Gabrieli stock sale reviewed by SEC

Gubernatorial candidate Christopher F. Gabrieli was questioned by the Securities and Exchange Commission in 1998 after he sold 30,000 shares in a hot high-tech stock the day before the stock price plummeted.

The SEC alleged no wrongdoing, and the inquiry did not result in any charges or sanctions. Gabrieli, who confirmed the investigation this week, said through a spokesman that he did nothing wrong.

``The SEC investigated and didn't find anything," said Joe Ganley, a spokesman for the Gabrieli campaign. He called it a ``routine review."

SEC investigators were looking at trades in Cascade Communications stock executed by Gabrieli and another partner at Bessemer Venture Partners in 1996 and 1997, according to two people deposed by the SEC and documents provided by the Gabrieli campaign.

Investigators zeroed in on one trade in particular: a short sale executed by Gabrieli the day before that company's stock dropped precipitously on Jan. 24, 1997, according to documents provided by the Gabrieli campaign.

Gabrieli used a trading technique called ``short selling against the box," in which he made a bet that stock he owned would decline in value. That allowed him to avoid a loss on the decline in his Cascade shares.

On the day of the trade, Cascade's shares were valued at $64 a share, according to publicly available stock prices. The next day the stock fell to $41. By shorting the stock, Gabrieli avoided a potential loss of as much as $690,000, according to calculations by the Globe.

Gabrieli's campaign yesterday provided a summary of Gabrieli's testimony before the SEC, contained in a memorandum written by Gabrieli's lawyer the day after he was questioned on May 5, 1998.

According to the memorandum, Gabrieli told investigators he sold the stock because he and other investors believed it was overvalued. He said he asked his broker when Cascade was going to announce its earnings -- which is a publicly known fact -- and timed the trade for the announcement.

Gabrieli's aide also said Gabrieli sold thousands of shares of Cascade stock over two years before the drop in price. Bessemer and its partners had invested years earlier in Cascade, a network switching maker based in Westford and later acquired by Ascend Communications. Bessemer investors did not sit on the Cascade board.

According to the memorandum, investigators asked Gabrieli if he ever had discussions with his partner, Felda Hardymon, regarding Cascade's earnings before Jan. 24, 1997. At the time of the trade, Cascade was in the process of buying Sahara Networks, a Connecticut company that had been backed by Bessemer partners. Hardymon was on the Sahara board.

They also asked if Hardymon had ``ever told anyone about estimates or earnings for Cascade before January 24, 1997," or discussed other Cascade matters.

``CG replied in the negative to each question," the memo recounted.

According to two Cascade directors deposed by the SEC, Paul Ferri and Richard Burnes, Cascade officials had warned the Sahara board that it was going to post disappointing earnings. They had made the disclosure because Cascade's stock would probably fall when the news was announced, and that would affect the value of the deal -- in which Sahara would receive shares of Cascade.

``We had an obligation to disclose that to the Sahara board members, " said Ferri, of Matrix Partners.

Later, he said, he was questioned by the SEC. ``They say, `We're looking into suspicious trades around these dates, and you have to respond.' They wanted all our phone records, who we talked to, all the meetings we had."

Hardymon's lawyer in the SEC investigation, Harvey J. Wolkoff of Ropes & Gray, said there was no finding that Hardymon had possession of information that was likely to lead to a drop in Cascade shares.

``After an investigation of the circumstances related to Felda's sale of Cascade stock, the SEC found that he had not committed any wrongdoing and hadn't broken any securities laws and determined to close the case," Wolkoff said. Under the securities laws, he noted, because there were no findings against Hardymon, ``by definition, there could be no violation by others with whom Felda had had contact."

The trade by Gabrieli was well known in venture capital circles in Boston at the time, in part because of a dinner party conversation at which Gabrieli allegedly talked about the Cascade trade.

Ted Dintersmith, a partner at Charles River Ventures, says that at a dinner party at Gabrieli's Beacon Hill home, Gabrieli told him about the Cascade stock sale.

``He said something like: `I can't believe how things worked out for me today. I had a hunch that Cascade was going to miss a number, so I called my broker and shorted a huge block of Cascade shares,' " Dintersmith recalled Gabrieli saying.

When he returned to work the next day, Dintersmith told two partners at his firm, including Burnes, who was on the Cascade board. ``I said, `Boy, I had the most amazing discussion with Chris Gabrieli,' " Dintersmith recalled telling them.

Burnes confirmed Dintersmith's account to the Globe. Ganley, the Gabrieli campaign spokesman, also confirmed that Gabrieli talked about the sale with Dintersmith at the dinner party.

Dintersmith, who said he was never deposed by the SEC, donated $200 to Republican Mitt Romney in 2002.