Aside from proving their insider trading case against ex-Keefe, Bruyette & Woods Inc. chief executive James McDermott, prosecutors brought out new information on three deals that never panned out.
According to testimony in the trial that ended last week, Keefe Bruyette represented National Australia Bank in negotiations with Advanta Corp. of Spring House, Pa.; proposed selling California State Bank of West Covina to City National Corp. of Beverly Hills; and helped SunTrust Banks Inc. of Atlanta bid for Barnett Banks Inc. of Jacksonville, Fla.
Prosecutors showed that Mr. McDermott's mistress, Cathryn Gannon, took positions in the shares of six banks that had dealings with Keefe Bruyette shortly before runups in their price. The prosecutors argued successfully that the transactions followed too close on the heels of tips from Mr. McDermott to be coincidental.
The string of successful transactions started with a $12,724 investment in Advanta on June 16, 1997.
Though Advanta was not sold, rumors that National Australia was considering a deal pushed the stock higher, allowing Ms. Gannon to make a $750 profit on July 8.
Behind the scenes, Keefe Bruyette was representing National Australia, which decided not to bid after conducting due diligence on the credit card specialist.
On March 17, 1997, Advanta, which specialized in credit cards, announced poor financial results and that it had hired an investment bank, BT Wolfensohn, "to explore all strategic alternatives."
In early May, reports that Advanta had solicited preliminary bids for potential buyers began to circulate. The market speculated that two of the bidders were General Electric and Associates First Capital.
According to testimony, Andrew Senchak, a Keefe Bruyette investment banker, and David Berry, who headed up bank research, traveled to Australia to work with National Australia Bank on a proposed bid for Advanta. Mr. Senchak and Mr. Berry came up with valuations for Advanta ranging from $33 to $61 per share. Advanta's stock price was in the 20s at the time, James Benjamin, assistant U.S. District Attorney for southern New York, noted.
When Mr. Senchak and Mr. Berry returned to New York they handed in their preliminary bid to BT Wolfensohn. In June they began negotiating to get in the door at Advanta to conduct due diligence.
On June 10, a published report said National Australia was interested in Advanta, helping to lift Advanta's stock. Negotiations, Mr. Mr. Senchak testified, "looked very promising." But around July 4 the due diligence began to hit snags.
"National Australia Bank didn't like what it was seeing in Advanta," Mr. Benjamin told the jury. "Advanta's people failed to provide information in a timely manager." As the situation deteriorated, Mr. Senchak transmitted negative reports back to Keefe Bruyette.
Ms. Gannon sold her shares on July 8. Talks between National Australia and Advanta collapsed between July 11 and July 12.
Ms Gannon also made $34,150 in profits selling shares of California State Bank, on Feb. 19, 1998. First Security Corp. of Salt Lake City announced that it was buying California State that day. Ms. Gannon had bought 4,860 shares of the company between Dec. 8, 1997 and Feb. 13, 1998.
But testimony was presented that a deal with National City Corp., was contemplated first.
Thomas Bishop and Gene Bishop, who founded California State Bank in the early 1980s, began thinking of selling their bank in the last few months of 1997, according to testimony by Peter Wirth, an investment banker at Keefe Bruyette. Mr. McDermott and Mr. Wirth proposed a sale of the company to City National. The Bishop brothers were initially interested in a deal but eventually decided that City National would not be "a good fit," according to Mr. Wirth's testimony.
"City National didn't work because it was too close to Cal State," Mr. Benjamin said. The Bishops "were worried [that] if the two banks had merged, they would have to fire or let go a lot of their employees, and they didn't want to do that."
The Bishop brothers later decided to merge with First Security Corp, which was willing to give a much better price.
Ms. Gannon, who is still a fugitive in the case, is charged with making profits of at least $88,000 from tips from Mr. McDermott.
After her successful trading of Advanta stock, Ms. Gannon's next windfall came in December 1997, when she sold shares of Central Fidelity Banks of Virginia that she had bought on June 16.
Wachovia Corp. of Winston-Salem, N.C., announced its purchase of Central Fidelity on June 24. Her profit: $7,044.
In early September 1997 Ms. Gannon made $30,400 selling a position in Barnett Banks. She bought 1,800 shares of Barnett on Aug. 26.
NationsBank Corp., which is now Bank of America Corp., announced Aug. 29, 1997, that it was buying Barnett.
With Barnett CEO Charles E. Rice going into alcohol rehabilitation and Wachovia entering the Florida market by buying First United Bank of Boca Raton, SunTrust was eager to buy Barnett.
On the afternoon of Aug. 25, Mr. McDermott received a confidential phone call from John Spiegel, the chief financial officer at SunTrust. "Spiegel told McDermott some stunning news. Barnett was up for sale," said Mr. Benjamin. SunTrust had been invited to submit a bid, and SunTrust wanted Keefe Bruyette' assistance.
SunTrust lost out to NationsBank. "The Barnett deal was something of a watershed, because NationsBank had agreed to pay a very high price for Barnett," said John G. Duffy, president and co-chief executive officer of Keefe Bruyette. Mr. Duffy was one of the witnesses at the trial.
Ms. Gannon made $15,791 in profits in March 1998 on 1,443 shares of First Commercial Corp. she bought in December 1997. Regions Financial announced it was buying First Commercial, of Little Rock, on Feb. 8, 1998.
Ms. Gannon also bought shares in First Commerce Corp. of New Orleans but suffered a loss even after Bank One Corp. said on Oct. 20, 1997, that it was buying the company.