Karcher Case Thrusts SEC’s Einhorn Into Limelight
Now that an exhaustive three-year probe into alleged insider trading at Carl Karcher Enterprises is over, Irving M. Einhorn can turn his attention to other things--such as waiting to see if he passed the California bar examination.
“I’m not very hopeful,” says Einhorn, 46, the Los Angeles Securities and Exchange Commission boss. Though he passed the Illinois bar years ago, he must pass the test here to practice law in California. “My plan was to study 14 hours every weekend, but,” he sighs, “it’s so boring.”
Einhorn, a used car salesman turned lawyer, isn’t the typical government bureaucrat. He joined the SEC straight from law school to get quick experience and then “go make some real money.”
Now, 16 years later, Einhorn is a senior lawyer with the commission, where he has earned a reputation as a sharp litigator and an able administrator. “He’s not the second coming of (former SEC Commissioner and longtime U.S. Supreme Court Justice) William O. Douglas, but he’s a good lawyer,” says Daniel K. Donahue, a former SEC lawyer who practices securities law in Newport Beach.
Since 1984, Einhorn has run the Los Angeles SEC office in relative obscurity, which Einhorn attributes to the public’s lack of interest in white-collar crime, unless big names or big money are involved. “(The local SEC office) brought around 30 cases last year, and I’ll bet most people can’t name one,” he says.
That is certainly changing. Two weeks ago, he filed insider trading charges against Carl’s Jr. hamburger chain magnate Carl N. Karcher, his brother Donald and 13 other family members. The SEC alleges that Karcher family members together avoided $310,000 in losses by selling Carl Karcher Enterprises shares after being tipped to the company’s financial woes in 1984 by Carl and Donald. The Karcher family has denied all the allegations.
Though dwarfed in size by the 1986 Wall Street insider trading investigation that snared arbitrager Ivan Boesky and Los Angeles securities firm owner Boyd Jefferies, among others, the Carl Karcher Enterprises case is the largest ever brought by the SEC in Los Angeles.
The Karcher case, which he shepherded, has focused new attention on Einhorn, the tough-sounding son of a Philadelphia cab driver.
By his own account, Einhorn wasn’t always bent on a law career. At age 21, he dropped out of Temple University just four courses short of a bachelor’s degree. With friends, he started a lucrative used car business. Einhorn said he bought used cars from dealers, fixed them up and sold them at a car auction in Bordentown, N.J.
He made about $1,000 a week, “but blew it all drinking and going to the track,” he says. “If I was doing it today, I’d have an ounce of cocaine in my pocket. . . . It was a fast life style.”
After five years, Einhorn grew disenchanted with the car business and life in the fast lane. “I don’t know if I’d be alive today if I had stayed,” he said. He returned to Temple University and received his bachelor’s degree in 1968.
His decision to go on to law school was arbitrary. “I can’t stand the sight of blood, so I couldn’t be a doctor. What else does a Jewish kid with no inheritance do?”
Einhorn joined the SEC’s Chicago office in 1972, after graduation from Valparaiso University Law School in Indiana. He rose quickly, becoming the SEC’s chief trial lawyer in Chicago. In 1980, Einhorn moved to Washington, where he spent four years as an assistant trial lawyer. He came to Los Angeles in 1984 as regional administrator.
30 Winning Cases
It was in Chicago that Einhorn first made his mark. As the SEC’s chief litigator there, Einhorn took a record 30 cases to trial and won each. “He’s very methodical but quick on his feet. He knows how to get his points across to a judge,” says Wayne Secore, a Dallas lawyer who worked with Einhorn in Chicago.
Einhorn gave up trial work when he came to Los Angeles, where his administrative tasks have ranged from straightening out kinks in the agency’s new telephone system to guiding young lawyers through insider trading cases.
Lawyers who have worked under Einhorn say he’s a fair administrator with a high tolerance for the slow-moving ways of government bureaucracy. The decision to go ahead with a case is made in Washington, not in the regional offices. Some former SEC lawyers say it can take the headquarters staff months to review a case. “I was frustrated, but Irv wasn’t,” one former SEC colleague says. “He’s a realist.”
Several former Los Angeles SEC lawyers credit him with setting aside a pecking order in which SEC accountants and financial examiners were made to feel that they were less important than lawyers.
Morale Booster
“Many times the non-attorneys have a better grasp of the facts than the attorneys do,” says Jane K. Crist, a former SEC lawyer who practices securities law in Los Angeles. “Irv seeks out the advice of accountants and examiners. It leads to better decisions on cases, and it’s good for morale.”
At the same time, he has made it clear that lawyers who monitor the activities of securities brokers and dealers--a frequently boring task--were considered just as important as those who litigate high-profile insider trading cases, former SEC lawyers say.
“Irv is really interested in both kinds of activities,” Donahue says.
Several former Los Angeles SEC lawyers say Einhorn has done much to stem--but not stop--the high turnover among staff lawyers, who leave the SEC for better paying jobs after only two or three years of experience. Starting lawyers at the SEC earn $27,716 a year, rising to $43,452 after five years. Former SEC lawyers say they nearly double their salary when they leave the agency.
“Our salaries are not competitive,” Einhorn says.
