A jury found R. J. Reynolds heir Smith Bagley and four other defendants innocent today of all criminal charges in a stock manipulation and conspiracy case brought by the U.S. government.
The government had alleged that, between Feb. 1, 1974, and April 15, 1975, the five conspired to manipulate the stock of Washington Group Inc., a textile and food conglomerate in Winston-Salem, N.C., that went bankrupt in June 1977.
The jury took less than nine hours to reach a verdict in the complex case.
Family, friends and attorneys of the defendants gathered in hushed tension just before 4 p.m. as the jury's findings were silently reviewed by U.S. District Court Judge Robert Merhige Jr.
The only sounds in the courtroom were the sobs of defendant Shirley Grubb, Bagley's former secretary, who was consoled by her attorney.
As verdicts of not guilty on each of six counts were read, Bagley hugged a member of his team of attorneys. Behind him, his wife, Vicki, who had pressed her face into her palms awaiting the verdict, looked up and began to cry. Sitting next to her, Bagley's mother, Mrs. R.J. Reynolds, remained stoic, as she had throughout the 13-day trial.
Bagley, a Georgetown resident and a staunch supporter of Jimmy Carter's 1976 presidential campaign, had been president of the Washington Group. The other defendants, besides Grukb, were James Gilley, the former chief financial officer of the company; Dewey W. Chapple, a former vice president of the Northwestern Bank, and William F. Thomas, a vice president of Interstate Securities Inc. in Winston-Salem.
After the verdict was read, Chapple's young children, who had sat patiently in the courtroom during the trial, gathered to hug and kiss their father. Gilley's daughter hooted joyously in the halls of U.S. District Court here as the defendants hastily departed for a planned victory celbration at a private home here.
Bagley announced that he would hold a news conference Thursday in Winston-Salem to discuss the case.
Justice Department attorney Robert Clark and assistant U.S. attorney patricia Lemley, who prosecuted the case, refused comment on the acquittal.
The government had alleged that five defendants had conspired to manipulate the stock of the Washington Group and, as part of the Conspiracy, misapplied funds from the Northwestern Bank.
The indictment, handed down in March, also charged that the five defendants individually had manipulated the stock of Washington Group.
The government contended that Gilley and Bagley cosigned large loans from Northwestern Bank to finance stock purchases for employes and friends, allegedly to keep Washington Group's stock price artificially high so that the two major stockholders, Bagley and Gilley, could enrich themselves and use the inflated stock to acquire new businesses.
Gilley's secretarty June Rikard, testified as a government witness that she had gotten a $105,000 loan, guaranteed by Bagley, to buy stock. Shirley Grubb, while earning $9,000 a year, got unsecured loans totaling $177,000.
Grubb's attorney argued that his client had "no knowledge of finances," and said Bagley made stock available to her because "he was a decent and generous man looking after a dedicated and loyal employe."
As part of the alleged manipulation, the government contended, Bagley and Gilley dismissed Wachovia Bank and Trust Co. in Winston-Salem as trustee of the Washington Group's employe profit-sharing plan.
The prosecutors said this was done because the bank would not sell off the blue-chip stocks in the employe fund portfolio and invest the money in Washington Group Stock.
The employe plans were moved from Wachovia to American Bank and Trust Co. of Pennsylvania in Reading, which immediately sold off about 50 percent of the portfolio, at a loss of about $480,000, and used the money to buy Washington Group stock.
Bagley and Gilley's attorneys argued that this was done because the blue chip stocks, like the rest of the market at the time, were depressed in price, while Washington Group stock was doing very well.
The prosecutors countered that Washington Group was doing well because Bagley and Gilley, directly or indirectly, controlled about 60 percent of the shares. And those shares, the government said, were being manipulated to inflate the price of the stock, which was traded in the over-the-counter market.
Gilley's attorney allowed that many of the 2,200 investing empolyes had less than $100 in the profit-sharing plan. To which prosecutor Lemley answered: "these were textile workers earning $5,000 a year or less."
Lemley also argued that the blue chip stocks were sold secretly, suggesting that Bagley and Gilley feared that the employes might object if they knew. "if there was nothing wrong with it, why didn't they tell someone about it?" she said to the jury.
During the trial the prosecutors were unable to demonstrate the contention that middle-level executives of Washington Group, who bought large quantities of the stock with loans gurranteed by Gilley and Bagley, were coerced by their employers into the purchases. None of the government's witnesses, when cross-examined, claimed to have been pressured into the purchases.
On July 18, the second day of testimony, Judge Merhige chastised the prosecutors for not establishing the conspiracy alleged in the indictment."You better start hooking up a conspiracy if you have one there," he warned the two government attorneys while the jury was out of the courtroom.
A week later, on July 25, Merhige used even stronger language: "i don't want to use the word 'witchhunt,' but from what I've seen so far I'm ashamed this case in court," he told Lemley, again out of earshot of the jury. On Monday, after Merhige dismissed two counts of misapplication of bank funds and two of three counts of mail fraud, the defense abruptly rested its case without calling a single witness.
Foreman Sandford Turner, 52, a life insurance salesman, said the jury did not have trouble understanding the complex financial case. He noted that it was a sophisticated group, three of whom work in trust departments of banks.
"i kept expecting the prosecution to come up with a surprise witness that would give credence to the two-week period we had given up from our jobs," Turner said. "I was surprised when they rested." CAPTION: Picture, Smith Bagley enjoys himself outside the courthouse after his acquittal. AP