Securities regulators are investigating allegations of insider trading in Galyan’s Trading Co. stock before the company’s sale to Dick’s Sporting Goods Inc. last summer, IBJ has learned.
Sources said those under scrutiny include star Indianapolis stockbroker Dave Knall and his son James, who worked with his father at a McDonald Investments office on 96th Street in Indianapolis.
Dave Knall, 60, one of the nation’s top-producing stockbrokers, has been on a voluntarily leave of absence from McDonald since Dec. 3. The firm placed James on indefinite suspension in mid-November, said Michael Monroe, chief communications officer for Cleveland-based KeyCorp, McDonald’s parent.
The Knalls could not be reached for comment. Monroe said the two stepped aside to address “regulatory matters.” He wouldn’t elaborate but said the matters are unrelated to management of client accounts.
Both the U.S. Securities and Exchange Commission and the National Association of Securities Dealers are investigating the trading in Galyan’s shares in advance of the June 21 announcement that Pittsburgh-based Dick’s was buying the Plainfield company for $305 million in cash, sources said.
Jeff Hennion, senior vice president of Dick’s, said: “All I know right now is … there is a review ongoing of the trading in Galyan’s stock. What I do know for sure is it doesn’t involve the trading in Dick’s stock and [that] it did precede our acquisition of Galyan’s.”
Hennion said the review he knew about was being conducted by the Washington, D.C.-based NASD, whose duties include monitoring the conduct of stockbrokers as well as overseeing NASDAQ, the market on which Galyan’s shares traded.
Former Galyan’s General Counsel David Zoba said that after the sale to Dick’s closed in late July, the NASD asked Galyan’s board members and executives to sift through a list of roughly 120 institutional and individual investors that had traded in the company’s stock and identify any who were relatives or acquaintances of insiders.
Zoba, now president of Indianapolisbased Premier Properties, said that in late 2004 the NASD followed up, asking company insiders to identify whether they had any ties to the investors on a smaller list, this one with fewer than 10 names.
Zoba said he doesn’t think the Knalls were on either list. He added that while the regulatory body did not tell the company exactly what it was looking for, “I can say to you in all honesty that … I am not aware of anyone from Galyan’s being a subject of the NASD investigation.”
Like the SEC, the NASD conducts regular “market surveillance” to detect possible improper trading. Frequently, NASD refers potential misconduct to the SEC, or the two regulatory bodies pursue probes jointly.
Spokesmen for the NASD and SEC declined to comment, saying they don’t confirm or deny the existence of investigations.
Insider trading involves making investment decisions based on information not available to the general public. That information can be used either to profit later, after a stock has risen, or to avoid a loss ahead of bad news.
In the case of Galyan’s, anyone with an inkling the Dick’s deal was brewing had an opportunity to make a tidy profit. The day before the deal’s unveiling, Galyan’s shares closed at $11.10. The next day, they closed at $16.68, a 50-percent increase.
Company filings show that Dick’s first approached Galyan’s in April 2003 and dangled its first offer three months later. Talks cooled that summer, then heated up again in April 2004, the filings show.
Attorneys say such extended talks increased the risk of word leaking out. Those who got early wind of a possible sale could have pocketed even larger profits. In February 2004, Galyan’s shares traded for as little as $7.60.
IBJ reported last month that Dave Knall had told some of his big clients his leave stemmed from an insider trading investigation that also involved James. In the calls, Knall indicated he had not done anything improper.
Dave Knall’s list of clients is a who’s who of Indiana business. In September, Barron’s ranked Knall fourth on its list of the nation’s top 100 financial advisers. According to the publication, he and his 30-person staff oversee $3.6 billion in assets.
In Knall’s absence, his partner, Jeff Cohen, is handling customer accounts. Cohen is a former investment-banking attorney with the now-defunct law firm Johnson Smith who teamed with Knall seven years ago.
KeyCorp’s Monroe would not speculate on when or if the Knalls will return. Observers note that SEC investigations often continue for many months. Unlike the Justice Department, which can bring criminal charges, the SEC has only civil powers, such as levying fines or barring defendants from the brokerage industry.
A database of broker disciplinary records shows no regulatory run-ins for Dave Knall during his more than three decades in the securities industry. The database also shows no regulatory problems for James, who joined the industry in 2001 and began working with his father in December 2003.
The SEC has rarely brought charges of insider trading involving central Indiana companies. In perhaps the highest-profile case, the SEC in 1991 charged then-Anacomp Inc. CEO Lou Ferrero with tipping off a friend to a soon-to-be-announced acquisition while they were gambling in Las Vegas.
Ferrero settled for $278,000, without admitting or denying the allegations. The SEC did not allege he traded on the information but charged the friend, Indianapolis businessman Michael Maio, did.
In addition, the SEC said Maio passed on the information to his son-in-law and to a female friend, who both also traded on it. In 1993, a federal judge ordered the trio to pay the government a total of $1.75 million.
In another case, the wife of former Adesa CEO Mike Hockett in 1997 agreed to pay $60,600 to settle SEC charges that she tipped off her brother before Minnesota Power & Light bought 80 percent of Adesa for $162 million. By trading on the information, the brother made $25,500 in illegal profits, the SEC said.