mation together." Silloway was supplied the name of Hodge as one who could provide such information. Silloway then called Hodge in late September or early October of 1969, but was unable to obtain answers to his specific questions on operating expense trends of Penn Central other than that Hodge had confidence in the Penn Central situation and was going to recommend the stock to some people who hopefully would purchase substantial amounts of the stock and that then he would be an influence in changing the management.

The lack of sales in April 1970 was explained as caused by an oversight by the portfolio manager in that the authorization for sale of the remaining portion of Penn Central Japsed 6 months after the September 1969 authorization. A new authorization was obtained on May 5, 1970, to sell IM's remaining position of 243,200 shares of Penn Central. When sales commenced on May 6 again there was little urgency in the disposition of the Penn Central stock.

John P. Vervoort, president of IDS securities and the trader of Penn Central for IM, commented on this lack of aggressive selling.

Answer. I do not recall specifically the instructions. However, if I look at the sales as they occurred none of them indicate to me that there had been any urgency, if you wish, or guidance or expression of opinion that this stock should be sold in a very definite manner. None of these trades are of any relative size with the exception being the 27th of May. So I cannot recall any precise instructions. Question. Can you recall any instructions whatsoever, precise or imprecise? Answer. I do vaguely recall a number of times having had participating instruction. When, precisely they were, I do not recall.

Question. Could you describe what these participating instructions were?

Answer. Participating instructions are generally construed as meaning to participate in the floor activity on a stock and we generally think in terms of 20,000 and 25,000 shares. Anywhere between that.

Participating sales were accomplished in this situation by a continuing order at the brokerage firm of Mitchum, Jones & Templeton to sell as many shares as possible within a specified price range. At the conclusion of the day, the Mitchum firm would notify Vervoort of sales executed on its behalf that day. Even on days which resulted in the sale of significant amounts of Penn Central stock, a number of smaller trades contributed to the larger total.

1 Trade was for 110,100 with 81,600 positioned by Shields & Co., after trades available at higher prices were executed.

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The sale of 110,100 shares through Shields & Co., was a variation from the previous pattern of selling small pieces of IM's Penn Central holdings. From the testimony of a number of witnesses at IDS, the change in selling pattern occurred because of a comment from the IDS analyst of Penn Central to the trader. Apparently at some time during the lunch hour. Richard Warden, the rail analyst for IDS, entered the trading room seeking the trader for Penn Central to discover how much PC stock IM continued to hold. Previously Warden had without success looked for Nienaber and Schwind for this information so he sought out the trader. Warden told the trader: "that I was concerned that this was a possible bankruptcy, and I felt that the stock should be sold." The trader then contacted Shields & Co. for a block bid and thereafter Mitchum, Jones & Templeton to find out how much had been sold that day on the participating sale instructions. Upon learning that 6,200 shares had been sold, the remaining order was canceled. Vervoort stated his reasons for the decision to sell:

My decision to sell that stock on that day was based upon a long period of selling this stock, passing a number of opportunities to have sold stock before, to have seen the price deteriorate constantly over a rather long period of time, having been involved in the wrong decision to purchase part of that stock, to the remark that Mr. Warden made, to the fact that the portfolio managers, Mr. Hal Schwind and Mr Nienaber were not available. I was just sick and tired of this stock and I was sick and tired of the indecisiveness. I probably felt guilty about having been involved in the suggestion that the stock be bought much earlier at much higher prices, that this was-it just reached the peak, if you wish at that time on that day or a combination of all these factors as the trend of the stock indicated that this thing could slip down further and I just took this opportunity to once and for all get it off the books.

To be done with a decision that had been made much earlier but had never been fully executed.

Vervoort had had this feeling of indecisiveness for a number of months, but characterized Warden's comment as the excuse needed to then act decisively. Warden's comment concerning the possible bankruptcy of Penn Central resulted from being told of a report over the Dow Jones on May 26, and an article in the Wall Street Journal on May 27, that Penn Central's commercial paper was maturing faster than it was being sold. While this information was contained in a prospectus dated May 12, 1970, issued by the Pennsylvania Co., Warden testified he did not recall whether in fact he had seen the prospectus and did not learn of the information concerning PC's commercial paper until May 27.

Thus Vervoort made a definite change to clearn out the position by diverting from the prior pattern of selling.36 Schwind stated that the trader's cancellation of the sales order at Mitchum Jones and the solicitation of a block bid at a discount from the current market price would be somewhat inconsistent with the instructions the trader had and that it is a customary practice for a trader soliciting a discount bid to first talk with the portfolio manager. However, Schwind also characterized a discount of three-fourths of a point as not clearly excessive but in a "gray area" in which the trader could in his discretion make such a decision. Nienaber also stated that the trader's action was within the limits of his discretion.

36 A telephone call was made from the Goldman, Sachs trading room to IDS shortly before IDS's sale of Penn Central, but who made or received the call and the substance of the conversation is not known. Mnuchin from Goldman, Sachs testified that this commercial call could have been made because the direct line had broken down.

