Business Week Probe Spreads to Prudential and Merrill Lynch

The investigation of pre-publication leaks from Business Week magazine zeroed in on two targets Thursday, including a Southern California office of Prudential-Bache Securities.

An official at Prudential-Bache, a New York-based brokerage firm, confirmed reports from sources Thursday that one of the firm’s Southern California offices had handled some of the suspicious trading. The trading apparently had been inspired by leaks of stock recommendations that would appear in the magazine’s widely read “Inside Wall Street” column.

The official said the account in which the suspicious trading had occurred had been closed down. Prudential-Bache is cooperating with an investigation by the Securities and Exchange Commission, he said.

Word of Prudential-Bache’s involvement followed disclosure Thursday by Merrill Lynch & Co. that it had fired a Connecticut stockbroker because of evidence that he, too, had purchased stocks using advance knowledge of what would be in Business Week’s stock advice column.

Officials close to the investigation said there wasn’t any apparent link between the Merrill Lynch and Prudential-Bache trading. They said it raised the disturbing possibility that there have been multiple leaks, possibly at the four plants around the United States where Business Week is printed. The magazine is a unit of McGraw-Hill Inc.

Business Week, the SEC, and the New York and American stock exchanges have all launched investigations into suspicious trading that occurred on Thursdays, the day before the weekly magazine was distributed to the public.

The investigations are focusing on possible leaks from the printing plants, two of which are owned by R. R. Donnelley & Sons. One of the Donnelley plants is located in Old Saybrook, Conn., not far from the Merrill Lynch office in New London, Conn., at which the fired broker worked. The other Donnelley plant is in Torrance.

Sources close to the investigation confirmed that Prudential-Bache had become one focus of the inquiry. However, an official at Prudential-Bache, who asked not to be identified, refused to disclose which Southern California office was involved or which stocks had been traded.

He said Prudential-Bache has “a few dozen” offices in California. The official said “this is just an isolated incident involving one particular account.”

The official said Prudential-Bache’s internal investigation was continuing, and he declined to say whether the trading was done on behalf of a customer. He also refused to say whether Prudential-Bache is considering disciplinary action against any of its employees.

Another source confirmed that officials from the SEC’s New York office had visited Los Angeles in recent days to look into the matter.

A Merrill Lynch spokesman said Thursday that William Dillon, 33, a broker in its New London, Conn., office, was dismissed “as a result of an internal investigation into the Business Week matter.”

The spokesman said officials at Merrill Lynch’s New York headquarters decided Friday to review the firm’s own trading after they read press accounts of the Business Week investigation.

The spokesman said the firm’s compliance department immediately ran a computer review of trading over the preceding 40 days. “It took just a matter of minutes to uncover a problem,” he said. He added that the SEC was immediately notified.

Eight Stocks Involved

Reached at his home in Old Lyme, Conn., Dillon said he was attempting to hire a lawyer and wouldn’t make any comment until he could get legal advice. “I want to respond to it (Merrill Lynch’s allegations), but I don’t want to put my foot in it,” Dillon said. Merrill Lynch said Dillon had joined the firm in October, 1986.

The Merrill Lynch spokesman said Dillon’s suspicious trading involved eight stocks, although he declined to identify them. He refused to say if Dillon had been trading on his own account or on behalf of customers.

SEC officials on Thursday refused to comment about any aspect of the investigation.

Mary McGeachy, a spokeswoman for Business Week, confirmed that the magazine had hired Kroll Associates, a detective agency specializing in financial fraud cases, to carry out its internal investigation.

A Business Week employee said the magazine first became aware of unusual trading on Thursdays preceding publication in early 1987. But the employee said the suspicious trading temporarily abated after the magazine tightened up security measures.