Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition

The Securities and Exchange Commission has reached a settlement with three men accused of trading on insider information about the acquisition between Mercer Insurance Group Inc. and United Fire & Casualty Co. (UFCS), with the latter to obtain the former. Per the SEC, in or around June 2010, Mercer Insurance director H. Thomas Davis Jr. found out about the talks between the two insurance companies and then allegedly tipped business associate/friend Mark W. Baggett, who then allegedly tipped golfing partner Kenneth Wrangell. Baggett and Wrangell then bought Mercer stock that they sold when the merger became public in November of that year. The Commission says they made over $83,000 in illegal profits.

Wrangell, who reportedly went into a cooperation deal with SEC investigators right away when they approached him about the insider trading, saw his penalty reduced to $11,380.39. His disgorgement remains at is $42,521.55. This agreement led to the quick gathering of evidence and settlements against the other two men. In addition to a bar from working for a public company as a director or officer, Davis has consented to be severally and jointly liable for the disgorgement of $41,584.45, which were Baggett’s profits, in addition to a $41,584.45 penalty and prejudgment interest.) Baggett will also pay disgorgement and a penalty.

In a Pennsylvania insider trading case, a district court has decided not to dismiss criminal securities fraud charges against Timothy McGee, who allegedly traded securities in a merger target using information that he obtained from a fellow Alcoholics Anonymous member. Judge Tim Savage found that the prosecution alleged enough facts to support that there was a relationship of confidence/trust between the defendant and his tipster.

The SEC had accused McGee and four direct/indirect tippees of trading stock using information that he had obtained by from executive of the merger target. That person allegedly told McGee that he was worried about his sobriety because of his company’s pending acquisition. The US Attorney’s Office went on to indict McGee on perjury and securities fraud charges over this alleged misconduct.

He has fought to get the securities fraud charge thrown out claiming that the indictment failed to allege that the confidential relationship between him and the tipster existed. However, the court said that it was a jury’s job to determine whether insider information was given and what was the context of the relationship. The court also turned down McGee’s challenge to 1934 Securities Exchange Act Rule 10b5-2, which was what he was charged under. He contended that it was a rule that was unconstitutionally void.

In a different insider trading case, the SEC said that the U.S. District Court for the Southern District of New York has approved its request for an emergency asset freeze order against broker Waldyr Da Silva Prado Neto. He is accused of engaging in insider trading based on information that he obtained from a brokerage customer prior to Burger King’s announcement that 3G Capital Partners Ltd., a private equity fund, was acquiring it.

Prado was allegedly working for Wells Fargo (WFC) when he found out about the takeover from the client, who had put $50 million in the fund that was used to acquire the hamburger chain in 2010. The Commission says that between May and September of that year, the Brazilian citizen traded in Burger King stock and made $175,000 in illegal earnings. He also is accused of tipping other people. both in Brazil and abroad, and they, too, allegedly traded on the insider tip (one of them made $1.68 million).

The SEC wanted asset freeze to keep Prado, who had recently left his job at Morgan Stanley Smith Barney, from moving more of his assets outside the country. However, the SEC noted that our national borders will not stop it from fighting against insider trading that takes place in the US.

Director, His Tippees Settle SEC Suit They Traded on Inside Merger Information, BNA Bloomberg, September 24, 2012

United States v. McGee (PDF)

SEC v. Prado (PDF)

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