Insider trading of stock: a new case for SEC?
The Securities and Exchange Commission (SEC) says it wants to crack down on insider trading of corporate stock. Within the past few years, it has been successful in prosecuting more cases in which corporate officials or their relatives and friends have illegally traded company stock on the basis of important nonpublic information. Here's a new case for it to dig its investigative teeth into.
On Monday, Dec. 14, the MGIC Investment Corporation, a Milwaukee-based private insurance company, announced it had agreed to be taken over by Baldwin United, a Cincinnati-based financial services firm, for $1.2 billion.
As early as last Wednesday, Dec. 9, however, the stock was already beginning to act like a yo-yo, reacting to rumors that the company was close to announcing a merger. Trading volume that day totaled 153,300 shares, as the stock climbed 11/8 to close at 435/8. Normal trading volume in the stock varied sharply, depending on the rumors. For example, last week daily volume averaged 161,200 shares and for the week of Nov. 20, volume ran only 77,860 shares per day. Over a five-week period, volume averaged 115,480 shares per day.
On Thursday, Dec. 10, volume increased to 196,400 shares and the stock jumped were in circulation.
For example, at Bache Halsey Stuart Shields Inc., Larry Wachtel, sitting at Bache's news desk, fielded a call from a broker who asked him for advice concerning a possible MGIC-Baldwin United merger which the broker had on good authority would take place. Later that day, Hildegard Zagorski, who sits on the news desk with Mr. Wachtel, handled another call regarding a possible MGIC-Merrill Lynch merger. In neither case did Mr. Wachtel or Ms. Zagorski recommend that the individual buy the stock, but rather warned them about all the rumors swirling around the marketplace concerning takeovers.
Reflecting on it later, Wachtel commented, ''You can go back 18 months with MGIC to when American Express made an abortive attempt to buy the company. You knew there was always that kernel of possibility that Max Karl, MGIC's chairman, would be looking for a buyer.''
On Friday, for no particular reason, the stock fell $2 a share on 243,000 shares. The company made no announcement that day and said it knew of no reason for the activity in the stock. Now the company says the merger wasn't really completed until this past weekend.
A spokesman for MGIC, John Ochotnicky, said the trading activity before the actual merger did not surprise him. ''If you follow various activities, like a securities analyst, a lot of the second-guessing turns out right. You can see the appropriateness of certain mergers, and while it may be conjecture, it often turns out to be fact. That's what financial advisers are being paid for; it's only a tribute to their understanding of how things work.''
Mr. Ochotnicky says he was not surprised by the activity in MGIC stock last week, since there had been rumors about the company's merging since the summer of 1979. Among the companies rumored to be bidding for MGIC were Northwest Industries, Merrill Lynch, and American Express. At no time did the company issue any public statements about the rumors. Mr. Ochotnicky says the actual agreement with Baldwin United took ''a couple of months'' to complete.
At the New York Stock Exchange, a spokesman says that before any takeovers are completed, it is normal for the exchange to examine the trading that took place before the announcement. Thus, trading in MGIC will be scrutinized.
In Washington, the SEC declined to comment on whether or not it would mount an investigation. Like the exchange, however, it monitors trading in stocks which occurred before the merger activity.
In fact, according to the SEC's new head of the Enforcement Division, John M. Fedders, such trading is of great interest to the commission. In a recent speech before the New York State Society of Certified Public Accountants, Mr. Fedders said that although the SEC's program to date has been successful, ''there remains widespread abuse of material nonpublic information by corporate insiders , their professional advisers, their 'tipees,' and others.'' Fedders went on to warn the investment community, ''We will not shy away from cases based on circumstantial evidence if the relevant facts demonstrated that any person breached a trust, confidence, or other duty owed another person or entity by effecting trades while in possession of insider information.''
At the SEC, an official points out that it is very hard to prove insider trading. Hard proof is difficult to obtain. The SEC's prowess in gaining proof has been improving, however. Between 1978 and 1981, the SEC successfully prosecuted 40 cases. This is more than were prosecuted from 1938 to 1978