Risk & Compliance

SEC Alleges Pre-merger Insider Trading

Former audit committee chairman exercised call options days before his company announced a merger, according to the commission.
Stephen Taub and Dave CookFebruary 7, 2007

The Securities and Exchange Commission announced on Wednesday that it has charged Donald A. Erickson, former audit committee chairman of oil and gas producer Magnum Hunter Resources, with unlawful insider trading before the company’s 2005 merger with Cimarex Energy.

In its complaint, the SEC alleged that in December 2004, Magnum was exploring a possible merger or sale of the company, and that Erickson was briefed regularly on the status of negotiations and participated in key decisions regarding the Cimarex deal.

According to the commission, in late December Erickson purchased Magnum call options, and in January — one day after he attended a board meeting that addressed the status of negotiations with Cimarex, and two trading days before the public announcement of the merger — Erickson exercised his call options and acquired 30,000 shares of Magnum stock.

The commission alleged that Erickson purchased and exercised the options based on material, nonpublic information about Magnum’s merger negotiations and, ultimately, the Cimarex deal; failed to report his options purchases to the SEC, as required of corporate insiders; and was tardy in disclosing the exercise of those options to the SEC. The regulator also accused Erickson of ultimately making a materially false disclosure by indicating that he had exercised the options after the merger announcement.

The SEC, which filed its action in U.S. District Court for the Northern District of Texas, is seeking a permanent injunction against Erickson, disgorgement, prejudgment interest, civil money penalties, and an officer-and-director bar.

Erickson, now president of valuation consulting and financial advisory firm Erickson Partners, could not immediately be reached for comment.