HIGH FINANCE: Henry & Cy Tell All

In a crowded room in Washington, the Securities & Exchange Commission tried to unravel a mystery: Why had Financier Cyrus Eaton suddenly called off a deal to sell $11.7 million in stock for his old friend Henry Kaiser? This week, after two weeks of hearings, SEC had the inside story from Henry and Cy of the fiscal shennanigans that had set the old friends a-feuding.

Henry Kaiser got his licks in first. On the stand, he pictured himself as a trusting babe in the financial woods, led astray by Eaton and his Otis & Co. Kaiser testified that on the day before the new issue was to be floated (Feb. 3), Otis & Co. told him that K-F's stock should be "stabilized." Kaiser did not know what that meant. The underwriters, he said, explained: to keep the Curb price of the old stock steady, K-F ought to peg it by buying at a fixed price.

"I was shocked and alarmed when they suggested it," said Kaiser. "I wanted to know what the SEC thought about this sort of thing." Eaton, he said, assured him that it was "not unusual," and a hasty telephone check with SEC verified it. Eaton thought that no more than 20,000 to 25,000 shares would have to be bought. Kaiser told him to go ahead. It took less than half an hour to fill the first order for 15,000 shares—but to Kaiser's surprise the market was not stabilized.

"The stock was simply thrown at us," said Kaiser. By day's end, K-F had been forced to buy 186,200 shares, using up $2.5 million of K-F's cash to do it. Kaiser said that Eaton hailed the performance as "another Kaiser miracle."

Caught Short? Where had all the stock come from? Witnesses implied that many a broker had made short sales, i.e., sold to

Kaiser at $13.50, expecting to deliver stock from the new issue going to brokers for $12.

Next day, when Eaton and his underwriting syndicate started to float the issue, the stockmarket was falling and so was K-F stock. Eaton called off the sale. Witnesses before SEC said they heard him say: "We would be just damned fools to go through with this deal ... I would rather have a lawsuit on my hands than be dead broke." Eaton's own lawyer testified: Eaton had asked him if there was any escape clause in the underwriting contract with K-F. Eaton reportedly said he was going over it with a "fine-tooth comb" to look for an out. (An out developed the following Monday when a Philadelphia lawyer filed a suit against Kaiser-Frazer, and Eaton used it as a reason to break the contract.)

It Was This Way. This week SEC heard well-groomed, white-thatched Cy Eaton tell his side. Wearing a dark blue suit with a light blue tie to match his eyes, Eaton gave photographers a big grin and then proceeded to deny K-F's charges.

Sure, said Eaton, he was there when they talked about stabilizing the stock, but he didn't say anything; he just listened. The stabilizing was not Eaton's idea; it was that of Henry's son Edgar. "Did you approve it?" asked the SEC examiner. Eaton replied: "No." Eaton said he would have been glad to carry out the underwriting "if conditions were right."