Safeway Stores charged Wednesday that Dart Group violated federal securities and racketeering laws in its recent purchases of 5.9% of the supermarket chain's stock.
Responding quickly to Dart's disclosure last week of its purchases, Safeway filed a lawsuit accusing Dart of "self-dealing" and scheming to unlawfully manipulate Safeway stock.
The grocery chain accused Dart of tipping off arbitrageurs and other market professionals about its purchases--before they were made public--in order to drive up the price of the stock.
Dart's actions were designed to reap a quick profit, Safeway charged, either by selling its stock after pushing up the price or by coercing Safeway into paying "greenmail." That's the term for forcing a company to buy back its own stock at a premium to avoid a takeover.
Oakland-based Safeway, the world's largest supermarket chain, also said in the suit that the Haft family, which controls Dart Group, lacks the integrity to run a company such as Safeway.
Dart, which made public last Thursday its 5.9% stake in Safeway, issued a simple statement describing the lawsuit as "frivolous, totally without merit and will be vigorously contested."
The Maryland-based company operates the Crown Books and Trak Auto chains but earned more than half of its fiscal 1986 operating income of $20.9 million from profits from stock investments, notably in May Department Stores of St. Louis and Jack Eckerd Corp., a Florida-based drugstore chain.
Suit Filed in San Francisco
Dart typically buys shares in a company, files a statement with the Securities and Exchange Commission suggesting that it might buy more or all of the stock, watches the stock rise amid takeover speculation and then sells its stock on the open market or to the target company for a premium.
Safeway's suit was filed late Tuesday in U.S. District Court in San Francisco against Dart; members of the Haft family, including Herbert H. Haft and his son, Robert M.; Garden Partnership, and Combined Properties Limited Partnership.
The Safeway purchases were made by Garden Partnership, which is 95% owned by Dart and 5% owned by Combined Properties, of which Haft family members are general partners.
The disclosure was not unexpected because trading in Safeway stock has been unusually heavy for the last month and Dart was often mentioned in rumors on Wall Street.
Safeway's suit alleged that Dart is operating as an illegally unregistered investment company and that it set up Garden Partnership to unlawfully avoid the filing and waiting requirements of federal securities law.
Garden Partnership on May 15 purchased 3 million shares of Safeway stock, or about 4.9%, at an average price of $40.38 a share, for a total of $121 million, the suit said. It added that the trade was reportedly handled by Jefferies & Co., a Los Angeles-based brokerage firm. The lawsuit characterized the brokerage firm as one "widely known for conducting activities on behalf of corporate raiders."
After the "secret" purchases, rumors surfaced as a result of "selective, intentional leaks to arbitrageurs and other market professionals by defendants or others acting at their direction or on their behalf," Safeway said in its lawsuit.
By such conduct, the suit alleged, Dart disrupted the market in Safeway securities and drove the stock's price up to more than $45 a share by June 12. (The stock closed Wednesday at $49.87 1/2 a share, down 62 1/2 cents, in New York Stock Exchange composite trading.)
In a 20-day trading period from May 15 to June 12, Dart was "fomenting rumors" that resulted in 7.8 million shares, or about 15% of Safeway stock, changing hands, according to the suit. On June 12, Garden filed a 13-D statement with the SEC publicly disclosing the purchases.
Safeway alleged that Dart Group's activities were part of a continuing pattern of illegal action used by Dart with other publicly held companies such as May Department Stores and Jack Eckerd. Safeway claimed that the actions were in violation of the Racketeer Influenced Corruption Organization Act.
The supermarket chain also claimed that the June 12 disclosure statement was false and misleading because it "fails to disclose the pattern of self-dealing between the Haft family and the companies they control, which pattern demonstrates that the Haft family lacks the integrity to manage a major publicly held corporation like Safeway."
Safeway also claimed that the Haft family has abused control of Dart, Trak Auto and Crown Books to enrich themselves at the expense of those companies and their public shareholders and have established an extensive self-dealing with those companies.
The suit cited various examples, pointing out that the Haft family has caused Dart and Trak Auto to lease extensive properties from private partnerships in which Haft family members, including Robert and Linda Haft, own all of the partnership interests. It also noted that the Haft family caused Dart to enter into "rich 10-year employment contracts" with Herbert, Robert and Gloria Haft. In fiscal 1986, Herbert and Robert Haft each received cash compensation of more than $1 million from Dart and its affiliates.
Safeway is seeking a court order requiring the Hafts to divest or rescind all of its purchases of Safeway stock. It also wants preliminary and permanent injunctions barring the Hafts from buying more stock and from filing allegedly false 13-D statements.