National security adviser William P. Clark would like to have an old and trusted friend from California as a permanent member of his foreign policy team, but he is faced with a slight complication.
Clark recently hired his longtime associate, former Air Force Secretary Thomas C. Reed, as a temporary consultant on defense issues. But Reed himself quickly warned Clark that the appointment could cause the administration embarrassment.
Six weeks ago, Reed agreed to repay $427,000 in profits from a private stock deal to settle charges by the Securities and Exchange Commission that he had made the money using inside information.
The SEC charged that Reed had obtained a large number of options to buy stock in Amax Corp. last March after talking to his father, a member of Amax's board of directors, who knew that Standard Oil of California was about to make an offer to buy the company. When the proposed merger was announced the next day, the SEC said, the value of Amax stock rose dramatically--and Reed's stock options, which he had bought for $3,125, netted him a profit of $427,000 in 48 hours.
Reed said yesterday he did not know the merger offer was imminent when he bought the Amax stock options. "I did not have inside information," he said. "I don't discuss business with my father."
Reed said, however, that "my active trading in Amax was unfortunate in light of the later SoCal offer. It was a very small roll of the dice . . . but the appearances are inappropriate."
Well-placed administration officials say they are testing the public reaction to the controversy by naming Reed as a 30-day consultant before deciding whether to tap him for a permanent national security or defense job. Reed is highly regarded by Clark and President Reagan as a defense specialist whose technical knowledge could fill an important void in the national security apparatus.
But officials also are worried that a permanent job for Reed, a wealthy California businessman who managed Reagan's 1970 gubernatorial campaign, could raise anew the kind of ethics questions they had hoped to put to rest when Clark's predecessor, Richard V. Allen, was forced to resign last month.
Reed said that he had given Clark the file on the SEC case and told him he would pass up the consulting job "if this causes you any grief," but that Clark insisted he take the temporary position. Reed was recently reappointed to the prestigious Defense Science Board, which advises the Pentagon on technological and procurement issues.
In signing an agreement to dismiss the government's case against him on Dec. 23, Reed neither admitted nor denied the SEC's allegation that he had violated securities laws, but promised not to use inside information in any future stock transactions.
The SEC directed that Reed's $427,000 profit on the Amax deal be placed in an escrow account and distributed to anyone who can prove in court that he lost money by selling Reed the stock options. Any remaining money would be given to charity.
O'Connor and Associates, a Chicago brokerage firm that sold Reed some of the stock options, is suing him on the grounds that he used inside information. Alton Harris, an attorney for the firm, said the total losses suffered by O'Connor and others who sold the options could be substantially more than $427,000.
"If that's all that happens to a guy, then there's no incentive not to trade on inside information," Harris said of the SEC settlement. "If I win, the SEC doesn't catch me. If I lose, the worst that happens is that I have to give back my ill-gotten gains."
Theodore A. Levine, the SEC lawyer who handled the case, said the agency settles 90 percent of its cases in an effort to avoid lengthy and expensive litigation.
"We got adequate relief," Levine said. "He Reed did not get favorable treatment. This was not treated any differently than any other enforcement action. Both parties wanted to settle."
Amax, a diversified mineral and natural resources company based in Greenwich, Conn., had rejected a 1978 merger offer by Standard Oil of California, which owns about 20 percent of the company's stock. In January, 1981, the SEC said, the chairman of Standard Oil renewed the effort by making a specific offer for Amax's stock to Amax Chairman Pierre Gousseland.
In late February, the SEC said, an Amax official called Reed's father, Gordon W. Reed, who was traveling in Barbados. Reed, a longtime board member and a consultant to the firm on oil matters, was asked to return for a special directors' meeting called at the request of Standard Oil. The meeting was later postponed until the regularly scheduled board meeting March 5.
At 8:13 a.m. on March 4, the SEC charged in a formal complaint, Thomas Reed called his father in Barbados. At 9:39, Reed called and spoke to his father again. Three minutes later, the SEC said, Reed called his Dean Witter Reynolds broker in San Rafael, Calif., and placed an order for 500 Amax stock option contracts.
At the time, the SEC said, Reed had obtained "nonpublic information" about the pending merger offer "directly or indirectly from persons associated with Amax."
Gordon Reed's office referred questions about the matter to his son.
A stock option contract, or "call option," is a stock market device that allows an investor to make a bet on stock prices without actually buying the stock. Investors often try to guess which companies are about to be taken over by larger corporations and to buy options on their stock before the merger causes its value to escalate. It is a risky purchase that, if successful, can exaggerate profits enormously.
The call options that Thomas Reed purchased, for about six cents a share, gave him the option to buy 50,000 shares of Amax stock at $50 a share. The company's stock was then selling at $38 a share. Therefore, the value of the stock would have to jump to at least $50 a share in the 2 1/2 weeks before Reed's options expired, or he would lose money on his investment of about $3,125.
Reed bought the options through the Quaker Hill Development Corp., a construction and agribusiness firm he runs in San Rafael, Calif., under a company account that the SEC said used his personal post office box.
On the afternoon of March 5, Amax officials announced that Standard Oil had offered a combination of cash and stock worth $4.3 billion to take control of Amax. In what would have been the largest corporate merger in U.S. history at the time, Standard Oil was offering to pay $78.50 a share for Amax stock that was then selling for $38 a share.
Although Amax directors rejected the merger proposal, the news caused the value of Amax stock to jump from $38 to $57 a share when trading closed March 6 on the New York Stock Exchange. The SEC said Reed placed an order that day to sell his Amax stock options--which had soared in market value from the six cents a share he paid to the nearly $9 a share he received--for a total profit of $427,000.
Reed said he bought all the stock options on behalf of several other company officials and their spouses. "None of the proceeds would have accrued to me," he said. "I bought it because I believe in Amax."
"The cost was trivial, as far as I was concerned. The return was enormous, as it turned out." He said he settled the case because "the SEC was as exercised as it was and this was consuming a great amount of time and legal fees."
O'Connor and Associates, which sold Reed nearly a third of his stock options and had to buy them back at a substantial loss, has charged in its civil suit that Reed had advance knowledge of the merger proposal when he placed the order. But Reed has denied the allegation in court papers and said the suit is "irrelevant" to his job prospects. "I have not asked for a permanent appointment," Reed added. "I like living in a small town in California."
The O'Connor lawsuit also named several brokers at Dean Witter and A.G. Becker, another investment firm, who bought a large number of Amax stock options for themselves and their customers. Spokesmen for both firms denied having any inside information on the transaction.
SEC officials say they have brought 45 insider trading cases since 1978, or more than in the previous 40 years, but have chosen to settle all but a handful.