Bank denial raises legal questions fTC

January 15, 1994|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Baltimore Bancorp Inc. may have stepped into %% a gray legal area on Thursday when it told a frenzied stock market that it wasn't negotiating with Mellon Bank about a takeover. %%

%% What the company, which owns the Bank of Baltimore, failed to mention, but later admitted in a statement, was that it was discussing a takeover with other banks.

"It's disingenuous to say you're not talking to X when you're talking to Y," said James Cox, a professor of corporate law at Duke University. "It's an area of the law that's filled with risks for the company."

Baltimore Bancorp concedes that its statement wasn't ideal. But the bank said it reacted as quickly and ethically as it could when it learned its secret talks had been leaked.

"My personal preference would have been to do one [statement], but we didn't have that luxury, given the way the events unfolded," said David L. Spilman, the bank's treasurer and head of investor relations.

The statement was one of three issued by the company during a hectic day on the stock market, during which the company's stock -- which before Thursday had been trading at a steady $14 a share -- rose as high as $16.25 on rumors that Mellon was going to buy the company for $21 a share.

Mr. Spilman said that about 10 minutes after the market opened, 50,000 shares of the company's stock had already been traded -- average number for an entire trading day for Baltimore Bancorp stock.

New York Stock Exchange officials quickly contacted the company and asked the bank to issue a statement explaining why so many shares were trading and why the price was up 50 cents in the first half-hour of trading.

Certain that their discussions about a takeover were still secret, Mr. Spilman said, bank executives genuinely did not know why the stock was in overdrive. So the bank issued a terse statement about 10:30 a.m. noting that the stock exchange had asked for a statement but stating that it had no comment on the stock's activity.

Then, Mr. Spilman said, the stock exchange called again to ask about the unusual trading and rumors that the bank was to be taken over. Bank executives then saw an article on the Dow Jones business news wire service citing rumors that Baltimore Bancorp was to be sold to Pittsburgh-based Mellon Bank for $21 a share.

Mr. Spilman said the rumors were false, and that the bank's first concern was to correct the error in the market. So about 2:45 p.m. Thursday it issued a one-sentence statement that the bank "does not expect to receive a bid from Mellon Bank and is not in negotiations with Mellon Bank regarding a possible sale of the company."

Of course, Mr. Spilman acknowledged, Baltimore Bancorp executives were talking to at least three other banks about a takeover of the local bank, but bank officials didn't believe they had to mention this in the second statement.

After the denial, Baltimore Bancorp's stock price dropped, but then began rising again as market watchers began to read between the lines of the company's release, said Alex Hart, an analyst with Ferris, Baker Watts in Baltimore.

"You have to read these company releases very literally. They said they weren't talking to Mellon, and I guess they weren't. But they didn't say that they weren't talking to someone else," Mr. Hart said.

As the day progressed, the bank noticed that the market wasn't buying its statement. The stock dropped to $15 about 15 minutes after the statement, but soon began climbing again. By the 4 p.m. close of the market, the stock was at $15.625 -- up $1.625, or 12 percent, on the day.

The bank decided to release a third statment, and at 5:40 p.m. announced that it was indeed in preliminary discussions with "several major bank holding companies." The bank also said it had hired the Baltimore investment bank Alex. Brown & Sons Inc. to help with the discussions.

"We were under no obligation to do the last release," Mr. Spilman said. "We had consulted with our legal counsel at each step, and we're sure that we were taking timely action."

Courts have ruled, however, that omitting information about merger talks can be misleading to investors.

In 1988, the U.S. Supreme Court ruled in a case called Basic Inc. vs. Levinson that preliminary merger talks cannot be concealed until an agreement has been reached. The court said that incomplete public statements could mislead investors into thinking that something was not happening when, in fact, it was. The court did not, however, set a firm standard for what a company should do when discussing or negotiating a takeover.

"The right thing to do would have been to suspend trading, get the story straight and then allow the information to be digested by the public," Mr. Cox, the Duke professor, said. "Then everyone would have had a level playing field."

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