NEW YORK — Federal securities regulators are focusing their case against alleged insider trader Dennis B. Levine on his trading in the stocks of nine companies for which he worked as an investment banker, according to legal documents made public Wednesday.
Levine's interest in at least one of those stocks was so strong that one businessman told the Securities and Exchange Commission that Levine had "turned gray" upon learning during a secret 1985 meeting that a deal for the company had fallen through.
The SEC on May 12 charged Levine, a merger specialist at the investment banking house of Drexel Burnham Lambert, with illegally trading stocks of more than 54 companies on the basis of inside information. The trades are said to have produced $12.6 million in profits over nearly six years.
But a memorandum filed Wednesday, in preparation for a key hearing in federal court today, indicates that the agency will focus its case on the stocks of nine companies involved in merger deals on which Levine worked directly and in which he was privy to non-public information. Levine made illicit profits of almost $2.1 million on those stocks, the SEC alleges.
The SEC argues in its papers that although it has not offered evidence linking the remaining 45 stocks to Levine's inside knowledge, given his "proclivity for trading when he knew that huge profits were highly likely . . . his use of a secret bank account in a foreign country and his concerted effort to obstruct the SEC investigation, it is highly probable that these securities purchases, too, were based on material non-public information."
U.S. District Judge Richard Owen is scheduled to hear arguments today on whether to extend a freeze order imposed May 12 on Levine's assets.
SEC documents also indicate that the agency's principal source at Bank Leu International, the Swiss bank through whose Bahamas branch Levine did all of the trading at issue, is Bruno Pletscher, the Bahamas unit's general manager.
In a lengthy deposition taken in April, Pletscher told the SEC that Bernhard Meier, Levine's co-defendant in the SEC case and then a Bank Leu officer, told him in 1985 that Levine was a hugely successful stock trader who "must know more than other people."
Pletscher traded some stocks on Levine's coattails. One trade was so profitable, he remarked, that "it was a joy to see the figure." (The bank has agreed to give up Pletscher's profits and those of other officers and customers who aped Levine's trades.) Pletscher was also present when Levine, warned earlier this year of the SEC's probe, ordered Meier to destroy such dangerous evidence as a copy of his passport and a signature card on file at the bank.
The companies at the core of the SEC's case are:
- Ludlow Corp., a company that was being bid for by a client of Levine's while he worked for the brokerage of Smith Barney, Harris Upham in 1981.
- Sierra Research Corp., which was bought by LTV Corp. in 1983 after Levine proposed the deal as an executive at Lehman Bros. Kuhn Loeb (now Shearson Lehman Bros.).
- Maryland Cup Corp., for which Levine and other Lehman specialists were trying to find a buyer in 1983.
- Esquire Corp., for which Levine helped negotiate a 1983 sale to Gulf & Western.
- Cone Mills, for which a Levine client made an unsuccessful bid in 1984.
- American Natural Resources, the target of a 1985 bid by a Drexel Burnham client, Coastal Corp., in a deal that Levine supervised.
- Crown Zellerbach, which was taken over by Anglo-French financier Sir James Goldsmith in a 1985 deal worked on by Levine.
- Multimedia Corp., which was pursued by two Drexel Burnham clients represented by Levine.
- Union Carbide, which was under takeover assault in 1985 by GAF Corp., for which Levine functioned as a "strategist," the SEC states.
It was during the Crown Zellerbach campaign that Levine momentarily let his guard down. In a deposition taken last weekend, Roland A. E. Franklin, a Goldsmith lieutenant, recalled a meeting at which he, Goldsmith and Levine learned that Mead Corp. had decided against making an offer for Crown.
"It struck us both (Franklin and Goldsmith) that Levine went gray," Franklin testified. "We exchanged a look, and we speculated at that time that he had a large number of shares. . . . We suspected he was anxious to get to his broker as quickly as possible."
In fact, as Pletscher testified, Levine called Bank Leu that very day and ordered the bank to sell his 100,000 shares of Crown stock "as quickly as possible." He still made a profit of more than $80,000.
The SEC's filings also shed light on the origin of Levine's trading alias at Bank Leu, "Mr. Diamond"--it was his mother's maiden name. "Revealingly," the agency stated, Levine's father, Philip, pleaded the Fifth Amendment when asked at a recent deposition for his wife's maiden name.