NEW YORK — In the largest such settlement ever won by the Securities and Exchange Commission, eight foreign investors agreed Wednesday to give up $7.8 million in illicit profits that they made by trading stock and options on advance word of the 1981 acquisition of Santa Fe International by the Kuwaiti government.
The settlement brings to a close the largest and most wide-ranging insider trading case ever pursued by the SEC. Alleged insider trading in Santa Fe securities has led to SEC civil suits against 21 people, including five former Santa Fe executives and their family members, in-laws, neighbors and business associates.
In settling the lawsuits, all have agreed to give up their profits, generally without admitting or denying guilt; the total comes to more than $10 million.
The largest previous settlement in such a case came last year when former Deputy Defense Secretary W. Paul Thayer, Dallas stockbroker Billy Bob Harris and banker Gayle Schroder agreed to repay $1,001,383 in profits from illicit insider trading deals.
Five of the civil defendants in the Santa Fe case have also faced related criminal charges; four were convicted on charges ranging from obstruction of justice to contempt of court, and the criminal case of the fifth, former Santa Fe director Darius N. Keaton, is pending in federal court in New York. Keaton settled a civil suit three years ago by giving up $285,000 in profits.
The foreign investors who settled on Wednesday complicated the SEC's investigation, agency officials said, by their use of Swiss bank accounts and foreign residences to thwart the investigation. For that reason and others, the probe has taken nearly five years. Because of Swiss banking secrecy laws, most of the investors involved in Wednesday's agreement were not even identified by the SEC until the summer of 1984.
"This case demonstrates that we're prepared to commit whatever resources are necessary to track down foreign trading," said Gary Lynch, the SEC's director of enforcement. "We're not going to fold our tents just because the trading is done in jurisdictions with secrecy laws."
All of the money involved in Wednesday's agreement is to go into funds to reimburse, among others, options traders who sold Santa Fe options to the alleged insiders, not knowing that the apparently worthless contracts would soar in value within days and cost them millions of dollars.
"The amount of the tipping that went on here was just shocking, huge by any measure," said Herbert Milstein, a Washington lawyer for five Pacific Stock Exchange floor brokers who lost an estimated $7 million by unwittingly selling underpriced Santa Fe stock options to the alleged insiders.
The defendants involved in Wednesday's settlement, the SEC contends, were all direct or indirect recipients of tips from Keaton, who as a Santa Fe director was kept informed of the four-month series of negotiations between the Kuwaitis and Santa Fe management.
Those defendants, and the amount of illegal profits they agreed to give up, or "disgorge," are:
- Costandi N. Nasser, a Jordanian citizen living in London who is Keaton's friend and business associate and allegedly Keaton's principal tippee, $457,725.
- Rachanal Foundation and Sonawel Anstalt, two corporations created by Nasser under Liechtenstein law, $4.2 million and $612,948, respectively.
- Hildebrand R. H. McCulloch, an Englishman who is a former employee of a Santa Fe subsidiary, $219,026.
- Sheik Khalid ibn Hamad al Thani, the interior minister of Qatar, an independent sheikdom on the Arabian Gulf, $375,333.
- A. R. Mannai, a Qatar businessman, $563,815.
- Luay Tewfik al Swaidi, an Iraqi businessman living in London, $547,787.
- Faisal al Massoud al Fuhaid, a Kuwaiti businessman, $858,561.
"Everyone had an overwhelming interest in disposing of this case, which has dragged on for close to five years," said J. Barry Morrissey, a Boston-based attorney for the defendants.
His clients maintain, he said, that they made their money legally by sagaciously following the stock market and the Middle East oil market.
The event at the core of these cases was the Oct. 5, 1981, announcement that Santa Fe International, an oil and minerals company based in Alhambra, would be bought by the government-owned Kuwait Petroleum Co. for $51 a share. Santa Fe had been trading before the announcement at $24.75 a share.
Although some of the defendants bought Santa Fe stock, they made most of their money in the options market.
An option represents the right, but not the obligation, to purchase a share of stock at a given price within a given period. Options giving an investor the right to purchase stock at an apparently uneconomic price sell cheaply but hold the potential for vast profits if the underlying stock rises sharply in price.
Court filings by the SEC indicate, for example, that, in the month before the takeover announcement, Nasser spent $240,000 for options giving him the right to purchase 435,000 Santa Fe shares for $25 each. After the announcement, he sold them for $4.4 million.
Except for insiders informing friends and relatives of the impending deal, the acquisition plans were kept so confidential and the takeover premium was so large that options sellers and stock traders were taken completely by surprise, people close to the case said.