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Court Urged To Uphold Convictions Of Former Reporter And Two Others

October 7, 1987

WASHINGTON (AP) _ A skeptical Supreme Court was urged Wednesday to uphold novel ″insider trading″ securities fraud convictions of a former Wall Street Journal reporter and two others who profited from stocks he was writing about.

Solicitor General Charles Fried, the Reagan administration’s top courtroom lawyer, said there would be ″a cascading deterioration″ of laws protecting investors if the justices sanction ″profit from stolen information.″

Fried, noting that the stock market scheme netted nearly $700,000 in profits, denied the government was overreaching in using the securities laws to convict former Wall Street Journal reporter Foster Winans, his former roommate and a stockbroker.

The government previously has argued that exempting Winans and his co- defendants from prosecution could create a loophole for other accused violators of insider trading rules. It cited takeover speculator Ivan Boesky, investment banker Martin Siegel and former investment banker Dennis Levine.

But the justices, who are expected to announce their decision in the Winans case by July, repeatedly expressed doubts about the government’s arguments.

Chief Justice William H. Rehnquist said federal securities law did not seem to cover the Winans’ case. ″You’re putting layers on″ the law, Rehnquist told Fried.

Justice Antonin Scalia said Fried was making ″strange usage of the word fraud.″

Don D. Buchwald, a lawyer representing the three defendants, said the government is trying to convert the Wall Street Journal’s rules for ethical conduct by its employees into a federal law.

Accepting the government’s theory would mean ″you’ve elevated every ethical breach into a violation of federal law,″ Buchwald said.

He conceded that Winans violated the newspaper’s rules. But he said the remedy for such misconduct is to fire the reporter, adding, ″They effectively drummed him out of the profession.″

Winans, who was in the courtroom Wednesday, has been sentenced to 18 months in prison for securities fraud and mail and wire fraud.

The mail and wire fraud charges stemmed from the fact that Wall Street Journal articles are transmitted by telephone line to its printing plant and the newspaper is mailed to subscribers.

Winans was one of two Wall Street Journal reporters who took turns writing the newspaper’s ″Heard on the Street″ column from August 1982 through 1984.

The daily feature is believed to cause sharp, if temporary, fluctuations in the price of stocks discussed in the column.

Winans revealed the subject matter of some columns in advance to two stockbrokers, Peter Brant and Kenneth Felis.

Prosecutors said the stockbrokers made about $690,000 and paid some $31,000 in kickbacks to Winans and his former roommate David Carpenter, who had worked as a clerk at the newspaper and was an alleged errand boy in the scheme.

Brant became the government’s key witness; Felis was sentenced to six months in prison, and Carpenter was placed on three years probation.

Winans was charged with misappropriating confidential information from the Journal in violation of its rules barring reporters from trading in stocks they are writing about or disclosing the content of forthcoming articles to people outside the newspaper.

The case is distinct from typical insider violations involving company officials and others who use confidential information of pending corporate takeovers, for example, to make money before the public learns the information.

While the issue of free-press rights has been raised in the case, there was no discussion of that Wednesday.

The justices and the lawyers instead focused on interpreting federal anti- fraud laws and their application to Winans’ conduct.

Buchwald argued that ″there must be a fraud on investors″ to warrant a securities fraud conviction. He said the only harm alleged in the case was to the reputation of the Wall Street Journal.

Justice Byron R. White suggested that the newpaper was deprived of the ″property right″ it has in information Winans obtained in his research.

But Buchwald said that idea only makes sense when a company suffers a competitive disadvantage. He offered the example of a firm that loses money because a disloyal worker takes trade secrets to a rival company.

″You’re really saying there is no property interest that needs to be considered,″ White commented.

Buchwald said the securities laws are designed to prevent ″the hoodwinking of investors.″ He added, ″A private wrong against the reputation of an employer is not what the securities laws are all about.″

But Fried argued that what was ″stolen″ in the case had real value, amounting to the commission of a crime.

″The information was valuable and its confidentiality was valuable to the Wall Street Journal,″ he said. ″It was very valuable to Winans and his confederates. That is what they took.″

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