A federal judge presiding over the criminal trial of Washington socialite Smith Bagley and four other defendants today severely criticized government attorneys for failing to establish during two full days of testimony the conspiracy alleged in the indictment.
"You'd better start hooking up a conspiracy if you have one there," the prosecutors were warned by U.S. District Court Judge Robert R. Merhige Jr. during this morning's session.
The remark caused Bagley, 44, a large man who maintains a passive courtroom demeanor, to turn in his chair and smile at his wife Vicki, who was seated in the audience.
Judge Merhige's criticisms were delivered while the jury was out of the courtroom. But in the afternoon, while the jury was in place, the judge showed that he was clearly frustrated by what he apparently considered a vague line of questioning by Assistant U.S. Attorney Patricia W. Lemley.
Bagley and the others are charged with manipulating the stock of Washington Group Inc., a now-defunct Winston-Salem textile and food conglomerate, between Feb. 1, 1974, and April 15, 1975. Bagley was president of the company and another defendant, James R. Gilley, was executive vice president and chief financial officer.
The 11-count indictment, returned last March, says that Bagley, Gilley and various of the three other defendants, conspired to defraud banks, employes and employe profit-sharing plans by using funds from those sources to inflate falsely the stock price of the Washington Group.
Today, the government concentrated on laying out its conspiracy charges against defendant Shirley Grubb, who was an administrative assistant at the Washington Group.
Government witness Brenda Morgan, once secretary to defendant Dewey Chapple, a former chief financial officer at the Winston-Salem branch of the Northwestern Bank, told of how Grubb got huge loans to buy Washington Group stock.
Grubb, while earning only about $9,000 a year, got unsecured loans totaling $177,000, pledging only the purchased stock as collateral. Some of the loans, however, were guaranteed by Bagley, the heir to the R.J. Reynolds tobacco fortune, and apparently, Bagley also repaid the loans for Grubb.
The government contends that these liberal loans were made possible by banker Chapple, himself also a Washington Group investor. Most of the stock was purchased through one of the other alleged conspirators, William F. Thomas, a vice president of Interstate Securities Inc.
Attorneys for the defendants sought to show that the loans were made in the normal course of banking. They noted that, the loans were not questioned by Northwestern's board of directors, its loan committee, or by federal and state examiners who reviewed the bank's books during that period.
Another government witness, former Washington Group employe June Rikard, told of getting an unusual phone call from her boss, Gilley, at about 8:30 a.m. on July 18, 1974. She said that Gilley made the call from the West Coast where it was then three hours earlier.
Gilley "asked me how I'd like 6,000 shares of Washington Group stock," Rikard testified. "I said, "You must be kidding" I knew we were talking about over $100,000."
But she said Gilley had assured her during the early morning call that Bagley would guarantee a loan to pay for the stock. And, she testified, Bagley got on the phone to confirm this. He said he had arranged (a similar loan) for Shirley (Grubb)," she testified. "He said he'd like me to have an investment in the company."
Rikard said that soon after the call she went to the hospital for an operation and while there she was brought a blank note for a loan from Northwestern Bank to sign. The note, she later learned, was a six-month loan for $105,000 to buy the Washington Group stock. Gilley also told her that she would get a 10 percent stock dividend during the six-month period she held the stock.
In January 1975, on Gilley's advice, she sold the stock through Northwestern where it had been pledged as collateral on the $105,000 loan. Interest and principle were apparently covered by profits of the sale.
At the time of the $105,000 loan, Rickard testified that she and her husband earned a total of about $22,000 annually.
The government contends that Bagley and Gilley used purchases by employes, financed by Northwestern loans, to buoy the price of Washington Group stock. The government claims that the stock hit a falsely inflated high of $31.50 in 1974, and then began its slide despite an alleged conspiracy by the defendants to keep the stock price up. CAPTION: Picture, SMITH BAGLEY...passive demeanor interrupted