Karcher Trial Starts Today Amid Hopes of a Settlement
When Carl N. Karcher, founder of the Carl’s Jr. hamburger chain, was accused of illegally tipping his relatives to bad financial news about his company, he was outraged. Karcher vowed to “set the record straight” at trial.
Now, with the trial scheduled to start this morning in Los Angeles, he would just as soon settle.
“Carl’s prepared to accept a settlement that makes economic and rational sense,” his attorney, Wes Howell, said in an interview Monday. “He believes he did nothing wrong. But the costs of a trial are so great.”
If no settlement can be reached, Karcher--along with six family members who also were accused of insider trading--will begin a jury trial before U.S. District Judge Edward Rafeedie. The trial, expected to last at least 8 days, could include testimony from more than 24 witnesses including the 72-year-old Karcher, his family members and possibly their financial advisers.
Attorneys for the Securities and Exchange Commission, which brought the lawsuit, have subpoenaed almost every senior officer of Carl Karcher Enterprises, the Anaheim-based fast-food company headed by Karcher.
When the SEC filed the case against Karcher in April, 1988, it named 14 of his relatives and Alvin A. DeShano, director of general accounting at Karcher Enterprises.
The suit accused the Karcher family members and DeShano of avoiding losses of at least $310,000 in 1984 by selling Karcher securities before public disclosure of a 50% drop in earnings.
Carl Karcher and Donald F. Karcher, company president and Carl’s younger brother, and their wives did not trade stock but allegedly tipped the other family members--through a series of phone calls and discussions--about the expected drop in profits.
The family has denied the allegations.
In the 12 months since the case was filed, developments have chipped away at the number of defendants remaining in the civil case.
First, Judge Rafeedie ruled in September that there was enough evidence against Carl Karcher’s son, Carl Leo, to find him guilty of insider trading without a jury trial.
In February, Donald F. Karcher, his wife and four family members agreed to pay $187,560 in fines and penalties to end the case against them.
And last month, the judge dismissed the government’s civil case against Carl Karcher’s wife Margaret.
In the meantime, DeShano became the only one of the civil case defendants to face criminal charges of securities fraud through insider trading. DeShano, 53, of Orange, will not stand trial for the civil charges until the related criminal case is resolved. His criminal trial is scheduled to start May 23.
Settlement Option
That leaves Carl Karcher and 6 family members remaining in the civil case.
Attorneys said that if the trial begins today they expect Rafeedie to suggest the option of a settlement.
While lawyers on both sides say they are prepared to begin picking a jury today, settlement discussions, in fact, have been going on for months.
For the defendants, a big reason to settle is the high cost of a trial. Howell estimated that if the trial is held, legal fees and costs of disrupting the company’s business “could easily come close to seven figures.” With all of the company’s senior people subpoenaed for the trial, “it would be very disruptive, just from an economic standpoint,” he said.
If the trial does begin, Howell will be battling SEC lawyers who are trying to prove three things: that Karcher had non-public information, that he illegally related it to his children, and that he knew or should have known that he should not convey that information.
Karcher, in turn, is expected to testify that he did not reveal anything to his children that caused them to trade their Karcher stock.
Focus of Defense
For the Karcher children and their spouses, “the big issue will be whether they traded (Karcher stock) based on the information,” said Karen Matteson, SEC trial counsel.
Their defense will focus on the contention that they did not receive any inside information from their father. Rather, they had other financial reasons to sell their stock, said Orville Armstrong, attorney for the children and their spouses.
If a jury decides that the defendants violated civil insider trading laws, they can be required to repay the total amount they allegedly avoided by the illegal trades, Matteson said. Each defendant can also be ordered to pay a penalty of up to three times the amount individually gained.
And Carl Karcher can be assessed three times the total amount of losses avoided, or $1.1 million, Matteson said.
In addition to Carl N. Karcher, the defendants are one of his daughters, Catherine Karcher Everly, and her husband, Daniel Everly; daughter Margaret J. LeVecke; daughter Barbara Karcher Wall (formerly Barbara Karcher Garrett); son and Catholic priest Jerome Karcher, and son-in-law Donald E. Fergus Jr.
