NEW YORK, JUNE 29 -- The Securities and Exchange Commission yesterday charged Allied Stores Corp. and a top partner at the Sullivan & Cromwell law firm with failing to promptly disclose merger negotiations last year.
The SEC alleged that George C. Kern Jr., the S&C partner who heads the law firm's merger group, and Allied failed to disclose promptly Allied's discussions with Edward J. DeBartolo Corp. about a possible merger or sale of Allied's shopping centers. At the time of the discussions, Allied was seeking ways to thwart a hostile takeover bid by Campeau Corp.
The SEC disclosure rules are designed to give all investors access to substantive information regarding public companies. The rules become particularly crucial during merger negotiations because of the impact that such discussions can have on a company's stock price.
Marvin Schwartz, a senior partner of S&C, said Kern, who was a member of the Allied board of directors, intends to fight the SEC's administrative action. Schwartz said the broader implications of the SEC action are "disastrous," arguing that Kern acted in good faith when he considered whether Allied needed to disclose its discussions with DeBartolo.
Schwartz said the implication of the SEC action against Kern is that lawyers must check with the government before they give their clients legal advice. "It would make pussycats of lawyers," Schwartz said. "This is hardly in the public interest."
SEC associate enforcement director John Sturc disagreed with Schwartz yesterday, saying there would be no need for lawyers to check with the government. Sturc said Kern allegedly made the decisions about disclosure himself and did not discuss the matter with any other Allied directors.
"He was a member of the board of directors of Allied and not merely a lawyer," Sturc said. "He was the person who made the decisions. What is alleged here is that he was the cause of the failure to comply."
When asked if the matter could have been handled more appropriately and with less use of resources through an SEC release rather than an administrative action against Kern and Allied, Sturc said, "Look, this was a major merger. This was not a small transaction."
According to the SEC complaint, Allied and Kern failed to amend its "14D-9" filings with the SEC after it had discussions with DeBartolo on Sept. 25, 1986, concerning the possible sale of Allied's shopping centers to DeBartolo. The SEC also said Allied failed to disclose promptly its merger negotiations with DeBartolo between Sept. 30. and Oct. 3, 1986, and failed to tell investors promptly that on Oct. 3, 1986, the Allied board adopted a resolution authorizing Allied management to conclude a merger agreement with DeBartolo once DeBartolo obtained financing.
SEC Commissioner Edward Fleischman, a former New York securitiees lawyer, issued a statement saying he did not agree with the SEC action against Kern. Fleischman said proceedings against lawyers "arising out of their professional conduct as lawyers" should be brought in federal court.
Through its action, the SEC is seeking an order against Kern and Allied requiring them to comply with SEC disclosure rules in the future. The action comes amid a continuing debate over the timing and substance of disclosure of merger negotiations.
Some have argued that earlier disclosure of merger negotiations would put all investors on notice of developments and eliminate the opportunity for illegal insider stock trading based on knowledge of the progress of confidential talks.
But in a statement issued yesterday, S&C said the disclosure of the uncertain talks between Allied and DeBartolo could have been misleading to investors. "The DeBartolo contacts with Allied, to which the allegations relate, were discussions of potential transactions that were either in such early stages or so conditional that consummation was at best uncertain," S&C said. "In fact, the transactions did not occur. Allied shareholders would have been ill-served by premature disclosure of the discussions. It is regrettable that a lawyer is faced with proceedings simply because of legal judgments with which the commission staff disagrees."