The Securities and Exchange Commission yesterday charged Kidder, Peabody & Co. with making nearly $13.7 million in illegal insider stock trading profits from 1984 to 1986 and participating in a fraudulent multimillion-dollar stock "parking" scheme with speculator Ivan F. Boesky.
Kidder, without admitting or denying the allegations, agreed to pay the government $25.3 million to settle the civil insider trading charges. The payment, which consists of an $11.6 million fine and the return of the $13.7 million in illegal profits, is second in size only to the $100 million that Boesky paid the government to settle insider trading charges last November.
As part of the settlement, Kidder, one of Wall Street's oldest firms, also agreed not to resume its "arbitrage" trading of takeover stocks until the SEC approves changes in the firm's internal policies and procedures. It also was ordered to retain an outside consultant to review its procedures.
Sources familiar with the investigation said the stock parking scheme involved Kidder officials, including the firm's former chief operating officer, John T. Roche, who resigned from the firm under pressure from General Electric Co. last month. GE, which owns 80 percent of Kidder, also replaced other top Kidder officials last month and said it planned to tighten managerial controls at the firm.
U.S. Attorney Rudolph W. Giuliani said yesterday that he would not seek criminal charges against Kidder. He cited as factors in his decision General Electric's full and early cooperation with the probe; its settlement of SEC charges; the changes in top management and policy recently instituted by GE, and the negative effect such charges would have on "Kidder's thousands of innocent employes and the firm's legitimate activities."
"We are pleased by the U.S. attorney's decision," said Kidder's attorney, Gary Naftalis. In a show of support, GE announced yesterday that it will provide another $100 million of capital to Kidder, bringing its investment to $880 million.
Kidder allegedly made the illegal stock trading profits after the firm's former takeover specialist, Martin A. Siegel, swapped inside information about upcoming corporate takeovers with a partner at another firm. While the SEC did not name that partner, sources familiar with the investigation said it was Robert M. Freeman, who headed the arbitrage department at Goldman, Sachs & Co.
Giuliani has said he intends to ask a grand jury for an indictment charging Freeman, Timothy L. Tabor and Richard B. Wigton, two former Kidder arbitrage traders, with participating in the illegal trading scheme with Siegel. Freeman, Wigton and Tabor have asserted their innocence. Charges against the three were dropped last month at the government's request after Giuliani said he needed more time to investigate before bringing a broader indictment.
Siegel, who had been regarded as Wall Street's premier takeover defense specialist, pleaded guilty in February to participating in the illegal scheme. He is the chief witness in the Freeman-Wigton-Tabor case and faces up to 10 years in prison. He also was charged in February with selling secret information about takeovers to Boesky for $700,000.
"Kidder has expressed no view concerning the guilt or innocence of Messrs. Freeman, Wigton and Tabor," Goldman, Sachs said yesterday in a statement. "When and if the government reinstitutes charges against those executives, a fair and impartial jury will have a chance to hear the facts from the defendants for the first time and to assess the credibility of Martin Siegel, who has pleaded guilty to serious felonies. Our attorneys have advised us that the Kidder settlement will have no effect whatever on any possible trial of Messrs. Freeman, Wigton and Tabor."
Yesterday's SEC insider trading charges against Kidder had been expected. Published reports had indicated that the firm, under pressure from GE, had decided to reach a settlement with the SEC in order to diminish the possibility of criminal insider trading charges.
According to SEC papers, Siegel became involved in Kidder's arbitrage trading in March 1984. At the time, he continued to work as an investment banker, advising companies involved in takeovers. His dual role was unusual, since SEC rules and "Chinese Wall" policies adopted by Wall Street firms mandate a separation of certain investment banking and stock trading activities.
From 1984 through February 1986, Siegel received inside information about takeovers involving The Continental Group Inc., St. Regis Corp., General Foods Co., Houston Natural Gas Corp., Unocal Corp and R.H. Macy & Co. Inc. from a partner at another firm, who sources said was Goldman's Freeman. Siegel used the information to help Kidder make illegal stock trading profits. In return for the information, Siegel passed confidential information to Freeman, who allegedly used it to make trading profits for Goldman.
One source said Freeman may not have been aware that Siegel was using the information to help Kidder make trading profits. He may have believed, the source said, that Siegel was using the information legitimately in his role as an adviser to corporations involved in takeovers. Prior to the charges against Siegel in February, it was not widely known that Siegel was involved in Kidder's arbitrage trading.
The parking charges against Kidder allege that officers of the firm, at Boesky's request, entered into an arrangement that permitted Boesky to conceal his ownership of stock by temporarily placing shares with Kidder, starting in December 1984. They allege that Boesky was eager to place the shares with Kidder to create the false appearance that his firm, Seemala Corp., had the minimum net capital required by law. The net capital rules are designed to ensure that firms have enough capital to trade stocks safely. Parking enabled Boesky to buy more stock.
The parking scheme was elaborate, according to SEC papers. It involved certain Kidder officers, Boesky, and an employe of Boesky's firm not identified by the SEC. Sources said the employe was former Boesky trader Michael Davidoff, who was charged earlier this year with participating in a separate stock parking scheme for Boesky.
As part of the scheme, Kidder received stocks from Boesky, who "entered into oral agreements" to buy them back later. Boesky agreed to compensate Kidder for the cost of holding the stock, in part, by paying more than twice the usual amount of commissions to execute trades. If Kidder made a profit on the stock it held for Boesky, the firm returned that profit to him by excusing commissions on future trades and engaging in other stock transactions.