Racketeering, Fraud Trial of 5 Ex-Princeton / Newport Officials Opens

NEW YORK —  Opening arguments began Tuesday in the federal racketeering and fraud trial of five officials of the now-defunct securities firm Princeton/Newport Partners L.P. and a former Drexel Burnham Lambert trader.

The six are accused of making phony securities trades to generate more than $13 million in false tax losses for Princeton/Newport from 1984 through 1986. They also are accused of illegally manipulating the market price of stock in COMB Co.

The trial, which is expected to last more than two months, may give the first glimpse of some of the government’s evidence against former Drexel “junk bond” chief Michael Milken, who is awaiting trial on racketeering and securities fraud charges. The case also marks the first use of the federal racketeering law against principals of a securities firm.

In his opening statement to the jury, Assistant U.S. Atty. Mark Hansen said the government would offer proof that Princeton/Newport engaged in sham securities trades with three brokerage firms to create false short-term capital losses and long-term capital gains. He said securities were “parked” temporarily with the brokerage firms under a secret, illicit agreement to buy them back on a specified date at a specified price different from their true market price.

He compared the defendants’ alleged parking and later repurchase of the securities to the use of a yo-yo, whereby “Princeton/Newport sent these securities out with a big string on them, waiting only for the moment when they give a little tug on the string and they all come right back into their hands.”

Hansen said that evidence in the case would include a tape recording of a telephone conversation between two of the defendants, Charles M. Zarzecki, Princeton/Newport’s head trader, and Bruce Lee Newberg, then a trader at Drexel.

Hansen said the tape, seized during a raid on the firm’s New Jersey offices, recorded Zarzecki confirming that he had sold stock to artificially depress the price of COMB common stock, in accordance with a request by Newberg.

Hansen said the end of the conversation includes the following exchange:

Newberg: “You’re a sleaze bag.”

Zarzecki: “You taught me, man.”

Newberg: “Welcome to the world of being a sleaze.”

Other defendants in the case include James Sutton Regan, the firm’s managing general partner, as well as general partners Jack Z. Rabinowitz and Paul A. Berkman, and Princeton/Newport controller Steven B. Smotrich. The firm had offices in Newport Beach and Princeton, N.J. It was founded in 1969 by Regan and Edward Oakley Thorp, a former mathematics professor at UC Irvine. Thorp wasn’t charged with any wrongdoing.

Theodore Wells, Regan’s lawyer, went first late Tuesday as defense lawyers began their opening arguments. He said Regan would take the witness stand in his own defense during the trial and testify that all of the trades were “appropriate, proper and lawful.” He said the trading was done in response to changes in federal tax law, and he said Regan gained nothing financially from the trades the government claims were illegal. All of the defendants have denied any wrongdoing.

Spectators in the packed courtroom of U.S. District Judge Robert L. Carter included lawyers for Milken and his brother, Lowell Milken.

The Milken case is expected to go to trial some time next year, and the charges against them include allegedly illegal schemes with Princeton/Newport. Newberg is also a defendant in that case.