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Karcher's Case Began With a Bell : Routine Alarm at Security Dealers' Assn. Spurs Inquiry

April 15, 1988|ERIC SCHINE | Times Staff Writer

The Carl Karcher case began Oct. 23, 1984, when a computer-generated alarm bell went off in the Washington offices of National Assn. of Security Dealers.

The bell signaled to investigators that Carl Karcher Enterprises' stock price was falling rapidly on heavy volume, prompting them to see if the computer contained any recent news items on the company. The computer promptly spewed out the answer in the form of a routine wire service story it had run at 9:39 EST that morning. "Carl Karcher Said Third Quarter Net Could Be Off by 50%," read the headline.

Within 24 hours, investigators say, they suspected that there was a problem at Carl Karcher Enterprises. That hunch turned into a 3 1/2-year investigation and yielded the biggest insider trading case in the West.

The drop that triggered the alarm at NASD was a decline from $21.50 a share to $16.50.

In market investigation parlance, Karcher stock "broke parameter," which can happen anytime there is an unusual change in price or volume on any of the 5,400 over-the-counter stock issues bought and sold on the association's computerized trading system.

Computer Monitoring Typical

According to Bernard Thompson, assistant director of NASD'S surveillance section, that alarm goes off 20,000 times a year, resulting in about 200 investigations last year. About 110 of those investigations were forwarded to the Securities and Exchange Commission for further inquiry.

NASD has a full-time staff of 32 investigators, working with high-powered computers, whose sole job is monitoring trading patterns of over-the-counter stock. Similar operations have been in effect for years at the New York and American stock exchanges. Computer monitoring of trading activity has been an integral part of efforts in recent years to identify insider trading patterns and other illegal stock manipulation.

On Thursday, the SEC announced that an investigation of Carl Karcher Enterprises had resulted in an insider trading lawsuit against Carl Karcher, 14 relatives and an employee. The defendants allegedly shared information about a decline in the company's earnings before it was released to the public and proceeded to sell large quantities of stock before the price went down.

NASD investigator Cameron Funkhouser was on duty when the alarm bell went off. He instructed the computers to check the day's news releases, which yielded the morning Reuters report.

"The computers are a tool," he said. "It's up to humans to know what to look for. When we saw the price movement, we then did another computer check comparing the price against the news. That gave us a red-flag situation," he said.

Further computer checks showed that there had been heavy selling of the stock on Oct. 22, a day prior to the news release, Funkhouser said. On that day, trading increased fourfold from the previous day, jumping from 21,250 shares to 107,620 shares. On Oct. 23, the volume increased to 182,000 shares traded.

Upon reviewing the trading pattern, the NASD surveyed its brokers to determine who had actually been doing the buying and selling of stock.

According to the SEC complaint, Karcher family members shared the non-public information about the drop in earnings and sold stock between Oct. 17 and Oct. 22.

By early January, 1985, the NASD had sent off its confidential findings to the SEC.

According to Irving Einhorn, director of the SEC's western region, his department's investigation took more than three years because of the number of defendants involved. In building their case, SEC staff members interviewed company officials, traders and family relatives and studied telephone records.

Einhorn said more than 50 people were interviewed at length for the case and noted that many of the defendants had several lawyers representing them during the inquiry.

"It's a mosaic that we pieced together," he said.

He said the SEC had been particularly meticulous in preparing the Karcher case.

"You're very careful when you have a case where people can afford to litigate this to the very end."

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