Goodbye, Mr. Chips
The U.S. District Court for the Southern District of Ohio in Columbus is not the usual venue for major insider trading cases. But since May 17, Ohio State University marketing professor Roger D. Blackwell, who's also a millionaire retail industry consultant and company director, has been on trial there for alleged insider trading, making false statements, and obstruction of justice. He denies all the charges, and his Washington lawyer, Thomas Gorman, says that Blackwell will be proven innocent.
It's not only the location of the case that's out of the ordinary. Normally, the vast majority of alleged insider trading incidents are handled as civil matters by the Securities & Exchange Commission and usually settled out of court. Legal experts say that making the Blackwell case a criminal one underscores the government's increasingly hard line when it suspects obstruction in financial cases.
The roots of the case go back nearly six years. Blackwell, an Ohio State professor since 1965, was a director of Worthington (Ohio)-based Worthington Foods Inc. in 1999 when the maker of vegetarian foods agreed to be acquired by Kellogg Co. (K ). The government alleges that he tipped off family members, friends, and business associates about the pending deal and that collectively they made $880,000 in illegal profits by trading Worthington stock. Four associates, including the office manager of his consulting business and her husband, are on trial with him. Five others -- among them his then-wife, Tina Stephan, who is engaged to Terry J. Lundgren, chief executive of Federated Department Stores Inc. (FD ), and Blackwell's 37-year-old son and 90-year-old father -- weren't charged but could be called to testify for the prosecution.
Friends and colleagues say the charges don't mesh with the man they know. In nearly 40 years as a respected marketing professor at Ohio State's Fisher College of Business, Blackwell has taught thousands of students and authored 28 books. He was a trusted consultant for many of the nation's largest retailers, including Federated, Wal-Mart Stores (WMT ), and Gap (GPS ). He became so wealthy from his books and consulting that four years ago he promised donations of at least $7 million to Fisher to build a hotel for visiting executives called The Blackwell. "Knowing Roger and his history, it's a little difficult to believe" that he may have been involved in insider trading, says Fisher College Dean Joseph Alutto.
The government claims that Blackwell did much more than just tip people off to the pending acquisition. It alleges that he lent $30,000 to his consultancy's office manager, who, with her husband, used the money to buy shares of Worthington's stock. Also, Blackwell and his former wife Stephan allegedly gave $20,000 to one of her unnamed relations who used the money to buy Worthington stock. Prosecutors also charge that the defendants, Stephan, and her relative made false statements to the SEC in an attempt to obstruct the investigation. Stephan, an unindicted alleged co-conspirator, declined to comment, saying: "I'm not at liberty to speak about [the case]."
The alleged misstatements to the agency may be why an SEC civil proceeding that began in 2003 morphed into a criminal case brought by the Justice Dept., says Russell Ryan, a former SEC enforcement lawyer. He says last year's high-profile convictions of investment banker Frank Quattrone and domestic diva Martha Stewart show that the government is taking a harder line on obstruction in SEC investigations. "The SEC and prosecutors have really come to the view that they need to send a stronger message," he says.
While that may be the purpose of the government's case, Blackwell didn't profit much from the deal. An investment partnership, of which he is half-owner, scooped up a modest $27,000 gain, according to court documents. That's a pittance compared with the millions in fines Blackwell could face if he's convicted -- along with a possible prison term and potential ruin to his consulting business and academic career.
By Robert Berner in Columbus, Ohio