McLean telephoned speculator before EAI stock dropped

January 06, 1994|By Gary Cohn, JoAnna Daemmrich and Kim Clark | Gary Cohn, JoAnna Daemmrich and Kim Clark,Staff Writers Staff Writers Ian Johnson and Gary Gately contributed to this article.

Baltimore Comptroller Jacqueline F. McLean, whose critical comments to a television reporter last fall were followed by a sharp decline in the price of stock in Education Alternatives Inc., spoke at least twice before the program with a speculator who stood to profit from the stock's decline.

City telephone records show that one call to Dallas-based speculator Tom Barton was made four days before Mrs. McLean was quoted on the TV show as saying she thought investors had been misled about the stock value of EAI, the company that runs nine Baltimore public schools.

Dan Dorfman, a financial columnist whose show on cable network CNBC is followed closely by investors, quoted Mrs. McLean on Nov. 23 as saying she believed EAI used "unethical" accounting methods that had caused the price of its stock to become inflated.

Mr. Dorfman, who says he called the comptroller at the suggestion of a source, also reported that Mrs. McLean "told me she's also heard rumors" that EAI was being investigated by the Securities and Exchange Commission.

The company's stock plunged in the wake of the comptroller's comments. The stock started the day at $36.25 a share and was selling for about $35 when the show aired at 12:30 p.m. Within minutes, it fell to $31.25 -- a paper loss in the company's value of more than $20 million.

The stock recovered later in the day to close down just 3 percent, at $35.25 a share.

It is not illegal for Mrs. McLean to have contact with stock speculators or financial columnists. And, in fact, some of her criticisms about EAI's accounting methods have since been supported by independent experts.

Still, the comptroller's actions highlight the delicate interplay between public officials, companies whose fortunes depend heavily on government, and investors who speculate in the stock of such companies. They also raise questions about whether elected officials should have private relationships with investors and make public statements that affect stock prices.

"My sense is that what she did probably has the appearance of official impropriety," said Andrew Stark, a professor of management at the University of Toronto and an expert in government and business ethics.

"It strikes me that she was less than careful about preserving the appearance of official propriety. An officer reasonably concerned about preserving public confidence would not conduct herself the way this individual seems to."

He said that talking to a stock trader who stood to profit from a decline in the price of shares, and then making extremely critical public statements to a financial journalist raised questions for him.

Mr. Dorfman said he was struck by how negative Mrs. McLean had been toward EAI's stock price. Many public officials criticize company's performance, he said, but he could remember few who attacked the price of a company stock.

"What struck me was that she kept knocking the stock. That struck me as unusual," Mr. Dorfman said.

Mrs. McLean declined to comment on her discussions with Mr. Dorfman and Mr. Barton. Her attorney did not return a phone call seeking comment.

Ethics investigation

Mrs. McLean, the third-ranking official in Baltimore government, is under investigation by Maryland's special prosecutor for hiring a public relations consultant who was paid more than $23,000 but apparently did no work. The money was deposited into two bank accounts -- the first of which was opened by Mrs. McLean herself.

State Prosecutor Stephen Montanarelli also is looking into allegations that Mrs. McLean steered a city lease to a Federal Hill building that she and her husband own. The lease would have boosted the value of the building, which was for sale, by more than $200,000.

Mayor Kurt L. Schmoke also asked the city ethics board to look into the allegations. However, he announced yesterday that the review has been put on hold to avoid tainting the criminal investigation.

Minneapolis-based EAI took control of nine Baltimore public schools in 1992, and the five-year contract, worth an estimated $26.7 million annually, legitimized the fragile company. But its stock remains volatile -- daily closing prices ranged from $19.75 to $48.50 last year -- and extremely sensitive to news about existing or potential contracts.

As EAI gained a foothold in Baltimore's school system, its stock rose dramatically.

But that rapid rise also made it a target for speculators involved in a practice known as short-selling. Here's how it works.

A short seller identifies a stock that he believes is likely to go down. Betting that it will do so, he borrows shares from a broker for a fee. If the price drops, he buys shares on the market and repays the broker with the lower-priced shares. His profit is the difference in the prices of the borrowed and the purchased shares, minus fees and commissions.

One of those involved in short selling EAI stock is Mr. Barton, who spoke at least twice with Mrs. McLean since September.

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