Tentative Settlement in Suit Against Karchers : 7 Defendants Would Pay Sum Without Admitting or Denying Violating Insider-Trading Laws

LOS ANGELES —  Attorneys for Carl N. Karcher, founder of the Carl’s Jr. hamburger chain, and six of his immediate family members reached a tentative agreement with the federal government Tuesday to settle a lawsuit accusing them of insider trading.

Under the agreement, Karcher and his relatives will pay an unspecified lump sum without admitting or denying the accusations of insider trading, attorneys said.

The seven defendants will also agree to permanent court orders forbidding them to violate insider-trading laws..

Attorneys for the Karchers and the Securities and Exchange Commission said they expected a final agreement to be completed by the end of the week. It must then be signed by U.S. District Judge Edward Rafeedie.

Carl Karcher’s attorney, Wes Howell, said the 72-year-old founder and chief executive of Anaheim-based Carl Karcher Enterprises chose to settle the case to avoid both the emotional and financial costs of a trial. He estimated legal costs could have approached $1 million for all seven defendants.

“The money we’re talking about is not going to make an enormous amount of difference” to Karcher, Howell said. “(But) he was seeing his whole family being swept up into something that was going to take a few weeks out of their lives. He was seeing his company, with all of the principal executives, being subpoenaed. . . . And I couldn’t promise him that he’d win.”

The settlement was reached the day trial was to begin in U.S. District Court in Los Angeles. Attorneys discussed the settlement in Rafeedie’s chambers for 2 hours early Tuesday before emerging with the tentative agreement.

The settlement notwithstanding, the SEC “absolutely” had a good case, said Robert D. LaFramenta, regional trial counsel for the agency. But, he added, “if someone offers relief that is in the public interest, we always have to consider it.”

Orville A. Armstrong, the lawyer for the six relatives, said he, too, had been confident about the case but considered the settlement to be in the best interest of his clients. “There is no admission of guilt,” Armstrong said. “We balanced the total expense against the whole process, including the slight risk of losing.”

Carl Karcher was on a Mediterranean cruise and could not be reached for comment on the settlement.

The settlement came as no surprise to observers. The SEC frequently settles insider-trading cases. Another group of Karcher family members entered into a similar agreement in February, and attorneys for Carl Karcher had acknowledged for months that settlement negotiations were in progress.

In addition, observers noted, the case was based largely on circumstantial evidence--such as records of telephone calls between defendants and the timing of securities sales--making the outcome unpredictable.

“It’s a tough case for both sides,” said one legal authority. “Neither side was assured of winning.”

The government’s allegations against Carl Karcher and his family came as a shock to many people in Southern California, where he is known as a successful entrepreneur and civic benefactor who has raised or contributed millions of dollars for charities, conservative causes and the Orange County Republican Party.

50% Drop in Earnings

Carl Karcher, 14 family members and a Karcher Enterprises employee, Alvin De Shano, were accused in a lawsuit filed by the SEC in April, 1988, of avoiding losses of more than $310,000 in 1984 by selling Karcher securities before public disclosure of a 50% drop in earnings.

Unlike most of the defendants, Carl Karcher and his younger brother, company President Donald F. Karcher, and their wives were not accused of selling securities themselves. Instead, the SEC alleged that they helped relatives avoid losses by tipping them through a series of phone calls and discussions about the expected drop in profits.

The defendants who agreed to Tuesday’s settlement are Carl Karcher; his daughter Catherine Karcher Everly and her husband, Daniel Everly; daughter Margaret J. LeVecke; daughter Barbara Karcher Wall (formerly Barbara Karcher Garrett); son Jerome Karcher, who is a Catholic priest, and a son-in-law, Donald E. Fergus Jr.

While the exact amount the Karchers will pay has not been released, attorneys confirmed it is less than the amount they could have been fined had a jury decided that they violated insider-trading laws.

A guilty verdict could have resulted in Carl Karcher personally being assessed a fine of three times the total amount of losses avoided, or $996,000. His six relatives could have been ordered to repay $332,000. And the relatives also could have been required to pay up to $996,000 as a penalty totaling three times the amount of the losses they allegedly avoided by the illegal trades.

Since the SEC suit was filed, allegations against most of the defendants have been resolved.

In September, Judge Rafeedie found Carl Leo Karcher, son of the chain’s founder, guilty of violating insider-trading laws. He was required to repay the $10,500.

In February, Donald Karcher, his wife and four family members, without admitting guilt, agreed to pay $187,560 to end the case against them.

Legal experts close to the case suggested that Donald Karcher’s family may have settled earlier with the government because less money was involved and the case against some of them appeared to be stronger.

Last month, Rafeedie approved a request by both the government and defense attorneys to dismiss charges against Carl Karcher’s wife, Margaret.

If the settlement with Carl Karcher and his relatives is approved, only De Shano remains as a defendant. De Shano was the only one of the civil case defendants to face criminal charges of securities fraud through insider trading.

Because of the pending criminal case, De Shano, 53, a resident of Orange, won a court order allowing him to delay trial on the civil charges until the related criminal case is resolved. De Shano has pleaded not guilty to the charges and is scheduled to stand trial May 23.

De Shano’s attorney, Davie Wiechert of Irvine, said the settlement will have no impact on De Shano’s criminal or civil case. “The trial date is still firm,” Wiechert said.

Of the 16 original defendants, Carl Leo Karcher and De Shano were the only two accused of trading securities on the basis of information to which they had direct access.