Eleven Washington area residents, including eight local stock brokers, allegedly made a profit of more than $900,000 in one week on investments totaling $8,688 as a result of the disclosure of insider information about an impending corporate takeover, U.S. Attorney Stanley S. Harris said yesterday.
In a 21-page document filed in District Court here, Harris alleged that brokers from Bellamah, Neuhauser and Barrett Inc.; Thomas A. Peacock, the director of government relations in Washington for Wheelabrator-Frye Inc.; and others received information in 1981 that Santa Fe International was about to be acquired by the Kuwait government.
Based on the information of that acquisition, they bought low-priced options that permitted them to buy more than 70,500 shares of Santa Fe stock at a set price in hopes that the stock price would soar once the acquisition became public knowledge, Harris said.
Peacock allegedly got the information on the planned takeover from John M. Nugent Jr., formerly a vice president and partner of Timmons and Co., a lobbying and public relations firm. Santa Fe was about to hire the firm to help out in the acquisition.
Despite instructions from superiors not to divulge the information, Nugent called Peacock the same night the firm was hired and later received $500 from him, Harris said.
Nugent, who is cooperating in the investigation, is expected to plead guilty today in connection with the grand jury investigation, Harris said.
According to the information filed in court, Peacock made a profit overnight of $250,000 and passed along the inside information on the takeover to a broker at the Bellamah firm. Brokers at that firm, who handled all the transactions, made profits ranging from $12,738 to $216,925, Harris said.
Harris said yesterday that the expected guilty plea will be the "first court proceeding in what is considered to be the most significant insider trading case yet ever referred to the Justice Department by the Securities and Exchange Commission."
Warren L. Miller, Nugent's lawyer, said Nugent had not intentionally called Peacock to share inside information or to participate in any profit-making. "It was a mistake," he said. "He had no idea of the profits" later said to have been made by Peacock, Miller said. Michael R. Klein, Peacock's attorney, had no comment yesterday.
Frederick Bellamah, president of the brokerage firm, said "I don't think they the brokers did anything wrong. My feeling is they had a tip but didn't know it was inside information." He said all but one of the eight brokers named by Harris are still with the 30-broker firm.
SEC laws and regulations are intended to ensure that buyers and sellers of stock have equal access to information that might affect the price of securities.
Often, people with inside information seek to maximize their profits by buying options, which allow them to pay little for the stock they obtain, SEC officials say. If the stock they are betting on does not go up in price, however, they lose the entire amount invested in purchasing the options.
According to the investigation headed by Assistant U.S. Attorney Carol E. Bruce and Pamela Joy Bethel of Justice's fraud section, Santa Fe stock had been selling at about $22 a share in September 1981, just before the takeover. The options were purchased Oct. 1 and gave the holders the right to buy Santa Fe on the New York Stock Exchange at $30 a share. If the market price of the stock did not rise before the options expired, the traders would have lost the amount they paid for the options--roughly l2 cents a share, or a total of $8,688.
However, trading in the stock was halted on Oct. 2 after the proposed takeover was announced. When trading was resumed on Oct. 6, the stock was selling for $44.75.
Harris said the Bellamah brokers made profits as follows:
Robert Engel, $32,539; Richard Centracchio, $91,109; James C. Atkins, $174,488; Joseph A. Barrett, $216,925; William Barrett, $12,988; Roger Horst, $42,188; and Jeffrey Leissenring, $12,738.
Joseph Barrett Jr. is listed as having made $12,988 on options purchased for him by his father without his knowledge, Harris said. A 10th Bellamah broker, Steven R. Tatusko, listed as having made $32,539, has since left the firm.
The government document filed yesterday says "Peacock tipped Tatusko about the impending Sante Fe merger without identifying the source of his information, Nugent, by name or title . . . "
Lance Estes, a broker with Winthrop Securities Inc. of Washington who happened to be in the Bellamah firm's offices when the trading was going on, made a profit of $32,539, Harris said.
Initially, some of the stockbrokers claimed to the SEC that they invested in the Santa Fe options because they overheard a rumor at a Georgetown restaurant, Harris said. He said the grand jury probe is investigating possible perjury before the SEC.
Not all the individuals named as profiting are targets of the criminal investigation, sources said. Nugent could receive a maximum of five years in prison or be fined up to $10,000 or both.