Opening Up the Journal Scandal

By Alexander L. Taylor III

Charges of "fraud and deceit" hit a reporter and his friends

The plan, according to the Securities and Exchange Commission, was first discussed after work one night last October at New York City's Renaissance-style Racquet & Tennis Club on Park Avenue. It was refined a few days later at a private home and golf club in the posh community of Locust Valley on Long Island's fashionable North Shore. Present: Peter Brant, 31, the handsome, polo-playing stockbroker who was one of Kidder Peabody's top salesmen, and Wall Street Journal Reporter R. Foster Winans, 35, one of the writers of the Journal's "Heard on the Street" column, an influential potpourri of stock-market gossip, tips and analysis. Brant's proposal: that Winans reveal to him the timing, subject and tone of upcoming articles in the Journal, including the "Heard" column. Everyone on Wall Street knows that a positive story in "Heard on the Street" can push a company's stock up, while a negative one will frequently drive it down. Brant proposed to buy and sell stock according to what the column was going to say about a company, and split the profits. As Winans later testified, Brant said, "You let me know what's going in the paper ... and we can make some money."

Within the week, the arrangement began to pay off. At the same time that he received $15,000 from Brant, Winans told him about a "Heard" column in the Journal that would be unflattering toward TIE/communications, a telephone equipment firm. Brant bought options that gave him the right to sell the firm's stock at a lower price, essentially betting that the stock price would go down. The day the article appeared, TIE/communications shares immediately fell 2% points, and Brant's scheme reaped profits of $106,537.77. During the next four months, Winans told Brant on at least 24 occasions about companies that were going to appear in the Journal, and Brant and others made profits of more than $900,000.

Last week the SEC filed a 55-page civil complaint in New York federal court charging that Winans, Brant and three others had engaged in a scheme of "fraud and deceit" by trading on the basis of inside information not available to the public. If found guilty of the SEC charges, they will be forced to pay back the money they made, but they will not face jail sentences. A separate criminal investigation against them is being conducted, however, and that could lead to prison terms.

The SEC charges that Winans' tips on Journal stories led to 46 instances of insider trading in the stock of 27 companies. Also charged in the suit, which is backed up by more than 200 pages of documents, are Kenneth Felis, a college friend of Brant's and another former Kidder Peabody broker, who is said to have gained $302,000 from the trades, and David W.C. Clark, 34, a New York City lawyer and country club crony of Brant's. Clark is believed to have made $590,000.

Given his key role, Winans profited relatively modestly from the scam. Though Felis suggested that Winans might be paid $25,000 for every column that benefited the speculators, he actually received a total of only $31,000. All the checks were made payable to David J. Carpenter, a former Journal news clerk and Winans' roommate. Carpenter, who is also charged in the suit, is said to have made about $4,400 in trading profits.

While Winans had earlier contended that he never compromised the Journal's news columns by deliberately planting stories, he admitted to investigators that he twice wrote favorable columns at Brant's request on companies in which Brant and his clients held stock: Chicago Milwaukee, a railroad holding company, and Digital Switch, a telecommunications manufacturer. Said Winans, who was fired from the Journal after the SEC began its investigation in March: "There is much in my conduct during the last months at the Journal which was wrong ... I stand in judgment of myself as having violated fundamental tenets of my profession."

Most of the SEC's version of events was, in fact, supplied by Winans and Carpenter. Brant denied to the SEC that he ever knew in advance of any of Winans' articles, and both Brant and Felis refused to cooperate with the SEC investigation.

The scheme allegedly worked out between Brant and Winans in October had at first gone smoothly. The journalist would call the broker from a pay phone near the Journal's newsroom in lower Manhattan to alert him to upcoming stories. For instance, on Oct. 26 Winans told Brant about a negative story that was due to appear on Commodore International, the home-computer maker. By selling the stock short, Clark made a profit of $134,671.79. Not all the trades were successful, though. When a favorable story on oil service stocks, including Schlumberger, failed to move the stock higher, Felis lost $37,914.25.

In early November, Kidder Peabody's internal surveillance system picked up the pattern of trading connected with Journal stories. Felis was told to discontinue such activity, and a company lawyer warned Brant's client Clark about questions of criminal violations.

To disguise payments made to Winans for the tips, Brant and Felis wrote checks to Carpenter. Phony invoices were created to give the impression that Carpenter was being paid for interior decorating work. On Jan. 29, Carpenter deposited a $10,000 check written on Felis' account at Morgan Guaranty Trust with "drapes" written on it. Despite their careful precautions, the scheme began unraveling in February. Tipped off by the American Stock Exchange about trading irregularities, the SEC began questioning Clark and Brant. At one point, Brant showed up at Clark's law office in a "state of high emotional excitement," according to Clark. He was brandishing a thick stack of $100 bills and said he wanted to "flee the jurisdiction" by going to Brazil. Although the two visited the Brazilian consulate, the trip was never made.

On March 22, Brant and Felis met with Winans and Carpenter over dinner at Manhattan's Plaza Hotel to discuss how they would handle the SEC inquiry. Winans said Brant told him, "All we say is that ... I was the source of yours and we talked frequently and we just guessed ... what direction the columns were going to go in." Brant also promised to pay Carpenter $50,000 or $60,000 after selling an apartment he owned. Brant added, "When it is all over, we will go into business in Florida and will all become millionaires."

It was not to be. As part of last week's suit, the SEC was granted a temporary restraining order to freeze the assets of three of the men. Not all the profits in the case have been found, and the Government suspects that some of the money has been moved to Switzerland. While Winans was apologizing for his actions last week, Clark vigorously denied the charges. Said he: "I had no idea that any money changed hands between Mr. Brant and Mr. Winans." Clark said that $1.2 million was taken from his account at Kidder Peabody and deposited in Brant's account at Morgan Guaranty Trust without Clark's knowledge.

The case filed by the SEC goes well beyond the bounds of a usual insider trading suit, which normally prohibits employees of a corporation from profiting on non-public information about the company's plans. In this case, however, the SEC alleges that Winans defrauded the publishers of the Journal by misappropriating confidential information about the content and timing of news stories. The Government suit also maintains that Winans had a duty to disclose to readers that he had a financial interest in the securities about which he wrote.

On Wall Street it is often said that two emotions rule the market: greed and fear. In the Case of the Country Club Speculators, greed clearly got the best of fear.

--By Alexander L. Taylor III.

Reported by Marcia Gauger/New York and Christopher Redman/Washington

With reporting by Marcia Gauger, Christopher Redman