Karcher Inside Trading Accord Runs Into Snag
Carl N. Karcher’s proposed settlement of an insider trading lawsuit has hit a serious snag after the U.S. attorney’s office refused to guarantee that it will not file criminal charges against the Orange County businessman, sources close to the case said Thursday.
The tentative agreement reached Monday hinged on Karcher’s lawyers winning an agreement from the Justice Department that Karcher, founder of the Carl’s Jr. hamburger chain, would not be the target of a later criminal prosecution for insider trading, The Times has learned.
But federal prosecutors have declined to give that assurance and instead have taken a wait-and-see approach, saying they are not ready to make that decision, several sources close to the case said.
Prosecutors “want to evaluate the evidence and the case” and will decide how to proceed sometime before the statute of limitations runs out in October, a source familiar with the negotiations said.
That stance, sources said, could kill the agreement, which was reached the day Karcher and six of his relatives were to begin trial in Los Angeles on charges of insider trading filed by the Securities and Exchange Commission.
When the agreement was reached Monday, lawyers on both sides said that an unspecified “obstacle” needed to be hurdled. But SEC and defense lawyers said they were optimistic that a final agreement would be reached within the week.
Further details of the tentative agreement were revealed Thursday. It calls for Carl Karcher to pay a fine of $332,000, the amount his relatives saved by selling company stock after Karcher allegedly told them that the fast-food firm was about to report a dramatic drop in earnings, said individuals close to the case. The agreement also would require the six relatives to pay, overall, an additional $332,000 to the federal government.
John Koutsos, a trial counsel with the SEC, declined to discuss the terms of the agreement. But he said that a “fairly standard” settlement in an insider trading case would be for a defendant to return illegal profits plus a penalty of an equal amount.
If Karcher, chief executive of Anaheim-based Carl Karcher Enterprises, lost the civil suit, he personally could have been assessed a fine of three times the total amount of losses avoided, or $996,000. His six relatives could have been ordered to repay a total of $1.3 million.
The SEC filed the civil case in April, 1988, accusing Karcher, 14 family members and company accountant Alvin DeShano of illegal trading or tipping off others to avoid stock market losses. Karcher himself was accused of tipping off others only, not of illegal stock trading. Charges against one relative were dismissed while Karcher’s son, Carl Leo Karcher, was found to have been involved in insider trading and fined $10,500.
Six other family members, including company President Donald Karcher, settled with the SEC in February by agreeing to pay $187,560. But that settlement included an agreement from the U.S. attorney’s office that criminal charges would not be brought against those who settled, said lawyers involved in the case.
To date, only DeShano faces criminal charges of securities fraud through insider trading. His trial is scheduled to start May 23.
Both the U.S. attorney’s office and Karcher’s lawyers declined to comment on the case.
Sources said that after prosecutors refused to make any guarantees, Karcher’s attorneys at the Los Angeles firm of Gibson, Dunn & Crutcher told other lawyers in the case that they would seek a meeting with U.S. District Judge Edward Rafeedie to set a trial date.
“We’re waiting to see whether Gibson, Dunn is going to proceed,” said Karen Matteson, SEC trial counsel, who otherwise declined comment.
Irving Einhorn, SEC regional administrator, said his office is ready to try the civil case. “I’ve been here five years and haven’t lost a case,” Einhorn said. “I don’t intend to lose this one. The evidence is conclusive.”
