Thursday, August 31, 2006
Maybe he didn't think he was doing anything wrong, or perhaps just fell asleep at the switch, but one expects more from a CFO, so whatever caused Tom Mitchell to buy a piddling amount of stock in a company has turned out not to be worth the hassle. Mitchell was CFO of Ferguson Enterprises, a large plumbing distributor, and bought 1,454 shares of Noland Company in 2005 while Ferguson was considering making a tender offer for Noland. He bought the shares in his account and those of two sons, so if he was trying to cover his tracks he didn't do a very good job. Interestingly, Ferguson passed on the acquisition, but another company did buy Noland, and the sale of the shares netted Mitchell a profit of $35,214. He settled the SEC civil fraud case and agreed to disgorge his profits and pay a one-time penalty.
An interesting aspect of the case is that the profits were not derived from the inside information on which Mitchell traded, but on a different transaction about which he does not appear to have had any knowledge, except perhaps that Noland was "in play." The fraud in insider trading occurs when the fiduciary trades on the material nonpublic information, not when a profit is realized, so the violation of the antifraud provisions of the securities laws occurred regardless of the outcome of the trade. Mitchell may have been able to make a good argument that his profits were not from the violation, however, but just the luck of having traded on information that never came to fruition and then holding the shares as an investment. Perhaps good in theory, but probably not worth fighting over in a case that settled for less than $75,000. Accident or mistake, the trading certainly doesn't make the former CFO look good. The SEC Litigation Release (here) describes the settlement. (ph)