The proceeds of Bevan's 1969 sales came to about $835,000, most of which was used in liquidating the Mellon loan (which exceeded $661,000 in December, 1968) and to reduce the Chemical loan by about $114,000, leaving an outstanding loan balance at Chemical of about $16,000.55 Both of these loans had been outstanding in significant amounts since 1965.56 Bevan's considerable reduction of his debts during this period appears, however, not to have been the cause of his 1969 sales, but simply the end result of a decision he made independently that the first half of 1969 was a propitious time to reduce his substantial financial reliance on Penn Central stock.57 Bevan made no further sales of Penn Central stock until after his June 8, 1970, dismissal. Between June and August 1970, Bevan sold all of his remaining shares of Penn Central stock, including 3,370 shares from the thrift plan which were distributed to him on August 3, 1970. His first sale was made on June 19, 1970, the last trading day prior to the Penn Central bankruptcy. On this day, pursuant to an order entered with his broker at Yarnall, Biddle & Co., on June 18, Bevan sold 4,900 shares at 11% in a limit order transaction. 58 On June 24, Bevan's broker entered and executed a further limit order to sell 5,100 shares at 8.59 At that time, Bevan still maintained his office at company headquarters "trying to get things straightened out for the railroad. ***" He had decided on June 8, the day of his dismissal by the board of directors, to sell all of his Penn Central shares." 60 stands that I would have no recollection of it. I did say he may have called me to tell me it was coming cr Q. No; but I am asking you if you are reasonably certain that you never initiated any such call? Q. So I take it that means that you are virtually certain? A. I am virtually certain. Q. So that you did not about that time initiate a call to Mr. Hackett or to anybody else at the Mellon Bank indicating to them that you would like them to write you a letter requesting that the loan be reduced? A. I can't even-well, a bank of the quality and character of Mellon, they wouldn't connive with anybody anyway. I don't understand it really at all. This ties in with the whole record. It does tie in completely. I don't recall, but the most I could say is that if they asked me verbally to do it I may have asked them to put it in writing, but I don't recall that. Now, I may have called Hackett to say, "Merry Christmas." I call a lot of our banks. It is a matter of custom, where we had relations, and maybe he brought it up at that time, I don't know. I don't recall. I am trying to reconcile with you, but, no, this would be always true when Pixley was there. I didn't know Hackett as well. Either he would call me or I would call him either before Christmas or New Years just as a matter of courtesy between us, and that happened with a whole number of banks. Q. But it is your testimony that at this time late in 1968 the suggestion that you did not suggest in any was A. I didn't initiate reduction of the loan. 55 Bevan claimed the proceeds were used to pay the Mellon Bank loan and capital gains taxes. During this time, Bevan had a third significant loan outstanding, with Provident National Bank, which was increased rather than paid down between 1968 and 1969. 67 As of December, 1967 Penn Central stock, at its market value at the time, comprised about two-thirds of Bevan's total assets. By the end of 1969, Penn Central stock, selling at less than half of its 1967 price, equaled about one-fourth of his total assets. Bevan's net worth both in December, 1967, and December, 1969 hovered around $2 million. This was also the last day the thrift plan made its regular daily purchase. On this day Goldman, Sachs purchased 2,800 shares for the thrift plan at 112, the market high of the day. 59 On June 22 and 23, trading in Penn Central stock had been suspended, except for one large trade each day which took place at the closing bell. 60 Q. When did you decide to sell at this time? A. As fast as I thought that I was allowed to after June 8th. Q. When did you reach that decision? A. June 8. I wanted to make a complete severance. Q. Can you tell us why you waited until June 18 to send in the first order, or why you decided on June 18 to send in the first order? A. I suppose it was to allow a reasonable length of time after I got out. I think—I am not sure of this-I think that I waited until it was announced that the Government was going to make the guaratneed loan. I didn't know about whether it was going to be made or not when I left. I thought it was going to be made, but that might have been interpreted [as] insider information, but I wasn't sure. I was optimistic about it. I think I waited until they announced they were going to make it, and then it was changed when they reversed themselves. But that is again recollection. Gerstnecker was vice president-corporate (finance) from the time of the merger until August 1969 when he retired to become the vice chairman of Provident National Bank. In this capacity, he functioned primarily as right-hand man to Bevan and was privy to all information on the company's finance problems. Gerstnecker owned 6,206 shares in February 1968, including 100 shares held in his wife's name. The bulk of these shares had been acquired through an option purchase in 1964, and though he had made some purchases and sales between 1964 and the time of the merger, he had maintained an ownership of