by saying, among other things, “It is very important for us to sit down and talk before you do something that hurts me and before I do something that hurts you.”

Staley charged that Dahl objected to the company’s planned stock sale and wanted Staley to consider a management-led takeover, arranged by Drexel, instead. When Staley said no, according to the lawsuit’s allegations, Dahl threatened the company’s management and thwarted its offering by manipulating the stock price.

Staley claims that Drexel manipulated its stock in two ways. First, to derail Staley’s effort to sell additional stock to the public, which would have made a takeover more difficult, Staley charges that Drexel engineered a scheme to drive down the stock price.

Staley also alleges that Drexel spearheaded a program to create abnormally high trading volume in its stock. The higher trading volume created the impression that a takeover attempt was under way, at the same time that Drexel’s Dahl said that the best way to preserve Staley management’s role in the company’s future was to hire Drexel to arrange a management buyout.

Drexel denies the charges and says its trading actually supported Staley’s stock price around the time of the offering. Documents filed by the firm appear to indicate that Drexel and its clients were overall buyers of stock, not sellers, during the week of Staley’s planned stock sale. That could indicate Drexel’s activities could have supported the price of Staley’s stock, rather than driving it down, as Staley has charged.

Drexel has moved to dismiss the lawsuit in Chicago federal court. An attorney for the firm declined to comment about the NYSE memo, as did an exchange spokeswoman.

Robert Haft and his attorney Hirsch said the family partnership bought stock in Staley because of recommendations by Dahl and a Drexel food industry analyst and then sold the block a few days later because the price of the shares began to fall. They said the partnership lost about $2 million in the transaction.

The Hafts “were not regular clients (of Drexel),” Hirsch said. “They had met Jim Dahl, I think, who regularly called them with investment ideas and they took this one--to their regret. This was a bad investment decision that they made.”

“The stock declined in price and we decided to sell it,” Haft said. “The broker (Dahl) made a strong recommendation not to sell the shares. We made our independent judgment and went forward and did sell the shares.”