Thomas C. Trexler, chief financial officer of Insituform East Inc. of Landover, has resigned after revealing that he made an investment error almost two years ago that cost the firm $93,000 -- and then hid the mistake from the company by coming up with $100,000 out of his own pocket.
Details of the unusual episode were reported by Insituform in amended 1986 and 1987 financial reports filed this week with the Securities and Exchange Commission.
The error apparently involved the buying and selling of options on a utility company's common stock rather than its preferred stock, as called for by the investment strategy the company was using. How the error occurred was not explained.
Insituform President Arthur G. Lang III declined to comment on the filing, and Trexler could not be reached for a comment.
Until his resignation, Trexler held multiple titles at Insituform, including executive vice president, treasurer, secretary and chief financial officer.
Insituform East, which had fiscal 1987 sales of $14 million, is in the business of repairing sewer pipes by relining them with plastic. The pipes to be repaired are not dug up.
Although the investment error occurred in May 1986, the filing said, Trexler did not tell the company about it until Jan. 28 of this year -- about 19 months later.
Once he did, it meant that the company's financial statements to the SEC for the 1986 and 1987 fiscal years had to be revised, the company said.
The $93,000 loss stemmed from Insituform's effort to use a widely employed investment strategy in which corporations buy high-dividend stocks shortly before the dividend is paid and then sell the stocks a short time later. While the strategy has some risks, corporations try to limit their risks by using hedging techniques.
Corporations favor the "dividend capture" strategy because they are required to pay taxes on only 30 percent of their dividends, enabling them to achieve short-term yields that are better than they can get in money market funds. At the time that Insituform used the strategy, corporations were required to pay taxes on only 15 percent of their dividends.
As related in the Insituform filing, Trexler, with company approval, bought 50,000 shares of the $1.96 preferred stock of Commonwealth Edison Co. for $22.50 a share on May 12, 1986.
But the Insituform filing added, "Contrary to the authorization received from the company, however, Mr. Trexler did not take measures to ensure the protection of the 50,000-share long position in the Commonwealth Edison preferred stock from risk of loss."
However, the filing said, "Mr. Trexler, on or about the same time, purchased certain put options and sold certain call options on shares of the common stock of Commonwealth Edison."
Investors who buy calls are betting that stocks will rise while those who buy puts are betting stocks will decline. On the other hand, investors who sell calls and puts are, in effect, taking the opposite side in an attempt to earn premium income.
In the Insituform case, the buying of puts was intended to protect the company against a decline in the value of the Commonwealth Edison stock; selling calls was intended to generate revenue to help offset the cost of the buying the puts. The strategy is called a "hedge wrapper."
The company told the SEC that on June 23, 1986, the 50,000 shares were sold at $20.625 a share, a loss of $1.875 a share, or a total loss of $93,750.
Several days later, the filing said, Trexler "indemnified the company for such loss in full by depositing $100,000 of his personal funds into the company's investment account." As a result, the company said, it suffered no loss.
The filing did not explain why Trexler put more money back into the company than was actually lost in the trading.
The company's June 1987 report listed Trexler's age as 37 and gave his annual salary as $120,000. He had been with Insituform for six years.
Clifford F. Ransom II, an analyst with Baker, Watts & Co., in Baltimore, said, "It is an unfortunate event and doesn't speak well for the financial management of the company at that time. It is also an unfortunate event personally for Tom Trexler. But it doesn't mean a hill of beans to where the company is going in the future."
Since the spring of 1986, Ransom said, Insituform has added new executives and revamped its financial management system.