6 Found Guilty of Racketeering and Securities Fraud : Princeton/Newport Case Seen as Key Victory in Wall St. Probe

A jury convicted the six defendants in the Princeton/Newport Limited Partners securities fraud trial on nearly all counts, giving federal prosecutors a decisive victory in their drive to apply the criminal racketeering statute to the securities industry.

Five senior officials of the small securities trading partnership and a former Drexel Burnham Lambert Inc. trader were convicted in U.S. District Court in Manhattan following a monthlong trial. The jury had deliberated for just over two days. Of the 64 pending counts, the jury returned guilty verdicts on all except a single count of wire fraud against two of the defendants.

All six were convicted of racketeering and racketeering conspiracy, as well as various counts of mail fraud, wire fraud, securities fraud and aiding the filing of false tax returns.

Swift Conviction

The verdict may be an ominous development for former Drexel junk bond chief Michael Milken, who faces a lengthy indictment on similar charges. Lawyers for Milken had been present as observers throughout the Princeton/Newport trial.

The verdict also marked the second major victory for the government in jury trials that grew out of the investigation of former stock speculator Ivan F. Boesky. Former Singer Co. Chairman Paul A. Bilzerian was convicted in June on all nine securities fraud charges pending against him.

The swift conviction on nearly all counts Monday in the Princeton/Newport case appeared to stun the defendants and their lawyers. There were gasps from relatives of the defendants as Ralph Jiminez, the jury foreman, began his lengthy reading of the guilty verdicts. Several defendants’ wives openly sobbed as the reading of the verdicts dragged on.

The defendants were James Sutton Regan, Princeton/Newport’s managing general partner; general partners Jack Z. Rabinowitz and Paul A. Berkman; head trader Charles M. Zarzecki; controller Steven B. Smotrich, and former Drexel high-yield bond trader Bruce Lee Newberg. Newberg is also a defendant in the Milken case.

Closed Shop

Lawyers for all of the defendants immediately said they would appeal. The defense lawyers for the most part said they were too shaken by the verdict to discuss it late Monday, but Paul Grand, the lawyer for Zarzecki, said: “The verdict is an outrage.” Grand and others claimed that the relatively rapid verdict after a lengthy trial--which included some of the most complex Wall Street technicalities ever put to a jury in a criminal case--suggested that the jury may not have reviewed the evidence thoroughly.

Grand said: “They didn’t bother to look at the evidence or consider it, or the lack of it.”

Princeton/Newport, which had offices in Newport Beach and Princeton, N.J., ceased operations within months after the indictment was returned in 1988. The firm said the threatened seizure of the defendants’ assets as allowed under the racketeering law meant that it could no longer continue operations.

U.S. District Judge Robert L. Carter ordered the jury to return today to consider the forfeiture issue. Under the racketeering law, known as the Racketeer Influenced and Corrupt Organizations Act, or RICO, the defendants could be required to forfeit large sums, possibly up to $19 million each, representing proceeds from the partnership.

Prosecutors from the U.S. Attorney’s Office in Manhattan said they wouldn’t comment on the verdict until after the jury reaches a decision on the forfeiture issue and is dismissed.

Princeton/Newport was founded in 1969 by Regan and a former mathematics professor at UC Irvine, Edward Oakley Thorp. The idea for the firm was based largely on Thorp’s development of mathematical models and use of computers to profit from temporary small discrepancies in the price of related securities. Over the years, the firm achieved an impressive average annual return of about 20% for investors. Thorp wasn’t charged with any wrongdoing.

The indictment charged that in 1984 and 1985, to cut down on the taxes that the firm’s partners had to pay on their profits, the Princeton/Newport defendants arranged sham purchases and sales of securities to generate phony tax losses. They arranged with Drexel and other securities firms to buy stocks or bonds that had temporarily declined in price. Princeton/Newport then bought them back at virtually the same price days or weeks later. The government claimed this amounted to “parking,” the use of phony transactions to hide the true ownership of securities.

Other Charges

Defense lawyers claimed at the time that the defendants believed this was part of a legitimate tax strategy.

The illegal sales were carried out by Drexel and two other firms, Merrill Lynch & Co. and S. G. Warburg, Akroyd & Smithers Securities Inc.

Princeton/Newport also was charged with parking securities for Drexel and manipulating the market price of stock at Newberg’s request.

The indictment marked the first time that the RICO law had been used against senior officials of securities firms. The law provides for heavy prison sentences and fines, and permits the government to seize all of the proceeds gained from the “racketeering enterprise,” including profits earned from legitimate activities.

The defendants had charged from the beginning that the government had brought Draconian charges out of vindictiveness because the Princeton/Newport officials and Newberg refused to cooperate in the government’s investigation of Drexel Burnham Lambert. Rudolph Giuliani, the U.S. Attorney in Manhattan when the indictment was brought, denied this.

Defense lawyers then launched a long and ultimately unsuccessful attempt to persuade the Justice Department in Washington that the indictment represented an inappropriate use of the RICO law. The outcome of the case is being closely watched by prosecutors and legal scholars, who have said a guilty verdict is likely to lead to additional use of RICO against securities firms.

Guilty Plea

Attorneys for Milken, who has denied violating any laws, couldn’t be reached for comment late Monday. A source close to Milken said Monday that the Princeton/Newport verdict won’t in any way change his plans to contest the charges against him. Prosecutors are expected to bring a new, superseding indictment against him soon, probably with additional charges. Milken’s trial isn’t expected to take place at least until March, 1990.

Drexel last December agreed to plead guilty to six felony counts, including charges relating to the firm’s dealings with Princeton/Newport. Drexel officials have said the impact of the RICO charges on Princeton/Newport, including the fact that Princeton/Newport went out of business, influenced Drexel’s decision to reach a deal with the government.

Merrill Lynch and S. G. Warburg weren’t charged, prosecutors said, because they cooperated with the government’s investigation.

A big part of the evidence presented in the Princeton/Newport trial came from tapes of telephone conversations seized by federal agents last year in a raid on the firm’s New Jersey offices. (See related story, Page 8.) The tapes appeared to contain frank discussions between the defendants and employees at Drexel and Merrill Lynch about illegal trades.

The main prosecution witness in the case was William W. Hale, a Princeton/Newport trader who was fired by the firm in 1986.

Judge Carter said he wouldn’t set a date for sentencing until after the jury decides the forfeiture issue. The two racketeering counts each carry a maximum penalty of 20 years in prison and a $250,000 fine. Most of the other counts carry maximum penalties of five years of imprisonment and a $250,000 fine.