Karcher’s Son Violated Insider Laws, Judge Says : But Court Rejects SEC Request That Treble Damages Be Imposed

A federal judge in Los Angeles ruled Monday that a son of hamburger magnate Carl N. Karcher had engaged in illegal insider stock trading.

U.S. District Judge Edward Rafeedie agreed with the Securities and Exchange Commission that there was enough evidence against Carl Leo Karcher to find that he violated insider trading laws without going to trial.

The younger Karcher, one of 15 family members accused by the government of insider trading, previously admitted to SEC investigators that in October, 1984, he told his broker to sell Carl Karcher Enterprises debentures after learning that the Anaheim-based fast-food company was about to report a dramatic drop in earnings. He was a company vice president at the time.

Should Have Known

By selling before the earnings announcement, which caused the price of Karcher securities to plummet, the younger Karcher avoided potential losses of $10,500, the SEC said.

“It is hard to imagine how a person in (Carl Leo Karcher’s) position would not know” he was violating insider trading laws, Rafeedie said during an hour-long hearing in federal court in Los Angeles.

But the judge added that the public usually thinks of insider trading as making a profit on inside information--not avoiding a loss, as Karcher did.

“So, conceivably he could have believed that” he legally could dump the securities before the price plummeted, Rafeedie said.

If there is no appeal, the decision ends the civil case against Carl Leo Karcher.

Under the ruling, he will be required to repay the $10,500 that he saved by selling the debentures four days before the company’s earnings decline was made public.

Rafeedie also enjoined the younger Karcher from future violations of securities laws. But the judge rejected SEC arguments that he impose a penalty of treble damages.

“There is insider trading, and there is insider trading,” Rafeedie said. And treble damages should be reserved for “a more egregious case,” he said. “This involved a single trade (and) is not the type of case that has been in the headlines involving . . . secret transactions.”

Carl Leo Karcher--who now owns 16 Carl’s Jr. franchised restaurants and is no longer a company officer--could not be reached for comment Monday. His attorney, Orville A. Armstrong, said he was “surprised and disappointed” and would have to talk with his client about whether to appeal.

“It is clear there was an inadvertent violation of the law--that’s why there was no penalty imposed,” Armstrong said.

Monday’s ruling “sends a clear message that if evidence of insider trading is presented,” Rafeedie “has a clear understanding of the law and won’t hesitate” to act, said Robert D. LaFramenta, one of three SEC lawyers who represented the government on Monday.

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 Carl Karcher Enterprises, which operates the Carl’s Jr. restaurant chain. Some of them sold Karcher Enterprises securities before the news became public and the stock price plunged, the SEC contends.

Thought It Legal

All of the defendants have denied the accusations. The statements by the younger Karcher about the debenture sales were made under oath to SEC investigators during an out-of-court hearing in August, 1985.

In papers responding to the SEC’s motion for summary judgment, Armstrong argued that Carl Leo Karcher believed it was legal to sell the debentures because he was selling them at a loss.

According to court documents, the younger Karcher sold 50 debentures for about $25,000 less than he had paid for them. The sale was made soon after Carl Leo Karcher saw a financial summary that showed that for September, 1984, the company expected an 83% drop in profit from the year before.

At the time, Karcher told the SEC, “I knew I could not profit from any information that was not public.” But, he said, “I firmly believed that it was my legal right to sell those (debentures) at the time if I was selling them at a loss.”

Soon after ordering his broker to sell 75 debt securities, Carl Leo Karcher was told by the company’s chief financial officer, Loren Pannier, that he should not sell any shares or debentures before the company issued a release telling the public about its earnings.

Karcher told SEC investigators that he immediately tried to cancel his order to sell the debentures. But by then, 50 already had been sold.

Most of the argument at Monday’s hearing centered on whether the younger Karcher actually intended to defraud, deceive or manipulate. Armstrong argued that his client had “made a mistake” and committed “a negligent violation. . . . He did not have that evil mental intent to manipulate.”

Rafeedie rejected that argument, instead finding that Carl Leo Karcher’s personal belief or knowledge of the law was irrelevant. “It is apparent that the defendant traded on information for his personal benefit . . . (and) violated the anti-fraud provisions” of securities laws, Rafeedie said.

“So much came out of Carl Leo (Karcher’s) mouth, there wasn’t much left to quibble about,” said John C. Koutsos, an SEC attorney in the case. “The only intent (to violate trading laws) you need is to use it for your benefit. It doesn’t matter whether Carl (Leo Karcher) is an expert in securities law.”

There was disagreement about the effect of Monday’s decision on the SEC’s case against the elder Karcher and the other defendants.

Defense lawyers noted that Carl Leo Karcher’s situation was unusual: He is the only defendant to date who has admitted using private information to trade in company stock, and he did not tip anyone or get tips from other defendants.

“His situation is really unrelated to Carl N. Karcher,” said Arthur L. Sherwood, another attorney for the elder Karcher.

The ruling “will have no impact on my clients,” added John Cotton, who represents Rosemary and William Bruns, in-laws of Donald Karcher and his wife Dorothy.