between 4,700 and 6,900 shares during that period. In January 1969, Gerstnecker sold 4,000 shares in four 1,000-share transactions, and he sold an additional 1,000 shares in May 1969, leaving him with a balance of 1,275 shares. On November 28, 1969, he made his final option exercise, purchasing 1,400 Penn Central shares at 2412. Gerstnecker determined at the end of 1968 to resign from Penn Central after July 1969, and go with the Provident National Bank. He testified that his four January sales were for the purpose of liquidating a large loan outstanding at Provident, so that it would not be outstanding when he moved over to Provident, and to purchase 1,000 shares of Provident stock. The Provident loan had been outstanding since March 1964, and totaled during most of that time approximately $155,000. Although Gerstnecker had made the sales in January, he did not pay off the loan immediately, but reduced it between February and July 1969. He purchased the 1,000 Provident shares in August 1969 at a price of $24,750. The price of these shares plus the loan total about $175,000. Even though this amount was less than the $272,000 proceeds of the January sales, Gerstnecker could not recall what uses he made of the balance of the proceeds. Gerstnecker claimed that his May 26 sale, which grossed $55,500, was to finance his planned final option exercise 6 months later, which in fact did take place just 6 months later, commanding a total purchase price of $34,300. Again, Gerstnecker could not recall the uses to which he put the balance of the proceeds. After further questioning, Gerstnecker also stated that the January sales may have been made due to a desire for diversification of his assets, since he was contemplating changing jobs. He did not elaborate, however, on why a prospective job change would necessarily prompt such diversification. Neither could he point to any reason for having decided to make the sales in January-even after it was called to his attention that his claimed uses of the proceeds, paying off the loan and purchasing the Provident stock, occurred between February and August, Gerstnecker simply indicated that he decided to make the sales following his decision to join Provident. Two other factors should be noted in connection with Gerstnecker's January sales. First, David Bevan began reducing his holdings in January 1969, and, although Gerstnecker disclaimed knowledge of these sales at the time they were being made, his position as Bevan's assistant makes the timing of these sales appear to be more than coincidental. Second, all of Gerstnecker's transactions were reported on form 4 as of the trade date, as required by form 4, with the exception of two trades, which were reported as of settlement date rather than trade date. These were the last two of his four January 1969 sales, in which he sold 1,000 shares each on January 29 and 30. On those 2 days the Penn Central market price peaked-the Penn Central market price had been rising for about 2 weeks-and Gerstnecker sold his shares at 71-712. The next day, January 31, the market fell 2 points, and the price of the stock resumed its steady decline which had begun in the last half of 1968.61 Although Gerstnecker claimed he did not remember directing the reporting of these trades as of settlement date, it is clear that it was a conscious departure from his reporting practice, 62 and his representation to the Commission that the trades occurred on February 5 and 6 rather than at the end of January also made it appear in the published trading summary that his trading had taken place after the publication of Penn Central's financial report. ROBERT HASLETT From the time of the merger until after the bankruptcy, Haslett served as vice president-investments of Penn Central. As such he reported directly to and worked closely with David Bevan. Haslett owned 5,425 shares at the time of the merger. Five thousand of these shares had been purchased pursuant to options in 1964 and 1967; the balance was acquired from the thrift plan. Haslett had made no sales of Penn Central stock since he began acquiring it in 1964. On July 15, 1969, he made his only prebankruptcy sale, selling 3,000 shares, and thereby reducing his Penn Central holdings to 2,402 shares. Haslett had no other transactions in Penn Central stock prior to the bankruptcy, and he allowed the substantial number of options at 24% which had been available to him since December 1967 to expire. When Haslett had exercised his options in 1964 and 1967, he had taken out unsecured loans for the full amount of the exercise price from Girard Bank, amounting to $63,000 in 1964, and $50,000 in 1967. From 1964 on, Haslett consistently maintained the loan at its original balance, and paid only the interest as it became due in quarterly installments. The balance of $113,000, therefore, was The market rise had been in response to Saunders' January 10 announcement of the proposed formation of the holding company. On January 30 Penn Central published preliminary figures for 1968, which, although registering an increase on a consolidated basis, indicated that the parent company had lost $2 million, down from a profit of $11 million in 1967. 