"TC The U.S. Securities and Exchange Commission staff is questioning whether a director of Baltimore Bancorp may have violated federal insider trading laws in a series of stock purchases between Nov. 16, 1990, and Jan. 17 of this year.
Attorneys on both sides of the proxy battle for control of the Bank of Baltimore's parent company said that they have been contacted by SEC staff attorneys in the last week regarding purchases of stock by Robert F. Comstock. Mr. Comstock was a member of the company's executive committee when he made the trades and was named to succeed Harry L. Robinson as chairman and CEO in June.
Citing policy, the SEC declined to confirm or deny whether it is investigating Mr. Comstock's trading activity.
Mr. Comstock, who reported his purchases shortly after they were made, as required by law, has not sold any of his Baltimore Bancorp shares. Mr. Comstock was traveling in Europe yesterday and was unavailable for comment.
In an interview last week, he said that his purchases were legal and added that he bought the shares after selling another stock on which he had lost money.
Benjamin F. Stapleton, an attorney representing Baltimore Bancorp, said yesterday that the company would cooperate with the SEC.
"They said they were initiating an informal investigation," Mr. Stapleton said. "They're doing their job. They're following up." He added that he thinks Mr. Comstock "was perfectly within his rights."
In all, Mr. Comstock bought 16,500 shares of the company's stock in eight separate transactions, according to public filings he madewith the SEC.
His last purchase in the series being questioned was Jan. 17, six days before the company announced better-than-expected fourth-quarter results.
Before the earnings announcement, analysts had feared that federal banking regulators, who audited the bank late last year, might make the bank put millions of dollars aside as a reserve against problem loans.
One securities firm, Ferris Baker Watts Inc., predicted Jan. 11 that problems with the bank's commercial real estate loans would lead to a loss of about $17.5 million. But Baltimore Bancorp's increase in its loan-loss provision was lower than expected, and the company reported a fourth-quarter loss of $6.5 million. Another securities firm, Legg Mason Inc., told clients the next day that the loss was smaller than expected.
Mr. Comstock paid from $4 to $5.375 a share in the purchases being questioned -- historically a low market price for the stock. In April 1990, the shares traded as high as $15.75 after First Maryland Bancorp proposed a $17-a-share takeover. The company rejected the proposal in mid-May, and the shares sank to a low of $3.75 in December. The shares closed yesterday at $10.50.
In the week following the earnings report, the paper value of Mr. Comstock's newly purchased shares rose to $99,000 from $68,062.50.
The purchases boosted Mr. Comstock's stake in the company by 80 percent, to 37,000 shares from 20,500, and followed a 14-month period in which he had bought no Baltimore Bancorp stock.
Since Jan. 23, he has reporting buying an additional 3,500 shares. He still owns all the company stock he has purchased.
One of Mr. Comstock's law partners, James T. Reilly, said that he bought nearly 12,000 shares of Baltimore Bancorp early this year -- Mr. Reilly's first investment in the company.
According to Daniel Burch, a proxy solicitor advising dissident shareholders led by Baltimore Blast owner Edwin F. Hale Sr., Mr. Reilly bought the stock shortly before the year-end financial report was released Jan. 23. Mr. Reilly said that he couldn't confirm the date.
He and Mr. Comstock said that they didn't discuss the company'scondition with each other before making their investments.
Mr. Comstock said that he didn't have advance information about the bank, did not know anything about the progress of the federal audit, and didn't know the final earnings for the quarter until the day they were publicly announced.
Internal bank documents indicate that the company's directors were regularly briefed on delinquencies in the company's loan portfolio and that on Sept. 19 a group that included Mr. Comstock discussed a plan for future additions to loan-loss reserves.
The directors were also briefed each month about earnings during the previous month. None of that information was public.
The documents do not show any briefings about the progress of the federal audit while Mr. Comstock was buying stock.
Baltimore Bancorp characterizes the questions over Mr. Comstock's purchases as partisanship by the Hale camp.
"I think it's a desperate maneuver on the part of the Hale group," said John Haigh, Baltimore Bancorp's president. "If anyone knows the rules, it's Bob Comstock."
Baltimore Bancorp said that it has no special policy on stock purchases by directors.
The SEC wouldn't discuss Mr. Comstock directly, but Lani Lee, branch chief of the SEC's Financial Fraud Unit in Washington, did agree to explain some of the areas the SEC considers during an investigation.
Ms. Lee said that the SEC investigates whether an investor was at meetings where material non-public information was disclosed and whether there are any documents showing that the person had material inside data. Other evidence includes conversations the investor may have had with other people, the trading pattern and the person's trading history.
Baltimore Bancorp is traded on the New York Stock Exchange, which also has guidelines advising directors on trading practices.
NYSE guidelines say that directors should not buy stock shortly before earnings announcements. The guidelines also say that directors should not buy stock when a material development is expected, but not yet announced.