McDonnell Is the Object of Inside Trading Probe : * Securities: A House panel is trying to determine if the firm divulged information about its deal with Taiwan investors before a public announcement.

WASHINGTON — A congressional panel has opened an investigation into whether McDonnell Douglas released inside information about its $2-billion deal with Taiwan Aerospace, resulting in a sharp increase in trading activity before the transaction was formally announced last month, The Times learned Friday.

McDonnell on Friday denied any improper handling of corporate information.

Paradigm Partners, a small investment firm in Washington state, alleged in a letter to Rep. John Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, that McDonnell violated U.S. securities laws by disclosing information about the Taiwan deal at a closed meeting arranged by an investment firm in mid-October.

One day after the Oct. 9 meeting, trading in McDonnell stock began to soar, more than tripling the prior day’s volume and rising substantially higher than the average daily volume during the month. Volume continued to grow, peaking at 453,000 shares on Oct. 15. Dingell’s staff said it has asked the New York Stock Exchange to provide information about the trading activity.

Spokesmen for both McDonnell and the investment firm that held the meeting, Wertheim Schroder, said the aerospace company did not release any details about the Taiwan deal or anything else that could be regarded as inside information, though McDonnell did discuss its efforts to find an Asian partner. The Paradigm letter, apparently in error, said the meeting occurred on Oct. 14.

In addition, a Chicago investment firm that has been hostile to McDonnell, Gilford Securities, has protested to the Securities and Exchange Commission on several occasions in recent months that McDonnell has made selective releases of material information to investors without making a full public disclosure until later. The SEC in turn has made inquiries to Gilford about its allegations.

In a letter to the SEC dated Nov. 13, Gilford specifically cited a disclosure on the Taiwan deal made to Goldman Sachs and three other unidentified securities firms on Nov. 7. Goldman Sachs issued an advisory to its clients five days later, on Nov. 12.

In the advisory, Goldman said that its confidence in the Taiwan deal “increased significantly following a meeting on Nov. 7 among ourselves, management and three other analysts. We now believe McDonnell will sell 40% of its commercial aircraft business for $2 billion.” Goldman also increased its estimate of McDonnell’s future earnings.

The day that the advisory was issued, trading in McDonnell shares hit 517,800 shares, and the stock closed at $77, up more than $4 for the day. Late that day, McDonnell Douglas issued an announcement confirming the deal with Taiwan Aerospace, including the specifics in the Goldman advisory.

The Gilford Securities letter of protest, a copy of which was obtained by The Times, alleged that Goldman Sachs held a short position in McDonnell stock, which it closed after the Nov. 7 meeting but before it discussed the information with outside investors. That would have allowed the firm to avoid taking potential losses when the stock price rose on the favorable information about the Taiwan deal.

“We believe such dissemination of information is a violation of principles of fair disclosure,” said the Gilford letter, which was signed by Vice President for Research Fred Wadler, who himself has become known in the investment community as an aggressive short-seller of McDonnell.

A Goldman spokesman on Friday denied any improper conduct. “It is untrue that following the meeting with the analysts, Goldman covered its short position,” he said.

McDonnell too insisted that its conduct had been appropriate. “We believe we acted properly in terms of the timing of our announcement of information about the scope of the negotiations,” said a spokesman for the St. Louis-based firm. “We don’t know” how Goldman was able to accurately predict the dimensions of the Taiwan deal, the spokesman added.

Without criticizing Gilford directly, McDonnell said it had been the victim of misstatements by short-sellers in its stock.

McDonnell Trading Draws Suspicion

An Washington investment firm has complained to Congress that McDonnell Douglas improperly disclosed information to an investment company in Washington about its pending deal with Taiwan Aerospace. Trading volume in McDonnell stock tripled after the Oct. 9 meeting. Trading volume jumped again after Goldman Sachs issued an advisory Nov. 12 outlining the deal following what it said was a meeting with McDonnell management. Overall, McDonnell’s stock price and trading volume were erratic in the weeks before its formal announcement late in the evening of Nov. 19 that it would sell 40% of its commercial operations to the Taiwan firm.

Oct. 9: McDonnell Douglas meets with Wertheim Schroder. Nov. 12: Goldman Sachs advisory issued. Nov. 19: Taiwan Aerospace deal announced.