Penn Central Precedents?

The Securities and Exchange Commission was only doing what had long been expected last week when it filed civil suits charging that massive fraud preceded the spectacular 1970 bankruptcy of the Penn Central. Even so, the suits--one against twelve former officers and directors of the railroad, headed by onetime Chairman Stuart T. Saunders, and also the accounting firm of Peat, Marwick, Mitchell & Co.; another against the investment firm of Goldman, Sachs & Co.--are unusually significant.

The SEC is clearly trying to set precedents that would expand its regulatory authority over company directors, the commercial paper market and independent auditors.

The SEC contends that Saunders, David C. Bevan, Penn Central's former chief financial officer, and other Penn Central managers arranged improper transactions between the railroad and its subsidiaries, improperly recorded revenue and made false statements about Penn Central's borrowings. The SEC is also attempting to:

1) Establish a doctrine that "outside" directors of a company (directors who are not company officers) must be alert to any suspicion of fraud. The SEC claims that three outside directors of Penn Central&* "had reason to know" that managers were misrepresenting the railroad's financial condition, but wrongfully kept quiet.

2) Make more information available to buyers of commercial paper (short-term corporate lOUs). Goldman Sachs insists that it did nothing wrong in marketing $83 million of commercial paper for Penn Central in the six months before the bankruptcy. But it signed a consent decree under which it promised that it will investigate companies for which it sells commercial paper and tell would-be buyers what it finds out.

3) Clarify the obligation of accountants to take a hard look at transactions that company managers ask them to approve. The SEC contends that Peat, Marwick failed to give "due professional consideration to the economic substance" of several Penn Central "transactions, schemes and ... devices." Peat, Marwick says the charges are "unfair."

The SEC is seeking only civil penalties--injunctions or consent decrees barring the defendants from committing the same acts again. But a federal grand jury in Philadelphia is investigating the possibility that some former Penn Central officers broke criminal laws and thus may be liable to jail sentences.

* Edward J. Hartley, president of Allegheny Ludlum Steel: Franklin J. Lunding, retired finance committee chairman of the Jewel Companies. Inc. grocery and food chain; and R. Stewart Rauch Jr., chairman of the Philadelphia Saving Fund Society.

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