Litton Files $30-Million Suit Against Shearson Lehman, Levine Over Insider Trades

In an action that could significantly expand litigation in insider trading cases, Litton Industries filed suit Tuesday for more than $30 million against the Shearson Lehman Bros. stock brokerage and admitted inside trader Dennis B. Levine.

The civil complaint, filed in U.S. District Court in New York, said that Litton was forced to pay in excess of $30 million more for its March, 1983, acquisition of Itek Corp.--due to Levine’s illegal activities while working for Shearson--than it otherwise would have paid.

Litton paid $240 million in cash for Itek, an East Coast electronics and defense firm. Under a merger agreement announced in January, 1983, it paid $48 per share for Itek. But in the fall of 1982, it had begun buying Itek shares for as little as $22.84, according to Litton spokesman Robert Knapp. In the suit, Litton charged that Levine’s “illegal conduct” caused the price increase.

Gave Up $11.5 Million of Profits

Levine worked at Shearson during the Itek acquisition, but in 1985 he took a $1-million-a-year job as a managing director at Drexel Burnham Lambert, an investment banking firm.

Levine was charged in May with making $12.6 million of illegal profits by trading in stocks on inside information while working for both investment houses. He pleaded guilty in June and agreed to give up $11.5 million worth of profits.

The Securities and Exchange Commission’s original complaint against Levine listed 54 takeover deals in which he had traded, an indication of how significant a number of cases he and Shearson may face.

“There is no doubt that if this case is pursued successfully, it will spawn a fair amount of litigation,” said Harvey Pitt, a securities attorney and former general counsel of the SEC. “There are a lot of insider trading cases, and a lot of people will seek to recover damages.”

Pitt noted that the real target of the Litton suit is probably Shearson. “By the time the government gets through with Levine, his pockets will be picked clean. Their real target is the brokerage firm.”

New Area of Securities Law

The critical legal question raised by the Litton suit, Pitt said, is whether the brokerage firm could be held liable for Levine’s conduct. Such legal issues represent a “new and evolving” area of securities law, he said.

Shearson spokeswoman Mary McDermott said the firm had not examined the Litton complaint and could not comment on the case, but she acknowledged that the potential for many more suits “certainly raises some questions.”

The Litton suit was filed under statutes and common law covering securities fraud, negligence, intentional interference, breach of contract, breach of fiduciary duty and the Racketeering Influenced and Corrupt Organizations Act. It also charged violations of New York law, alleging wrongful misappropriation, misuse and improper disclosure of confidential and proprietary information belonging to Litton.

Also named as defendants in the suit were Ira Sokolow, a former Shearson vice president; Bank Leu International, the Bahamian unit of a Swiss bank where Levine conducted his trades, and Bernhard Meier, formerly Levine’s account manager at Bank Leu.

The Litton complaint alleges that Itek was one of several specific acquisition candidates presented to Litton by Shearson in meetings in which Sokolow participated.

The SEC said Levine acquired and used inside information in the Itek merger, even though he was not directly involved in the deal, the Associated Press reported.

The illicit trading was concealed from officials at the firms where Levine worked, the commission was quoted as saying.

But the Itek merger was not one of the nine key cases that the SEC focused on in the Levine case. None of those nine companies, or any of the other companies involved in mergers in which Levine traded on inside information, have filed suit.

Pitt said that the only other suit in this unexplored area of insider litigation that has been filed is Anheuser-Busch’s suit against Paul Thayer, former chief executive at LTV. He was convicted of insider trading after he left LTV and had taken a job as deputy secretary of defense in the Reagan Administration. He is now serving a prison sentence. In Litton’s acquisition of Itek, it paid $212.25 million for 4.04 million shares of common stock and $27.75 million for convertible subordinated debentures. If the $30 million in damages it is seeking were spread over the full 4.04 million shares, it would amount to $7.43 per share.