Business Week Stock Trading Scandal Widens

A stock trading scandal involving a column in Business Week magazine widened Friday as a broker in the Anaheim office of Prudential-Bache Securities was fired and brokers from two other firms were implicated.

Brian J. Callahan, 28, a 3 1/2-year employee at Prudential-Bache who also wrote a personal investing summary in the Orange County Register, was fired after allegations that he received advance information of tips that would appear in the magazine’s “Inside Wall Street” column.

The information came from an employee at a Torrance plant that prints Business Week, officials said. Callahan then traded on the information for the printing plant employee’s account and several others, although sources familiar with the case say he personally profited very little from the transactions.

Broker Suspended

Also on Friday, Advest Inc., a brokerage based in Hartford, Conn., said it suspended an unidentified broker in its New London, Conn., office for trading on pre-publication information leaked from a plant in Old Saybrook, Conn., that also prints Business Week.

Another firm, Shearson Lehman Hutton, also disclosed that at least one and possibly three former brokers in its Hartford, Conn., office may have traded similarly from information leaked from the Connecticut plant.

At least four brokerage firms are now involved in the widening investigations concerning Business Week, the nation’s largest business weekly with a circulation of nearly 1 million. On Thursday, Merrill Lynch said it fired a broker, William Dillon, from its New London office after similar trades involving stocks touted in Business Week.

Some sources familiar with the investigations said they would not be surprised if employees leaking pre-publication information from Business Week had accounts and relationships with brokers at other firms. The suspicious trading may have started more than two years ago, they said.

Business Week, the Securities and Exchange Commission and the New York and American stock exchanges have all launched investigations into the suspicious trading, uncovered publicly last week. The trading usually occurred on Thursdays, a day before delivery of the magazine to newsstands and to some homes and offices.

Similar Case

The case is similar to one a few years ago involving pre-publication leaks of stock tips in the Wall Street Journal’s market-moving “Heard on the Street” column. However, in that case, one of the column’s authors leaked the information. Business Week has said there is no evidence that the author of its column was directly involved in leaking information.

Efforts to reach Callahan, the dismissed Prudential-Bache broker, on Friday were unsuccessful. However, sources who know the young broker described him as an “average producer” who earned about $80,000 a year, who largely kept to himself and who really did not profit heavily from the alleged trading.

“He wasn’t a superstar, but he wasn’t an underachiever either,” said one source, adding that the broker probably made less than $10,000 in commissions from the trades and did not trade for his own account. His small personal gain is “what makes the whole case so sad,” the source said.

Broker’s Background

Callahan, the source added, attended Anaheim High School and UC Riverside, and got his first job with Paine Webber in 1981 before joining Prudential-Bache in late 1984.

Callahan’s boss is Brad Weddon, resident manager of the Anaheim office. As such, he would have had to sign off on the trades that Callahan made. Prudential-Bache confirmed that he is still the resident manager and said that while the investigation was continuing, the firm did not have any evidence of wrongdoing by Weddon.

One source said the employee at the Torrance printing plant had an account at Prudential-Bache’s 33-member Anaheim office for only a short time and that the suspicious trading began only about two or three months ago.

Suspicious Trading

The employee’s account “was small, but that doesn’t preclude whether or not he had any accounts elsewhere. The SEC will determine that,” the source said. The source added that Prudential-Bache officials uncovered the suspicious trading late last week and reported it soon afterward to the SEC and other authorities.

James Ratcliffe, director of public affairs for R. R. Donnelley & Sons of Chicago, owner and operator of the Torrance and Connecticut plants that print Business Week, declined to identify the suspected employee, saying that allegations against the person have not yet been substantiated.

“Prudential-Bache gave us a name or names and said these were the ones they suspect. We haven’t had the opportunity to confirm that,” Ratcliffe said.

The Torrance plant, one of four regional plants that print Business Week, has about 650 employees and also prints such magazines as Time, Newsweek, Sunset and the Los Angeles Times Magazine. Donnelley is the nation’s largest commercial printer.

‘Hot Trades’ Summary

Meanwhile, Orange County Register Editor N. Christian Anderson said Friday that Callahan would no longer contribute a weekly “Hot Trades” summary to the newspaper.

The summary, published in the Register’s Business section each Monday, listed the county’s five best- and worst-performing stock issues, based on percentage price movements, for the preceding week. It also included a “Key Pick” item in which Callahan summarized recent events affecting the preceding week’s biggest percentage gainer.

Anderson said newspaper officials were not concerned about possible insider trading violations in this case because the information Callahan supplied to the paper was based on the previous week’s market activity. Callahan transmitted the information to the Register after the close of trading each Friday, Anderson said.

‘It Is Not a Tout’

“The purpose of the column is to explain to readers why a stock moved so much. It is not a tout. It is not giving readers advice as to what stocks to buy,” Anderson said.

He said Callahan was chosen to provide the weekly trading summary because of an earlier arrangement in which Callahan and Prudential-Bache has helped the Register compile results in an annual stock-picking contest open to Register readers.

Meanwhile, Shearson Lehman said improper trades involving former brokers at E. F. Hutton--which Shearson acquired earlier this year, after the trades had taken place--are believed to have taken place before August, 1987. Shearson said it believed that the activity at the Hutton office was minimal.

A source at Shearson declined to identify the brokers but said that at least one was still working as a broker at another firm.

Under Investigation

At Merrill Lynch, people familiar with the firm’s internal probe say a second broker in the firm’s New London office, James Smith, is under investigation but that no disciplinary action has been taken against him. Smith’s secretary said he was unavailable for comment.

In its latest issue, dated Aug. 8 and released late Thursday, Business Week printed a letter of apology to its readers, describing the unusual trading activity and saying steps have been taken to increase security.

The magazine begins printing Wednesday at midnight for release to the news media on Thursday at 5 p.m. Eastern time.

Times staff writers Scot J. Paltrow in New York and Eric Schine in Orange County contributed to this story.

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