Because of an editing error, a Business article yesterday contained an incorrect figure for Washington Bancorporation's default on short-term debt. The amount was $25.8 million. (Published 8/29/90)

The Securities and Exchange Commission is investigating whether there was illegal insider trading in the stock of the parent company of National Bank of Washington before its announcement May 7 that it was defaulting on $25.8 billion in short-term debt.

The trading probe is one part of a wide-ranging SEC investigation into activities at Washington Bancorporation, the parent of NBW. Washington Bancorporation (WBC) disclosed the insider trading probe in a recent filing with the SEC.

The announcement that WBC was defaulting on the short-term debt, known as commercial paper, drove down the price of WBC common stock. A shareholder acting with inside information could have avoided losses by selling WBC shares prior to the announcement.

At the beginning of April, WBC stock closed at $14.50 a share; on May 1, it had dropped to $9.25 a share; and by May 8, after the commercial paper default was disclosed, the stock plunged to $4.75 a share.

The SEC probe focuses in part on possible insider trading by directors of the bank, sources said. However, the SEC's inquiry is not limited to trading by bank directors and could involve employees or officials of the bank and people they told in advance about the commercial paper default.

Several former directors of WBC could not be reached for comment yesterday.

The default on the commercial paper was a sign that the end was near for NBW. On Aug. 10, the federal government declared the bank insolvent, shut it down and sold it to Riggs National Bank. Sources have said the U.S. Attorney's Office and the Federal Bureau of Investigation also are making inquiries about how the commercial paper program was handled.

SEC officials yesterday declined to confirm or deny the investigation. Sources close to the probe said it recently has been elevated from an informal to a formal status, giving the agency full subpoena power as it moves forward.

Under the insider trading laws, it is generally illegal for individuals to trade stocks on the basis of confidential corporate information that may affect stock prices.

A number of prominent individuals, including officers and directors of NBW and other shareholders, saw millions of dollars worth of stock market value wiped out when the Federal Deposit Insurance Corp. took over the bank this month. Many of them had paid as much as $16 a share for the stock, which is now worthless.

In addition to the insider trading issue, the SEC is investigating whether NBW improperly invested customer funds in risky, uninsured commercial paper issued by WBC in the weeks before the commercial paper default.

The SEC also is investigating whether WBC failed to disclose to its stockholders that it made loans that may have involved higher-than-normal risk to a company associated with two bank directors, Harry Huge and Duff Kennedy.

Huge is chairman of American Equity Investors Inc., a small venture capital company that received two loans from the bank. Kennedy is a director and shareholder of American Equity Investors. Neither Huge nor Kennedy could be reached for comment.