Karcher Case Raises Issue of What Executives Can Tell Family

Irvine Co. executive Ray Watson acknowledges that he and his wife share an occasional secret.

As a board member of Walt Disney Co., for instance, Watson is often privy to inside information at the Magic Kingdom. And, he notes, it’s “only human” for a board member to go home and sometimes discuss inside information with his wife.

Watson said he sometimes confides in his wife. “But I say: Elsa, you are not to mention this to a soul, and she doesn’t.”

Watson’s warning is an example of the caution that corporate directors and officers must exercise--even with their families--to make sure that privileged information about public companies does not lead to insider stock trading.

The issue was spotlighted this week in a $1-million civil lawsuit filed Thursday by the Securities and Exchange Commission against Carl N. Karcher, founder of Carl’s Jr., and 14 of his relatives.

The government contends that Carl Karcher and his brother Don illegally tipped off relatives about some bad news their company was about to announce and that the relatives sold company stock before the news became public.

The Karchers have vehemently denied the charges.

“They didn’t tip. There was no communication at all,” said Thomas E. Holliday, a partner with Los Angeles-based law firm Gibson, Dunn & Crutcher, who represents Carl Karcher and his wife.

Whatever the outcome, such a case raises questions about what information business executives can share with one another--or take home.

When a son asks Dad, “How’s business?” how much can he say?

Basically, federal law prohibits anyone with material knowledge of an important corporate development from buying or selling that company’s stock before the information becomes public. Insiders can include lawyers, executives or, potentially, even a newspaper reporter.

The basic rule forbidding insider trading has several variations that can amount to defenses or “outs,” legal experts said Friday.

For a corporate executive to be liable, they noted, he or she must know--or be reckless in not knowing--that whatever is said will be used as the basis for a trade.

“Basically, you can’t tip to people who you have reason to know would trade on the basis of it,” said Jonathan Eisenberg, a partner with the Washington firm of Kirkpatrick & Lockhard and author of “Avoiding Insider Trade Liability.”

“You have to tell somebody--knowing he would trade,” added New York corporate lawyer Charles M. Carberry, who was the prosecutor in the insider-trading case against Ivan F. Boesky.

Emerging court decisions and case rulings have left gray areas. If a son, for example, merely senses that something is troubling his father--who happens to be a chief executive--can the son legally use his sixth sense to buy or sell stock?

“Did the father actually tell his son earnings were down? Or did the son look into his face and know after 30 years that his father was having a hard time?” said a Los Angeles corporate law specialist who asked not to be named. “It’s an area that Congress is going to have to legislate at some point.”

William J. Popejoy, chairman and chief executive officer of Irvine-based Financial Corp. of America, holding company for American Savings & Loan Assn., said he tries to “be guarded in conversations with family members or anyone regarding insider information.”

He said he has refused to give advice to tennis cronies and others who ask if they should buy stock in his firm, and sometimes they appear to be offended by his refusal.

At home, Popejoy said, confidential company information “is not something we discuss around the dinner table.”

He said he has repeatedly told his wife and his three grown sons that “if they happen to hear or see something, mum is the word.”