Nynex And At&T Can't Hang Up On This ScandalMichael Schroeder and Mark Lewyn
Back in 1990, Nynex Corp. became the center of a lurid scandal involving bawdy parties at Florida hotels held annually by its suppliers. The explosive disclosures surfaced during a regulatory proceeding in a state rate case for Nynex' New York Telephone unit. After investigations by the company and the state utility commission didn't produce information that might have led to criminal charges, the issue of what dozens of party-goers dubbed the "perverts' conventions" faded away.
Until now. BUSINESS WEEK has learned that the Securities & Exchange Commission is taking a look at the retreats as part of its ongoing investigation into a sprawling insider trading ring. On Feb. 9, the SEC charged that a group of 17 friends--many of whom had worked together at New York Telephone when it was part of AT&T--allegedly reaped $2.6 million trading on illegal tips on AT&T's plans to take over several companies. On the same day, the Justice Dept. brought criminal securities fraud charges against six of the alleged insider trading ring members.
Now law-enforcement officials are trying to find out if the two scandals are linked. The weeklong retreats, from 1984 to as late as 1989, may have overlapped with some of the alleged insider trading, which took place from 1988 to 1991. On Apr. 5, the SEC issued at least two subpoenas requesting information about the retreats, including the closely guarded names of attendees, according to Scott J. Rafferty, a former Nynex employee who received one of the subpoenas.
One of the few names made public during the Nynex scandal was Lawrence Friedman, a former Nynex vice-president who arranged the parties. Friedman is also a member of the insider trading group charged by the SEC. And sources say at least two others named in the SEC's complaint are on the secret list of those who attended the retreats: Thomas Alger, one of the two ringleaders, and Robert Flanagan, who was scheduled to be Alger's roommate at the 1985 retreat at the Marina Bay Hotel in Fort Lauderdale. They were friends who had worked together at New York Telephone. Alger has pleaded guilty to criminal conspiracy, while Flanagan is fighting the charges. Alger declined to comment. Friedman through his lawyer declined comment. Flanagan could not be reached.
"SECRET SOCIETY." William R. McLucas, the SEC's enforcement chief, also declined to comment. AT&T and Nynex weren't accused of any wrongdoing in the trading scheme. AT&T had no comment. Nynex still refuses to discuss the Florida meetings, citing its policy against disclosing personnel matters. In the New York rate case, the company contended that such disclosures could strain marriages and hurt company morale. Nynex also argued that the identities of those who attended and the companies they represented, as well as alleged prostitution and other convention activities, are "trade secrets" that needn't be disclosed. Accepting that argument, an administrative court judge ordered that the names remain under seal. "Had Nynex publicly disclosed their names, the wrongdoers wouldn't have been able to keep the secret society together to do their insider trading," says Rafferty, who alerted the SEC to the Nynex tie.
The SEC's new focus on the Nynex parties could reveal the full extent of what is already one of the largest insider trading rings. The scheme was orchestrated by Alger and Charles L. Brumfield, both AT&T labor relations executives, the government charges. The men passed confidential information to friends and relatives about the company's plans to acquire four companies--Paradyne, NCR, Digital Microwave, and Teradata--the SEC complaint says. After the participants illegally traded on the information, they passed back $300,000 of the illicit profits to Alger and Brumfield, who is known as "Big Red" because of his red hair. Brumfield also pleaded guilty to criminal conspiracy.
BAD-DEBT SCAM. Another alleged participant was Joseph Penna, a union representative for 2,000 technicians and clerical personnel at AT&T's computer unit, who negotiated contracts with Brumfield. Three days after AT&T had announced a $6 billion takeover mf NCR, Penna denounced the deal in an interview with the Newark (N.J.) Star Ledger. "I'm not going to stand by and allow that," he said. But just days before the deal was announced, Penna allegedly made more than $36,000 in illegal profits from trades based on information about the imminent proposal, according to the SEC complaint. Penna had no comment.
One of the men under criminal indictment has been in trouble with the law before. Joseph A. Cusimano, a former executive vice-president of International Games Inc. in Joliet, Ill., pleaded guilty in 1992 for his part in a scheme to conceal $173,000 in political contributions. He was sentenced to three years' probation and fined $99,000. Cusimano, a friend mf Brumfield, was the largest profiteer in the insider trading scheme, making more than $865,000, according to the SEC. The agency's complaint also alleges that Cusimano falsified a promissory note to cover up payments he made to Brumfield in return for inside information. His attorney says Cusimano expects to be acquitted at his trial.
All six of the defendants in the criminal case have pleaded innocent. Their trial is scheduled for the fall. The SEC, meanwhile, is pursuing its case against the 17 individuals it has identified as part of the insider trading ring. With the renewed prosecutorial interest in the frolicking in Florida, that number could go higher.
MID-1988 Nynex investigates lewd gatherings of employees at Florida hotels from 1984 to 1988. Two convention organizers were dismissed, including Lawrence Friedman. In February, the SEC alleged that Friedman was involved in an illegal insider trading ring.
DEC. 1988 The SEC says the insider trading scheme started when Charles Brumfield, an AT&T executive, obtains nonpublic information about AT&T's plan to buy Paradyne. He tips two former AT&T executives.
NOV. 1990 Brumfield learns of AT&T's plans to acquire NCR and passes it on to Thomas Alger and others. During the next year, says the SEC, Brumfield passes tips about AT&T's takeover of Digital Microwave and Teradata.
FEB. 1995 The SEC files charges against 17 people, including Brumfield and Alger, alleging they made illegal insider trading profits of $2.6 million.
APR. 1995 SEC starts exploring whether the Nynex gatherings and the AT&T insider trading ring are linked.