Karcher Son Admitted Insider Trading Under Oath, SEC Says

The Securities and Exchange Commission has requested a summary judgment on insider trading charges against a son of hamburger magnate Carl N. Karcher, claiming that the younger Karcher made admissions to investigators that clearly establish his guilt.

In recently filed documents, the SEC contends that Carl Leo Karcher should be found guilty and fined without a trial because he admitted under oath that he told his broker to sell Carl Karcher Enterprises debt securities after learning that the fast-food company was about to report a dramatic drop in earnings.

“I firmly believed that it was my legal right to sell those . . . at the time if I was selling it at a loss,” Karcher told SEC lawyers.

The younger Karcher, then a Karcher Enterprises vice president, sold 50 debt securities for about $25,500 less than he had paid for them, according to court papers.

But by dumping the debentures four days before the company’s losses were made public, he saved at least $10,500 by avoiding a market price decline that followed the announcement, the SEC contends.

Contacted by telephone Thursday, Carl Leo Karcher declined to comment on the SEC’s request or other aspects of the insider trading case.

The younger Karcher, his father, 13 other family members and one company employee were accused by the SEC in April of illegal insider trading.

According to the SEC’s lawsuit, Carl N. Karcher illegally tipped some of his relatives in late 1984 about an expected drop in earnings at his Anaheim company, which operates the Carl’s Jr. restaurant chain. Some of them sold Karcher Enterprises securities before the news became public and the stock price plummeted, the SEC contends.

All the defendants have denied the accusations. The SEC is seeking a summary judgment against Carl Leo Karcher only.

In papers responding to the SEC request, Carl Leo Karcher’s lawyer, Orville A. Armstrong of Los Angeles, contends that his client believed it was legal to sell the debt securities because he was selling them at a loss.

“He did not have the intent to defraud or manipulate,” Armstrong said in an interview. “At most, he was merely negligent.”

But SEC lawyers contend that illegal insider trading has occurred if a company insider trades on the basis of information that is not public. “And we think it’s pretty clear from Carl Leo Karcher’s testimony that that’s exactly what he intended to do,” said SEC trial counsel John C. Koutsos in an interview.

Carl Leo Karcher’s admissions were made during an out-of-court hearing in August, 1985, when SEC lawyers were investigating potential insider trading at Karcher Enterprises.

Carl Leo Karcher--who now owns 16 Carl’s Jr. franchised restaurants in the areas of Palm Springs, Palm Desert and Yuma, Ariz. areas--had resigned three months earlier as vice president of manufacturing and distribution after 17 years with the company.

According to Carl Leo Karcher’s sworn testimony, a number of company officers--including President Donald Karcher--attended a monthly meeting on Oct. 17, 1984.

At the meeting, Carl Leo Karcher told the SEC, he was surprised to see a financial summary that showed that for the month of September, 1984, the company expected an 83% drop in earnings from the year before.

The statement also showed that for the third quarter ended Nov. 2, 1984, Karcher Enterprises anticipated that profits could be as much as 50% below the same period of the prior year.

On Oct. 19, 1984, Carl Leo Karcher testified, he called his broker at Bateman Eichler, Hill Richards and instructed him to sell 75 debt securities. Karcher expected to sell the debentures--which he had purchased for $126,750--for about $88,500.

At the time, Carl Leo Karcher told the SEC: “I knew that I could not profit from any information that was not public.”

But “since I was so close to a margin call and I had no idea what would happen with the results of the information being released later on, I thought . . . it was all right for me to sell those shares, those debentures.”

The younger Karcher explained that he owed Bateman Eichler about $836,000 on his margin account, with monthly interest payments of about $14,824.

A margin account allows its holder to buy stock or other securities partially on credit. Brokerage houses require the holder to keep a minimum amount of equity in the account. If the value of stock in the account drops, the brokerage house may issue a margin call requiring the holder to pay in more equity. If he fails to do so, the brokerage house can sell securities until the required level of equity is reached.

For Carl Leo Karcher, selling the debentures would have allowed him to avoid an expected margin call by reducing the amount of debt in the Bateman Eichler account.

But on the same day he ordered the debentures sold, the younger Karcher testified, he was told by Karcher Enterprises Chief Financial Officer Loren Pannier that he should not sell any shares or debentures before the company issued a news release about its third quarter results.

“When I learned . . . I could not sell any securities . . . until a press release announcing (the results) was released, I immediately attempted to cancel my order to sell the 75 debentures,” the younger Karcher said in his court papers.

But by then, 50 of the debentures already had been sold, and Karcher did not ask to buy them back, according to court documents.

The third-quarter earnings finally were announced on Oct. 23.

Forty-four minutes after the announcement was made, Carl Leo Karcher sold another 50 debentures. The SEC has not accused Karcher of insider trading in connection with the second sale of debentures.

U.S. District Judge Edward Rafeedie is to rule Sept. 12 on the SEC’s motion for a summary judgment. If the SEC wins, the younger Karcher will not be tried and will be required to repay the $10,500 in potential losses avoided by selling before the earnings news was released, and possibly up to three times that amount as a civil penalty.

Armstrong also has filed a motion for summary judgment for his client. If the judge rules in Carl Leo Karcher’s favor, the complaint will be dismissed against him alone.

Judge Rafeedie has set April 11, 1989, as the date to start what is expected to be a four- to six-week trial of all the defendants in the case.