Two Charged in Business Week Insider Case : Securities: The SEC has sued a former broker and a printer’s quality control analyst. It is the fifth lawsuit to arise from the scandal.
The Securities and Exchange Commission on Tuesday filed civil insider trading charges against a former Orange County stockbroker and an ex-employee of a Torrance printing plant in the wake of the 1988 Business Week magazine insider trading scandal.
In the fifth insider trading lawsuit to result from the scandal, the SEC sued Brian J. Callahan, formerly a broker in the Anaheim office of Prudential-Bache Securities, and William N. Jackson, a former quality control analyst at a printing plant owned by R. R. Donnelley & Sons, which prints Business Week magazine.
The SEC suit, filed in U.S. District Court in Los Angeles, charged that Jackson made illegal profits totaling $19,506 for himself and two brothers. Callahan and several brokerage clients allegedly made at least $19,684 from the illicit scheme.
As reported, Callahan was dismissed by Prudential-Bache in August, 1988, after the firm obtained evidence that he had bought stocks based on advance knowledge of what would be in the magazine’s “Inside Wall Street” column. The column recommends stocks, and their prices frequently go up after subscribers receive the magazine.
The SEC suit charges that Jackson, whose job it was to check the quality of color reproduction in magazines printed at the Donnelly plant, saw copies of Business Week well before they were available to the public. He allegedly obtained the illegal profits by using his advance knowledge to buy stock in 49 companies recommended in the column beginning in September, 1987.
The suit charges that Callahan learned through a mutual friend that Jackson had advance access to the magazine. He then allegedly persuaded Jackson to open an account at Prudential-Bache and offered him help in selecting which stocks recommended in the column to buy.
Callahan allegedly promised that he wouldn’t use the information to do trading for himself. But the suit charges that he broke the promise and used Jackson’s tips to buy stock in at least seven companies for himself and other clients. The suit alleges that, in some instances, Callahan bought stock for customers without notifying them in advance.
Frederick Saal, an attorney in the New York law firm representing Callahan, said: “We really have no comment other than to say Mr. Callahan will ultimately prevail in this matter.” Mark Bonensant, the Los Angeles lawyer representing Jackson, couldn’t immediately be reached for comment despite two calls to his office.
The suit alleges that Prudential-Bache’s own internal investigators noticed the improper trading in June, 1988, and Callahan admitted to a supervisor that he had been getting information from Jackson and the magazine column. Prudential-Bache ordered Jackson’s accounts closed out. But Callahan allegedly continued to use the inside information to recommend stocks to customers. Prudential-Bache didn’t fire Callahan until August, 1988, after the scandal became public.
A spokeswoman for Prudential-Bache, asked Tuesday why the firm permitted Callahan to remain for two months despite evidence of insider trading, said she couldn’t comment because the firm’s lawyers hadn’t yet seen the suit. But she said: “We did fully cooperate with the SEC.”
After an investors’ news service noticed in 1988 that stocks routinely went up just before they were touted in the Business Week column, investigators discovered that a number of individuals around the country were getting advance access to the magazine from printing plants and the magazine’s headquarters. The scandal has also led to several criminal insider trading prosecutions, resulting in the guilty plea last August of Shayne A. Walters, a former salesman in Irvine for Donnelley, as well as guilty pleas by a former Merrill Lynch broker in Connecticut and a Business Week employee in New York.
Jeffrey R. Zuckerman, an SEC lawyer in New York, where the Business Week investigation is based, declined to say whether federal prosecutors are conducting a criminal investigation of Callahan and Jackson. Zuckerman said the SEC investigation of the Business Week affair is continuing, and additional civil insider trading suits may be filed.
The SEC suit against Callahan and Zuckerman asks that they be forced to “disgorge” the illegal profits, as well as an unspecified amount of commissions earned by Callahan from improper trading that he allegedly did for customers. The suit also asks for civil penalties of three times the illegal profits, totaling $58,518 for Jackson and $59,052 for Callahan.
