A federal judge on Monday refused to dismiss civil charges of insider trading against fast food magnate Carl N. Karcher and two members of his family.
Instead, U.S. District Judge Edward Rafeedie determined that the lawsuit against the founder of Anaheim-based Carl Karcher Enterprises should begin trial as scheduled on May 2.
"Whether circumstantial evidence is sufficient to warrant (a verdict against the Karchers) is a matter that should be presented to the jury," the judge said.
The ruling came one week after the judge dismissed the government's civil case against Margaret Karcher, the wife of Carl N. Karcher. The U.S. Securities and Exchange Commission had asked Rafeedie to drop the charges against her.
Carl N. and Margaret Karcher are among 16 people accused of insider trading violations in a civil lawsuit filed by the SEC in federal court last April.
The suit accused Karcher family members and company accounting director Alvin A. DeShano of avoiding losses of at least $310,000 in 1984 by selling Karcher securities before public disclosure of a 50% earnings decline.
Unlike most of the defendants, however, Carl N. Karcher and his wife were not accused of selling any of their own stock. Instead, the SEC alleged that they helped relatives avoid losses by tipping them through a series of phone calls and discussions to the pending earnings announcement.
Illegal insider trading is the buying or selling of securities, either directly or through intermediaries, based on information not available to the public. Federal law also bars insiders--such as corporate officers--from passing along tips to others who use the information to profit or to avoid losses.
The judge's decision to drop charges against Margaret Karcher came after attorney Wesley Howell Jr. asked the judge to determine that there was insufficient evidence to continue the case against her and Carl N. Karcher. He told the court last week that there was no evidence that Margaret Karcher had done anything wrong.
"The arguments against Margaret were borderline frivolous," Howell said Monday. He said he may seek financial damages from the SEC after the trial.
But according to SEC trial counsel Karen Matteson, the government does not agree that it had no evidence against Margaret Karcher.
'The One Who Had Access'
Matteson said the SEC asked the court to dismiss the case against Margaret Karcher because the "ultimate source" of the inside information was Carl N. Karcher. "He's the one who had access to the information, and any tipping by (his wife) would be redundant," Matteson said.
Howell told the court that Carl N. Karcher, 72, had only given his children fatherly advice. He said that Karcher told his children he thought that they had borrowed too heavily against Karcher stock held in margin accounts and that they should do what their brokers advised. Brokerages often allow customers to use stock held in margin accounts as collateral for loans.
Howell said the Karcher relatives "had eight zillion reasons" to sell their stock. "The market had fallen dramatically, they had huge margin debts that were increasing, and their brokers were pressing them to sell," he said in an interview. "These weren't sales out of the blue. These people had very, very rational reasons to be selling."
Howell said there was "no doubt (Karcher) knew these kids were selling and no doubt he would try and help them if he thought it was legal and proper. But that isn't the issue. . . . What he didn't do was give them any material, non-public information."
Matteson, however, said Karcher "was heavily involved in the investment activities of his children." He said the children often sought Karcher's financial and investment help. In some cases, Matteson said, Karcher loaned stock or money to his children to help them out of margin calls.
"It's very clear," Matteson said outside of court, "that Carl was heavily involved in their financial affairs and that all of these children had serious financial needs. And none of them had much income coming in. There's overwhelming circumstantial evidence that Carl Karcher conveyed material, non-public information to his children before they sold."
'Entitled to Vindication'
After Monday's court session, Howell said the defendants could agree to settle the SEC's lawsuit for something other than a complete dismissal of the charges.
"Carl feels he's entitled to a vindication," Howell said. "But I'm not sure whether he's willing to spend the money to go to trial and run the risk a jury could decide against him."
Lawyers for the Karchers had also asked Rafeedie to dismiss the civil case against one of Carl N. Karcher's daughters, Catherine Karcher Everly, and her husband, Daniel Everly. That request was denied Monday.
Seven Karcher family members are now scheduled to be tried on the civil violations. In addition to Carl N. Karcher and the Everlys, they are daughter Margaret J. LeVecke; daughter Barbara Karcher Wall (formerly Barbara Karcher Garrett); son Jerome Karcher, and son-in-law Donald E. Fergus Jr.
DeShano, the company accountant, has been criminally charged in connection with the case and is set to begin trial on April 25. Six Karcher family members agreed in February to pay a total of $187,560 in civil fines and penalties to settle the civil case against them. Another son, Carl Leo Karcher, agreed last year to pay back $10,500 in losses he avoided.