Irvine Firm Agrees Blum Stock Sale Was Proper

The $2.7-million sale of an Orange County company’s stock last year by Richard C. Blum, the husband and chief financial backer of gubernatorial candidate Dianne Feinstein, was completely proper, a spokesman for the company said Friday.

Blum sold the stock in March, 1989--on the eve of a management shake-up that caused an immediate plunge in the value of the company’s stock. Blum, a director and major stockholder of Irvine-based National Education Corp., has said he had no advance word of the announcement and did nothing wrong.

But with questions on the transaction being raised because of Blum’s leading role in paying for the Feinstein Democratic campaign, the company issued a statement agreeing with Blum’s contention that he had acted properly.

“The company has looked into the matter and, to the best of its knowledge, Mr. Blum in no way acted improperly,” said Steven I. Baser, National Education Corp.’s senior corporate counsel.

Baser, reading from the prepared statement, added, “Further, we understand that the (Securities and Exchange Commission) reviewed the matter and presumably reached the same conclusion.”

The existence of investigative interest by the SEC was first confirmed last week by Blum, who said he and other company officials had been questioned “some months ago.”

SEC representatives declined again Friday to say whether the agency has investigated, is investigating or will do so.

Based on federal records, The Times reported Sept. 14 that Blum sold the $2.7 million in stock during the two days before the company announced that its president was resigning. The announcement, the firm has acknowledged, caused its stock value to drop immediately.

Blum, who continues to control more stock than any other director of the company, has said he was skiing in Squaw Valley at the time of the sale and had no inkling of the impending resignation before he sold the stock, on March 14 and March 15, 1989.

His actions, he said, complied with federal law barring corporate insiders from exploiting information not available to all shareholders.

National Education Corp. announced the resignation of its president, Jerome W. Cwiertnia, on March 16, 1990.

Also Friday, Blum and other company officials said no inferences should be drawn from the fact that the company obtained just 46% reimbursement from an insurance carrier for costs stemming from a 1989 shareholder lawsuit that named Blum, three other directors and the company as defendants.

Jeffrey A. Brill, the company’s general counsel, said the company is satisfied with its ability to get the reimbursement. The case was settled in March before going to trial when the company--while describing the litigation as groundless--agreed to pay the plaintiffs $11,850,000.

The suit alleged violations of federal securities law, fraud and misrepresentations of the company’s true financial posture. The lawsuit said the company issued rosy financial information for the firm at the same time that several directors, including Blum, were selling stock.

Nearly all the stock selling that was at issue in the lawsuit was conducted by Blum, and he was the only director to sell stock in the days immediately before the March 16, 1989, management announcement.

National Education Corp. said at the time of the March settlement that it would “vigorously pursue” a claim for reimbursement with its insurance carrier, which was then refusing to pay any part of the $11.8-million settlement. Four months later, in July, National Education Corp. announced it had agreed to accept the insurance company’s offer of $5.5 million--46% of the $11.85 million paid to the shareholders who sued.

Brill, the company’s general counsel, said that in his view the insurance company’s refusal to pay a larger portion of the settlement was not related to the accusations of wrongdoing contained in the shareholders’ lawsuit. Brill also noted that the four directors--but not the company itself--were insured.

Brill acknowledged that the insurance policy in question states specifically that the firm will not be indemnified if directors violate federal securities law or engage in other wrongdoing. But Brill said that provision has no bearing on the company’s ability to collect just 46% of the settlement cost.

The insurance carrier--the Chubb Group--continues to provide insurance for National Education Corp., according to others familiar with the matter.

Ralph Jones, national manager of executive protection for the Chubb Group of Insurance Companies in Warren, N.J., said company practice bars him from commenting on its relationship with any insured party, including National Education Corp.

Blum, in a statement relayed by Feinstein’s campaign manager, said that “the insurance company fulfilled its obligation to protect” the four directors named in the shareholders’ lawsuit.

“However,” Blum added, “since the policy does not insure the company itself, the company paid a portion of the settlement.”