FTC Seeks to Block Profits by Raleses in Interco Stock

By several estimates, Washington’s Rales brothers made a $75-million profit buying--and then selling--stock in Interco Inc. last year, a handsome consolation prize for failing to take over the St. Louis consumer goods conglomerate.

But the Federal Trade Commission says the brothers’ profits were gained illegally. Three of the five commissioners have now asked the Justice Department, in a confidential petition, to take the Raleses to court to get the money back.

Neither the Raleses nor their attorneys would comment on the FTC action. Spokesmen for Interco were similarly mum.

The three commissioners hope to make an example of the Raleses--the latest in a line of acquisitive corporations and well-known takeover artists who, in the opinion of the commission, have thumbed their noses at the FTC. Among the others: Donald Trump, in his 1986 bid for Holiday Corp. and a 1987 move on Bally Manufacturing; and the Wickes Cos., in attempting to take over Owens-Corning in 1986.

Notify Commission

Federal law requires investors who accumulate more than $15 million worth of a company’s stock to notify the commission and thereby, albeit unintentionally, alert stock speculators who will undoubtedly drive up the price of the raider’s target company. But the maximum fine for not complying--$10,000 a day--turns out to be a relatively paltry sum compared with the millions of dollars in profits that raiders can make, whether they actually succeed in their takeovers or--as in the case of the Rales brothers--whether they do not.

In the Interco case, Steven and Mitchell Rales, through a limited partnership, had accumulated more than $15 million of Interco’s stock by May 24, 1988, according to the FTC’s petition. But the Raleses did not serve notice with the commission until Nov. 10, 1988.

The Raleses argue that the delay was perfectly legal, and that, in any event, they were protected by a loophole in the FTC law. That loophole exempts partnerships from the reporting requirement if none of the investors owns more than 50% of the partnership. Because each of the Rales brothers owned only 49% of the partnership investing in Interco, they argue neither was required to file with the FTC.

Considered ‘Sham’

The commission considers the Rales use of partnership in the Interco case a “sham”--a ruse to avoid FTC notification.

Even if the commission’s view prevails, the Raleses still would come out ahead under a $10,000-a-day penalty, which would cost them an estimated $3.84 million. That would still leave the brothers with a pretax profit of more than $70 million.

“It’s totally inadequate,” said commissioner Terry Calvani, of the $10,000 civil fine.

All five commissioners have expressed their dismay over the weakness of the $10,000 fine; they disagree over what to do about it. That internal dispute came to a boiling point last month, when a three-person majority asked the Justice Department’s Antitrust Division to file suit against the Raleses to force them to disgorge, or give back, their profits from the Interco deal.

The Justice Department refuses to talk about the case. Disgorgement is regarded as an extreme remedy by antitrust lawyers, many of whom expressed surprise that the FTC, often regarded as a paper tiger in business regulation, would even consider the matter.

‘No Case Law’

“There’s no case law in this,” said Michael N. Sohn, an antitrust attorney with the Washington law firm of Arnold & Porter. But the absence of case law does not mean that the FTC majority is seeking an expansion of the agency’s enforcement powers, Sohn said.

Calvani is confident the FTC could prevail in a suit against the Raleses, if only the Justice Department would bring the case. Under the law, he said, “the commission has the right to equitable relief, and that relief can include disgorgement of unjust riches, divestment, or other remedies.”

It was Calvani and commissioners Andrew J. Strenio Jr. and Mary L. Azcuenaga who voted to pursue disgorgement in the Rales case, according to FTC: Watch, a private regulatory newsletter, and other sources familiar with the vote. FTC Chairman Daniel Oliver and commissioner Margot Machol voted against the measure.