Who Knew What, When, About First Fidelity?Phillip L. Zweig
When First Fidelity announced on June 19 that it would sell out to First Union Corp., based in Charlotte, N.C., for $5.4 billion in stock in the biggest bank deal ever, Spain's Banco Santander, First Fidelity's largest shareholder, could hardly have been more pleased.
With a 30% stake in First Fidelity Bancorporation, based in Lawrenceville, N.J., Banco Santander stands to be $365 million richer if and when the $64-per-share transaction is completed. The $64 deal price was 31% higher than the previous trading day's close. All told, it would have parlayed its $650 million investment into well over $1.5 billion.
But before the final champagne toasts are exchanged, say securities lawyers, the deal may face scrutiny by regulators. Banco Santander raised its First Fidelity voting stake from about 25% to 30% this spring, a period when First Fidelity was considering, among other options, selling out to a larger bank. The issue: whether the Spanish bank, which holds two seats on the First Fidelity board, bought First Fidelity shares while in possession of "material, nonpublic" (a.k.a insider) information.
No charges have been filed. But John F. Olson, a securities law partner at Gibson, Dunn & Crutcher in Washington, says that "given the close time proximity of the Santander purchases and the announcement, it would not surprise me if the SEC and the New York Stock Exchange took a look at who knew what, when." The Securities & Exchange Commission declined to comment. A spokesperson for the New York Stock Exchange says: "It's our policy not to comment on specific cases." Gonzalo de las Heras, head of Banco Santander's U.S. operations and a First Fidelity director, says: "Santander did not know in advance that First Fidelity would be matched with First Union."
Banco Santander began accumulating its First Fidelity stake in 1991, with the goal of eventually acquiring 30% of the voting stock. After buying 24.8% by December, 1994, it obtained approval from the Federal Reserve Board to acquire the remaining 5% or so, which it did between February and May 26.
First Fidelity, according to Anthony P. Terracciano, the bank's CEO, formulated a strategic plan around January, 1994, that called for either continuing to make modest acquisitions, buying a large bank, or selling out to a larger bank. Terracciano says that in mid-April of this year, he asked a panel of five directors, including de las Heras, to review those options. At a June 19 press conference, Terracciano said that "we had been going through a very intensive analysis of our strategic options for the past three months." But another high-level source at the bank, who asked not to be named, recalled that Terracciano made his request in late January or early February.
Another source close to the transaction says that Terracciano and Edward E. Crutchfield Jr., First Union's CEO, had been talking "on and off" for years. At the press conference, Crutchfield said: "I wanted to do this for three years with this guy." First Union declined to comment further for this article. But Terracciano said merger talks only became "very intensive" during the first week in June. He added that he didn't recommend to the board that it accept an offer from First Union until June 15. H. Rodgin Cohen, the partner at law firm Sullivan & Cromwell who advised First Fidelity, says that "no decision had been made to change the basic strategy" before June 2.
THE TIMING. Olson of Gibson Dunn says that if an inquiry establishes that Santander, as a buyer of First Fidelity shares, knew significantly more than the average investor about what Terracciano had up his sleeve at the time, Santander could be vulnerable to charges of wrongdoing. The fact that Santander announced its intention to buy the additional shares may not be a defense. "The Fed approval and purchase schedule is a possible explanation for the timing," says Mary Lynn Durham, a banking partner at law firm Jones Day Reavis & Pogue in Cleveland. "But if [Banco Santander] purchased on insider information that doesn't get them off the hook." Her view is supported by a 1993 appeals court ruling in U.S. vs. Teicher, the so-called "Yuppie Five" insider-trading case, which involved intended purchases.
Some lawyers say First Fidelity probably should have advised Santander to stop accumulating shares as soon as there was any inkling that a change of direction might be in the offing. All of which could give new meaning to the phrase, buyer beware.
Banco Santander's Rich Deal
MARCH, 1991 Spain's Banco Santander agrees to buy up to 30% of First Fidelity stock. Two Santander executives to join Fidelity board.
EARLY 1994 First Fidelity completes strategic plan consisting of three options: selling out to a larger bank, acquiring a big bank, or continuing to make modest acquisitions.
DECEMBER, 1994 Santan-der's stake reaches 24.8%.
JAN. 17, 1995 Santander receives Fed approval to buy final 5%.
FEBRUARY Banco Santander begins buying remaining shares in open market.
MID-APRIL First Fidelity CEO Terracciano says he told five directors on advisory panel, including a Banco Santander executive, to review the bank's strategic options.
LATE MAY Banco Santander completes final share purchase.
JUNE 4-5 Talks intensify between Terracciano and First Union Chairman Crutchfield.
JUNE 15 Terracciano recommends to board that First Fidelity sell to First Union for $5.4 billion in stock.
JUNE 19 Deal announced.