Defendant’s Boss Testifies That He Too Sold His Karcher Stock

A Carl Karcher Enterprises executive whose subordinate is on trial for illegal insider trading testified Wednesday that he too sold Karcher stock in the weeks before public announcement of a dramatic decline in company earnings.

George Clower, controller of the Anaheim fast-food chain and the immediate supervisor of company accountant Alvin DeShano, acknowledged that he sold blocks of his own Karcher stock on five occasions in the fall of 1984.

Clower’s testimony came during the 2nd day of DeShano’s criminal trial in federal court in Los Angeles.

DeShano, 54, is accused of avoiding $7,107 in potential losses in October, 1984, by relying on confidential information to sell his Karcher stock. If convicted, DeShano could face up to 5 years in prison and a fine of as much as $250,000.

Clower testified that he sold a block of Karcher stock as late as Oct. 11, 1984, the day before Karcher executives received a preliminary internal report showing that the fast-food company’s earnings for one month would be as much as $900,000 below projections.

But Clower, who has not been accused of illegal insider trading, said he stopped selling his Karcher stock after the financial report was distributed because “it would be imprudent for a person in my position” as a company insider to sell more shares.

Clower said the preliminary report was circulated on Oct. 12, 1984. The document, which covered the 4 weeks ending Oct. 5, showed that earnings for the month would be $800,000 to $900,000 below projections and $300,000 lower than the comparable period in 1983.

DeShano sold his stock on Oct. 15, the next trading day after the report was distributed to Karcher executives. The market price of Karcher stock plunged $4.125 per share after the company’s lower earnings were publicly disclosed on Oct. 23.

Under questioning by defense lawyer David W. Wiechert of Irvine, Clower said that his stock sales “were not an absolutely black or white issue. It was a gray issue.” But he said he did not believe that he was violating any Karcher rules about using confidential information.

DeShano, director of general accounting at Karcher Enterprises, contends in court papers that Clower told him that it was proper to sell his stock when he did. Clower was not asked to respond to that claim in his testimony Wednesday.

The trial stems from a civil insider trading lawsuit filed last year by the Securities and Exchange Commission against DeShano and 15 members of the Karcher family. The defendants, including company founder Carl N. Karcher, were accused of avoiding stock market losses of at least $310,000 by selling securities before the earnings decline was made public.

The civil case is still pending against Karcher, six of his relatives and DeShano. DeShano is the only one who has been criminally charged. Court papers state that the SEC investigated Clower but decided not to file charges against him.

Defense lawyer Wiechert tried to portray DeShano as a numbers cruncher whose work dealt with “the little pictures,” namely, keeping track of profits and losses for Karcher Enterprises’s chain of Carl’s Jr. restaurants.

In response to Wiechert’s questions, Clower said DeShano was not involved in determining Karcher’s earnings projections.

Moreover, Clower testified that DeShano was a “very honest” 12-year employee who was a procrastinator. That trait, DeShano’s attorney has said, was one reason that DeShano delayed selling his stock until after the negative earnings report was distributed.

The trial before U.S. District Judge A. Wallace Tashima is expected to last up to 6 more days.