62 Gerstnecker's secretary apparently coordinated the filing of Gerstnecker's reports with the secretary's office at Penn Central. (Gerstnecker, of course, signed the form 4's which were submitted to the Commission). The documents submitted by Gerstnecker in connection with his trading contain a copy of the letter transmitting the certificate for the 2,000 shares to his broker. Handwritten on the bottom of this copy, in what appears to be his secretary's writing, is the notation, “Use settlement dates, Feb. 5 and 6, in reporting sale." maintained from December 1967, until July 1969, when Haslett paid off the loan in full. Haslett stated that his July 1969 sale of 3,000 Penn Central shares, which grossed him about $130,000, was for the purpose of paying off the $113,000 loan, which was in fact paid off July 23.63 The bank had not requested that the loan be paid off or reduced, and Haslett could not pinpoint why he chose July 15, 1969, as the time to sell stock to pay off a loan which had been outstanding, in part, since 1964: "I sold the stock because it was acting poorly. I had a large bank loan, and I sold enough stock to pay off my bank loan, and sold no more stock, kept the balance." O'Herron, who had worked for Penn Central's Buckeye subsidiary for a number of years before he was brought to Penn Central to be groomed as Bevan's successor, became Penn Central's vice-president finance in September 1969, following a 2-month stint in charge of accounting. He replaced Bevan upon his departure in June 1970. At the time he joined Penn Central in July 1969, O'Herron reported an ownership in Penn Central stock of 2,575 shares (including shares held in the names of his wife and children). Prior to joining Penn Central he had received, through his employment at Buckeye, Penn Central option grants of about 9,000 shares, all of which had been exercised and most of which had been sold by 1968. After joining Penn Central O'Herron's only sale prior to bankruptcy was the sale of 500 shares on February 9, 1970. O'Herron stated that he made this sale, which grossed about $13,000, to liquidate an outstanding (unsecured) bank loan of $12,000 which he had taken out for income tax purposes in April 1969, and which he had told the banker granting it that he would liquidate prior to the end of 1969. Although at the time of the sale O'Herron had a number of other equity securities he could have sold to obtain funds for the loan, O'Herron could only answer, when asked why it was Penn Central stock he chose to see, that it had stopped paying dividends. O'Herron stated that the February sale was purposely timed to follow the dissemination of the 1969 preliminary financial figures by a number of days. By February 1970, O'Herron was deeply involved in the preparation of both United States and foreign public offerings, and he was taking part in the negotiations for private Swiss franc financings and for stand-by bank loans to tide Penn Central over prior to the $100 million Pennco offering. On February 5, 1970, a few days before his sale, he had been informed by a representative of Goldman, Sachs that they would no longer "roll-over" the Penn Central commercial paper as it became due. 63 From about 1964 to 1970 Haslett had another, secured, loan outstanding at Girard Bank in the amount of $35,000. OFFICERS REAL ESTATE AND TAXES Both of the officers discussed in this section are tax specialists, although one looked after the postmerger real estate transactions and one for a time was also titular head of the accounting department. Both of them attended the budget committee meetings, Saunders' monthly policy meetings. Feb. 1, 1968.. Sept. 4,1968. Sept. 17, 1968. S. H. HELLENBRAND Originally a New York Central officer, Hellenbrand became a Penn Central vice president, taking charge of industrial development and real estate following the merger. In March 1970, with the retirement of T. K. Warner, Hellenbrand also headed the tax department. In February 1968, following the exercise of all available options, Hellenbrand owned 3,867 Penn Central shares. In September 1968, Hellenbrand sold 3,500 shares, reducing his holdings to only 367 shares. Although further options became available to him at attractive prices at the end of 1968, Hellenbrand effected no further Penn Central stock transactions, aside from his thrift plan participation, until after the bankruptcy. Hellenbrand claimed that his buying and selling followed no specifically laid out program, even though in 1965 and 1966 he had exercised options and 6 months later each time sold at least as many shares as he had acquired. In his testimony, Hellenbrand could point to no specific reasons for his 1968 sales: As I said, I recall among the reasons was a desire to pay down the loan which I had outstanding in the bank, and of all the reasons which go into the operation of the human mind to buy or sell something** *. I do not know that there was anything more specific than the conclusion that I felt it was a wise thing for me to do at the time.64 It is likely that Hellenbrand knew at the time of his 1968 sales of the dubious tax-oriented transactions management was then planning for the Great Southwest-Macco subsidiaries to conceal the disastrous condition of the railroad. Hellenbrand also was aware at that time that the so-called Park Avenue properties were not, as they had been advertised to be, a liquid investment which the railroad could sell for cash, due to the formidable obstacles raised by heavy mortgages and minority interests. The loans to which Hellenbrand referred were loans obtained in connection with the exercise of the stock options. In September 1968 however, Hellenbrand had only $33,000 outstanding on his loans, while the proceeds from his September sales equaled $228,000. |