Additional circumstances relating to IM's May 27 sale of Penn Central

At the initial stages of the investigation of the circumstances relating to sales by both Alleghany and IM of substantial quantities of Penn Central stock on May 27, 1970, coordination between sales was believed to be possibly linked to several telephone calls recorded on telephone toll slips of Alleghany to various personnel at IDS. A certain number of telephone calls should certainly be expected because of the close affiliation between Alleghany and IDS, but most likely such calls would be to management personnel at the higher corporate levels of IDS due to Alleghany's interest in overall corporate policy of IDS. Indeed, this was primarily the situation in that calls normally made were to such individuals as the vice president for public relations, the comptroller, vice president for law, et cetera. However, calls were made on May 25, 26, and 27 which did not follow the prior pattern of calls from Alleghany to IDS.

On May 25, 1970, a call was made to the telephone number of Thomas R. Reeves, vice president for investments, which lasted for 19 minutes. A few minutes after the conclusion of that conversation, a call was made to the telephone number of Robert B. Johnson, vice president-investment research which lasted for 34 minutes. The next day, May 26, at 10:11 a.m. (New York City time), which would be 9:11 a.m. Minneapolis time, Johnson of IDS apparently conversed with someone from Alleghany for 15 minutes. On May 27, the day of the trading by Alleghany and IDS, Silloway's secretary received a call at 11:15 a.m. which lasted for 2 minutes.

The obvious question is what was the purpose of these calls? A reason for focusing on these calls is that neither Reeves nor Johnson had received direct phone calls from Alleghany for the year prior to May 1970. In addition, Silloway received only one phone call from Alleghany on his direct number during the year prior to May 1970. It is possible that these calls bear no relationship to the trading in Penn Central but the suspicions exist in that after Alleghany had placed its order to sell then IDS may have been given the green light for it to sell. Counsel for Alleghany stated that "we are unable to determine who placed these calls but Mr. Burns does not recall making any of them."

From affidavits of Thomas R. Reeves and Robert B. Johnson, it does not appear that either person was the recipient of these calls from Alleghany on those dates. Reeves was in New York City on May 25 through May 27 and stated that it was his practice to use Alleghany's office to keep contact with his office in Minneapolis. In addition, Johnson was not in his office on May 25, but was playing in a golf tournament which was verified to the best of their recollection by three other persons. Both Reeves and Johnson denied discussing Penn Central with anyone on May 25 through May 27.

Other coordination could have existed due to an IDS executive committee meeting on May 26 at Alleghany's office attended by Kirby and Silloway. However no, evidence was uncovered that Penn Central was discussed either informally or formally and furthermore, both these persons denied any conversations occurring on that date or at any other time, other than previously described in this section.

Officers and employees of Alleghany Corp., Investors Mutual Fund, Inc. and Investors Diversified Services, Inc. asserted that the sales on May 27, 1970, of Penn Central stock were made independently without any communication between these entities and that none of the sales was made on the basis of material nonpublic information.

INTRODUCTION

Between the time of the formation of Penn Central Transportation Co. in February 1968 and the June 1970 bankruptcy, as management deliberately and increasingly glazed its public reports with distorted optimism, many members of management succeeded in selling many shares of Penn Central stock.37 This section of the report deals with the detailed inquiry the staff has made into the sales of Penn Central officers and directors after the merger. 38

The securities laws, in particular rule 10b-5 of the Securities Exchange Act of 1934, prohibit stock transactions based on material inside information which has not been disclosed to all parties in the transaction or to the public in general. Therefore, any officer aware that the company's prospects were significantly more dismal than the public had been led to believe would have been precluded from trading in Penn Central shares while the disclosure gap existed, even though such officer's unwillingness or inability to correct the disclosure gap could have had the effect of locking him in to his investment.

Other sections of the report analyze in depth the areas in with the Penn Central disclosure gap existed, and the widening of that gap with the passage of time and the decline of the company. This section, which examines the timing and extent of officers' sales, the reasons given for them, and the position of the officers in the corporate structure, is intended to be read in conjunction with the full report in determining whether any officer trading was done on the basis of material inside information.39 The reader's attention is also called to the chronology of events which accompanies the disclosure report, and which should also used to shed light on the possible culpability of various officers for their sales. Finally, even though very difficult to assess, the existence of rumors should not be discounted. Considering the broad and fundamental nature of the problems facing Penn Central, their impact may well have been widespread and significant.

During the course of this investigation, the trading of over 80 officers and directors was reviewed, including officers and directors who left prior to the bankruptcy and/or joined the company post merger. A large amount of documents of such trading and the reasons for it were submitted and reviewed, and in certain cases outside confirmations of various events were obtained. Any major trading which occurred after the merger was questioned in testimony or through the use of affidavits. The staff found that virtually no outside directors,

The 15 officers whose trading is summarized in this report held, at the time of the bankruptcy or of their departure from the company prior to bankruptcy, only about 30 percent of the total amount of Penn Central stock they had owned at the time of the merger. (This figure excludes thrift plan distributions). The term "officer" in this report means anyone with the title of president, vice president, treasurer, secretary, comptroller of Penn Central Transportation Co. or of Penn Central Co.

Although the news coming out of the company was, in retrospect, optimistic to the point of absurdity t was, even in its watered-down form, mostly bearish. Some officers' trading occurred at times when specific terms of bad news were known within the company, but had not reached the public in any form, such as, For example, earnings reports. Where there appears to be a connection between an officer's sale and such specific information, it is discussed below as part of the summary of the officer's trading.