Carl N. Karcher, who founded Carl's Jr. hamburger chain and who stars in its advertising with homey pitches for potatoes and patriotism, was accused by the federal government Thursday of illegally tipping off his relatives about some bad news his company was about to release.
With the help of inside information from Karcher and others, the U.S. Securities and Exchange Commission said in a lawsuit, relatives and an employee avoided stock market losses of at least $310,000 in 1984.
Besides Karcher, who is chairman and chief executive of Anaheim-based Carl Karcher Enterprises, 14 other family members and one employee were named in the SEC civil lawsuit that seeks more than $1 million from defendants. Among those named is Donald F. Karcher, company president and Carl's younger brother.
For Carl Karcher, the lawsuit belies his long-held image in Orange County as an endearing family man and an unabashed patriot. Over the years, the father of 12 children has raised millions of dollars for numerous charities and for the Orange County Republican Party. He has even made certain that American flag decals are placed on the entrances to each of his 449 Carl's Jr. stores.
In a statement, the 71-year-old Karcher reacted with outrage to the SEC's charges on Thursday.
"These charges are totally false," Karcher said. "My wife and I did not sell any of our stock, nor did we tell anyone else to do so. . . . To suggest that any of us would intentionally violate the securities laws is highly offensive.
"I deeply regret any concern this meritless suit may cause among our employees and shareholders. Throughout the 45 years that we have been in business, my wife and I and the rest of our family have conducted ourselves ethically and with great regard for the law."
The self-made millionaire founded the chain 47 years ago as a hot dog stand in Los Angeles. Several years later, he brought his brother, Donald, into the business. In a separate statement, Donald Karcher, 60, also denied any wrongdoing.
"It is extremely unfortunate that I and members of my family now face these groundless charges leveled by the SEC," he said. "I categorically deny the allegations contained in the complaint. I have never intentionally or unintentionally violated securities laws."
In its suit filed in U.S. District Court in Los Angeles, the SEC alleges that in 1984 the two brothers and their wives tipped other family members--through a series of phone calls and discussions--to upcoming news about a 50% drop in profits at Carl Karcher Enterprises. The suit does not contend that Carl Karcher or Donald Karcher--or their wives--sold any of their own stock.
Insider trading is generally defined as buying or selling securities, either directly or though intermediaries, on the basis of information not available to the general public.
Federal laws prohibit any stock trading based on this knowledge. The laws also bar insiders--such as corporate officers--from passing along tips to others who use the information to profit or to avoid losses.
"We have to show people in these situations you don't tell your brother, you don't tell your family, you don't tell your friends, you just don't do it," said Irving Einhorn, the SEC's regional administrator at a press conference Thursday morning.
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Einhorn said the SEC lawsuit seeks recovery of illegal profits, damages equal to three times the
profits and a ban on engaging in insider trading again. That would amount to more than $1 million in all.
The decision to press the case with a civil lawsuit and not seek criminal charges, Einhorn said, was made by Robert C. Bonner, U.S. attorney for Los Angeles. But Einhorn said he strongly supported jail terms as the best means of discouraging insider trading. "Jail time slows criminal conduct down," he said. Bonner's office declined to comment.
The chain of events that led to the complaint began Oct. 12, 1984, the suit alleges, when Alvin DeShano, director of general accounting at Karcher, allegedly received a preliminary financial report that indicated earnings for the quarter ending Oct. 5, 1984, to be 83% lower than the like quarter from the previous year.
Three days later, DeShano--who is also named in the SEC lawsuit--sold all of his company stock and avoided losses of more than $9,000, according to the complaint. Several days after that, the suit alleges, both Carl Karcher and Donald Karcher received the same reports. The complaint goes on to say that Carl Karcher proceeded to inform his wife, Margaret, and that Donald told his wife, Dorothy.
Phone Calls Alleged
In the days that followed, phone calls took place and discussions with family members were held and--directly or indirectly--relatives learned of non-public information, the suit alleges. These calls resulted in a flurry of stock sales by family members, the suit says.
Carl Leo Karcher, son of Carl N. Karcher, and a vice president at the company, is accused of profiting from information he learned at the office.
Other family members alleged to have profited from inside information were Carl N. Karcher's son, Jerome; his daughters Barbara Karcher Garrett, Margaret J. LeVecke, Catherine Karcher-Everly and her husband, Daniel, and Carl N. Karcher's son-in-law, Donald E. Fergus Jr.
Also named in the lawsuit were Donald F. Karcher's daughter, Doneta Ann Thomason, and her husband, David; and Dorothy Karcher's sister, Rosemary Bruns, and her husband, William T. Bruns.
At the press conference, the SEC's Einhorn denied a reporter's suggestion that the SEC sought to make an example of the Karchers because they are well known. "This is a case we would bring regardless of the name," he said.
Karcher is the latest in a series of insider-trading cases pursued by the SEC, including a 1986 stock trading scandal involving big-league arbitrager Ivan Boesky. Among those snared by federal officials have been Wall Street investment bankers Dennis B. Levine and Martin A. Siegel, Los Angeles securities firm owner Boyd L. Jefferies and the New York brokerage house of Kidder Peabody. Levine, Siegel and Jefferies pleaded guilty to criminal charges, and Kidder Peabody paid a $25.3-million fine in a civil case.
The suit comes as the company is enjoying a turnaround after several years of declining profits. At Carl Karcher Enterprises, officials see little effect on operations. "This unfortunate development has no material impact on our operations or financial performance," said Loren Pannier, Karcher's chief financial officer.
But it has stunned some of Karcher's closest friends and associates, who are generally reacting to the allegations with disbelief.
"I am confident that these allegations will be disproved," said Art Birtcher, an Orange County developer and personal friend to Carl. Birtcher, who knows Karcher as a generous religious contributor, said he considers Karcher "a walking example of integrity and honesty."
The president of the United Way of Orange County, Merritt Johnson, said he was surprised that the accusations would be leveled at "one of the key leaders of the community." He said that Karcher has donated "in the millions" to United Way and other charities.
And shock was also expressed by Republican Party Chairman Thomas A. Fuentes, who described Karcher as a strong supporter of conservative Republican causes and candidates. Fuentes said that he "cannot personally imagine (Karcher) being involved in anything that would be illegal."
Times staff writers Leslie Berkman, Mary Ann Galante and James S. Granelli contributed to this story.