Criminal Probe of Thrifty Stock Trading Started
Several Los Angeles-area residents and two Beverly Hills stockbrokers have been questioned in a criminal investigation of possible insider trading in Thrifty Corp. stock, according to sources close to the federal inquiry.
Information about the larger investigation came to light Tuesday after the Securities and Exchange Commission filed its settlement of civil insider trading charges against William S. Banowsky, a leading Los Angeles businessman and former president of Pepperdine University.
Under an agreement filed in U.S. District Court in Los Angeles, Banowsky will pay $754,000 in fines and penalties as a result of illegal purchases of Thrifty stock in 1986 by two of his sons, his father, one of his secretaries and 14 others.
Although the trading occurred at the same time, the second phase of the investigation by the SEC is completely unrelated to the insider trading by the people tipped by Banowsky, according to the sources.
Irving M. Einhorn, SEC regional director in Los Angeles, confirmed that additional evidence of possible insider trading in Thrifty stock is under investigation. He refused to provide any details, except to say that the ongoing inquiry is unrelated to the Banowsky case.
Unlike the Banowsky case, in which there were no criminal charges, the U.S. Attorney’s Office in Los Angeles is involved in the second phase of the inquiry.
Two sources who asked that their names be withheld said investigators are looking at purchases of Thrifty stock by people who learned of the pending acquisition from a major Thrifty shareholder and by Beverly Hills residents who were told of the deal by a neighbor.
Several people have refused to answer questions from SEC attorneys about their purchases of Thrifty stock shortly before the announcement on May 28, 1986, that the Los Angeles-based drugstore and sporting goods chain was to be acquired by Pacific Lighting, the sources said.
Trading in Thrifty stock, which usually amounted to 20,000 or 30,000 shares a day, increased sharply in the days before the Pacific Lighting deal was announced. On May 27, nearly 700,000 shares changed hands and the company was forced to temporarily halt trading on the New York Stock Exchange.
Such unusual buying before a merger announcement often signals to the SEC that people with inside information may be buying stock to profit when the price rises after the announcement.
In this case, sources said SEC investigators suspect that some of the purchases were connected with a secret meeting of big Thrifty shareholders on May 26, Memorial Day.
Pacific Lighting had approached Thrifty management secretly on May 16 about a possible merger. Thrifty’s top managers, including longtime Chairman and Chief Executive Leonard H. Straus, agreed tentatively to a price of about $885 million.
A key strategy was for Straus to secure the approval of Thrifty’s major stockholders in advance to protect against a possible bid by another company once the deal became public.
So Straus called major shareholders to his home in Beverly Hills on the evening of May 26 to ask them to sign options to sell their stock to Pacific Lighting, according to the sources. Straus stressed the confidentiality of the information to the shareholders, the sources said, and he is not a focus of the inquiry and did nothing wrong.
Among those at the meeting were Donald G. and Barbara Q. Guild, who had acquired 465,541 shares of Thrifty when they sold their drugstores to the company earlier in 1986.
Douglas L. Thorpe, an attorney for the Guilds, said Barbara Guild went to a previously scheduled meeting on the morning of May 27 with her stockbroker. In discussing her investments, Guild told the broker of the Thrifty deal, but she stressed its confidentiality.
The Guilds did not buy any additional Thrifty shares. Thorpe said they have cooperated fully with the SEC inquiry and are not targets of the investigation. A source close to the inquiry confirmed that the Guilds are not suspected of any wrongdoing.
However, sources said several people who had accounts at the brokerage acquired Thrifty stock, and the SEC has tried to question two brokers at the firm.
A source said the SEC has offered immunity to several people but they have refused it. The next step, said the source, is for the Justice Department to approve immunity for one or more of those people. If they still refuse to talk, they could be jailed on contempt charges.
The civil case against Banowsky represented a similar chain reaction. He told the SEC that he suggested to his father, one son and a secretary that they consider buying Thrifty stock the week before the merger.
Banowsky was an outside director of Thrifty and made the suggestion after being informed by Straus on May 20 that a special board meeting might be scheduled, according to the SEC complaint against him.
He did not buy stock himself and cooperated with the SEC once his role was discovered. But under securities laws he was responsible for the $442,837 in profits made by 18 people who bought stock and stock options as a result of his tip, the SEC said.
Among those who bought stock were Banowsky’s father and two of his sons, the SEC said. Sources identified the sons as Britton, 29, and William Jr., 27, both lawyers in Dallas who had graduated from law school shortly before the trading occurred. Neither son returned repeated telephone calls placed last week, Monday and Tuesday.
The SEC complaint said the employers of one son, identified by sources as Britton, bought stock and paid him $10,000 for the tip. The SEC also said the future father-in-law of the other son, identified by sources as William Jr., bought Thrifty stock for himself and his two daughters.
The $754,000 in fines and penalties that the elder Banowsky has agreed to pay came from him and those who traded in Thrifty stock, according to the sources.
TRACKING THRIFTY
Volume of shares traded and closing stock price.
Date Volume Close May 5 20,100 26 May 6 8,300 25 3/4 May 7 34,300 26 1/4 May 8 703,700 27 1/2 May 9 53,700 27 3/4 May 12 17,700 27 7/8 May 13 17,000 27 1/2 May 14 33,200 28 1/8 May 15 43,300 27 7/8 May 16 24,700 27 1/2 May 19 33,000 28 May 20 62,000 28 1/4 May 21 121,200 29 3/8 May 22 226,600 30 1/2 May 23 219,400 32 May 27 698,500 37 1/2 May 28 754,100 38 May 29 856,000 37 7/8 May 30 370,600 37 7/8
