This perhaps goes without saying, but when the SEC’s enforcement staff call to ask about potential securities law violations, they aren’t just gathering facts, as they like to say. And it can be very hard to know what to do in response. Kenneth Wrangell got such a call recently, and it appears that he made the most of it.
Here are the facts, as laid out in three complaints the SEC filed last Thursday: H. Thomas Davis, Jr., a board member of Mercer Insurance Group, and sometime resident of Wilmington, North Carolina, learned that the company was about to be acquired by United Fire & Casualty Co., another insurer. Davis told his friend and business associate, Mark Baggett, about the impending acquisition in late 2010. Baggett then stockpiled 4,426 shares of Mercer as they moved toward the merger date. Baggett also shared details about the merger with his golfing buddy Wrangell, who then bought 4,500 shares of Mercer stock for himself. The acquisition was announced after markets closed on November 30, 2010, and the Mercer share price rose almost 50% the next day. Baggett and Wrangell, both Wilmington residents, immediately sold their holdings for illicit profits of $41,584 and $42,521 respectively.
Now, it is impossible to know exactly how the investigation unfolded. But it is likely that the SEC started with phone calls to the traders, Baggett and Wrangell. The staff probably asked them how they came to learn about Mercer Insurance Group and why it seemed to be such an attractive stock in late 2010. Wrangell appears to have spilled the beans pretty quickly. We know from the SEC’s press release:
When contacted by SEC investigators about his suspicious trading, Wrangell promptly offered significant cooperation. He provided truthful details acknowledging his own trading and entered into a cooperation agreement that resulted in direct evidence being quickly developed against Baggett and Davis. This cooperation enabled the SEC to swiftly reach settlements with all three individuals to recover ill-gotten monetary gains.
“By making the choice to cooperate with the SEC and voluntarily provide all of the necessary evidence at the outset of the investigation, Wrangell saved the SEC time and resources and himself a larger penalty,” said William P. Hicks, Associate Director in the SEC’s Atlanta Regional Office.
This sort of cooperation can be brought about by at least two things, and one is sheer panic. Wrangell might have gotten the call from the SEC, decided he really didn’t mean to sign onto securities fraud, and given up his golfing partner Baggett immediately. I heard about such immediate confessions when I was on the SEC’s enforcement staff, but was never fortunate enough to be on the other end of one. The second is a clear-eyed assessment of the case and its possible consequences by competent counsel. An attorney would examine the strength of the evidence and evaluate what it would cost to resolve the matter and the likelihood of persuading the staff not to proceed.
The typical price for an insider trading settlement is what is often called a “one-and-one.” That is, the trader pays disgorgement of the profits gained or losses avoided (the first “one”), and then pays a civil penalty equal to that amount (the second “one”). Here, Wrangell would have had to pay $42,251in disgorgement and the same amount in a penalty under the typical settlement. Instead, his quick selling out of his friends allowed him to pay a penalty of only $11,380, roughly a quarter of what he otherwise would have owed. Assuming the case was a strong one, and knowing that it would have been very expensive to litigate, Wrangell made a good deal for himself. And the SEC got to trot out its individual cooperation program again.
Davis settled the case against him by agreeing to a one-and-one for tipping Baggett to his trades, $41,584 in disgorgement and a $41,584 penalty. He also agreed to a bar against serving as an officer or director of a public company. Interestingly, while Baggett settled his case also, the parties have left the amount he will pay in disgorgement and penalty up to the court. Tipping inside information and trading on that information are two separate offenses under the securities laws, and it’s possible that Baggett could be ordered to pay what Davis paid. But the court could view that result as a sort of double recovery for the SEC, and might order much less.