Einhorn tries to keep lawyers by promoting them quickly or by giving them professional challenges. Donahue says Einhorn nearly talked him into remaining at the SEC by offering him a new position that combined trial work with regulatory responsibility for securities brokers and dealers.
“He’s creative,” Donahue says. “I almost stayed. But the salary outside the government is too hard to turn down.”
The turnover among lawyers is a big problem because it hampers investigations, as cases are shuffled from one lawyer to another when lawyers quit the agency. “You lose time, because a new attorney has to learn the case,” Crist says.
‘Far From Winning War’
Indeed, it can take years before charges are finally lodged against a defendant. One recent case accused the president and treasurer of Video Station, a Canoga Park video equipment retail chain, of filing false financial statements between 1981 and 1983.
Allegations in the Carl’s Jr. insider trading case were filed after a three-year probe. At one point, 12 lawyers were assigned to the case.
Though former SEC lawyers credit Einhorn with lifting morale in an office beset with a heavy caseload and high turnover, some say he is far from winning the war against the investment scams that have given Southern California the reputation as a haven for con artists.
Beneath Einhorn’s affable and loquacious nature is an extremely cautious lawyer who doesn’t take chances on his securities cases, former colleagues say.
Take the Carl’s Jr. insider trading investigation. Einhorn’s superiors at the SEC in Washington gave him the go-ahead to file a lawsuit six months before he actually did. Einhorn says he took extra time to go over every detail and to give Karcher family lawyers additional time to review the charges. “This case was too important,” he says.
And Einhorn acknowledges that he doesn’t bring a case unless he is “more than 90% sure” that he will win.
Einhorn’s caution means that “all his targets are modest,” says one Los Angeles securities lawyer, who worked for the SEC in Los Angeles during the 1970s. “With the exception of the Carl’s Jr. case, there are no big names.” By the time the SEC brings charges against some, the firms are so deeply in trouble that they’ve stopped operating or are in bankruptcy proceedings, critics say.
No Losses Yet
Says Michael J. Donahue, Daniel Donahue’s older brother and also a former SEC lawyer who now practices law in Century City: “It’s my impression that the office used to be more aggressive than it is now.”
Einhorn bristles at the suggestion that he’s not tough enough on securities violators. Last year, he says, the Los Angeles SEC filed 31 civil court cases and administrative actions in its region, which includes California, Arizona, Nevada, Hawaii and Guam. Four years ago, the office handled 22 such proceedings.
At the same time, Einhorn says, he has broadened the kinds of cases the Los Angeles SEC investigates to include financial accounting fraud and insider trading--two priorities at the SEC generally. “When I got here, everyone was working on oil and gas scams,” he says.
He says the Los Angeles SEC hasn’t lost a case yet under his leadership.
But critics say the Los Angeles SEC piles up its victories, or, in many cases, consent decrees, because it goes after many little-known targets who don’t have the financial resources to fight back. One SEC target who maintains his innocence said he settled with the commission recently after his lawyer told him it would take years and at least $10,000 to mount a legal defense.
“That is the case with many targets,” one Los Angeles securities lawyer says. “Not many people can afford to fight the SEC.” He may have a fight on his hands with the Karcher family, however. The Karchers have served notice that they intend to fight the allegations vigorously, and they have the financial wherewithal to battle the SEC.
Some Los Angeles securities lawyers say it appears that cases involving investment scams have a lower priority than flashier insider trading probes. Crist says the SEC pursued insider trader cases that involved as little as $10,000, but “your garden variety fraud case had to involve at least $2 million, or we wouldn’t look at it.”
Einhorn acknowledges that there “is a threshold” for fraud cases, but defends the practice. “It has to involve millions of dollars and many people before we can look at it,” he says. “There are just too many of them. I could tie my people up on oil and gas scams all day.”
Changing Jobs
Einhorn says he tries to choose cases that send a signal to would-be violators. For example, he says the commission filed civil charges last month against Burbank radio and television financial adviser R. G. Reynolds over an allegedly fraudulent $1.7-million gold ore promotion. “A lot of people watch these shows and they can’t tell what’s an ad and what’s a legitimate show. The fact is, these shows raise a lot of money. People believe what they see on TV.”
Einhorn says the agency is currently investigating an insider trading case that’s bigger than Carl’s Jr., but he doesn’t expect to complete the probe for a year. He won’t say more, but it’s likely that Einhorn won’t be around to see it through.
As with most of the young lawyers who leave the SEC, Einhorn plans to leave the SEC for more money.
He says he started to change his thinking last September, after a doctor recommended cosmetic jaw surgery for his daughter. After thinking it over, Einhorn and his daughter decided against the operation. “But what bothered me, is that if she had wanted it, I couldn’t have paid for it.” It would have cost $20,000, of which only about $10,000 would be covered by insurance.
Einhorn says he can triple his $75,000 a year salary by working for a private law firm. He’s already had one job interview and has taken the California bar examination. Did he pass?
“I’ll find out around Memorial Day, but I’m not optimistic.” Einhorn says he didn’t study nearly as much as he should have. If he flunks, “next time, I’ll take a (bar review) course,” he vows.
