Questionable Insider Trading in FCX and PXP: Part III of the Investigation

Benzinga has been covering the double acquisitions by Freeport McMoRan Copper and Gold FCX of McMoRan Exploration MMR and Plains Exploration PXP fairly in depth since the deal was announced approximately one week ago. As written previously both here and here, there have been many questionable relationships in the deal that deserve answers from all of the involved parties.

Further research done along with Kai Petainen, SISU Investor, Forbes Contributor, and Teacher of Applied Quant Valuation at the prestigious Ross School of Business, has revealed one relationship that is too close to leave undisclosed. With insider trading becoming increasingly more important as a policy goal of the SEC, this story may just be the next big headline.

Thursday, Benzinga disclosed how the CLL Global Research Foundation sits in the middle of many of these directors. The Institute has many board members consisting of large donors to the program, and so it was intriguing to investigate these board members. Of all of them, one stood out.

Introduce Susan Berry Kohlas, who currently sits on the Board of Directors of the CLL Global Research Foundation. Of all of the Board members of three firms involved in the deal, she actually has no direct relation to the firms in that regard. However, per CLL's website, which can be found here, “Ms. Kohlhas serves as Managing Director and Portfolio Manager of Baldwin Investment Management, LLC. She has over 25 years of individual and institutional investment and risk management experience.” So, one of the Directors works for a private wealth management firm, that also serves as family office and provides financial planning tools.

Benzinga and Petainen were intrigued by this relationship, and therefore decided to look at Baldwin's latest SEC filings relating to its holdings. Sure enough, two of the stocks held on behalf of clients were Freeport McMoRan Copper and Gold and Plains Exploration. In fact, the firm as a whole decreased its stake in Freeport by some 22.47 percent in its latest filing, September 30, from the previous quarter and increased its stake in Plains by 22.03 percent in the same quarter. Thus, a firm that invests on behalf of its clients with an employee who is a Managing Director and Director of Research bought and sold stocks in the run up to a deal to which that specific Managing Director has links.

It is important to note that this buying and selling could be completely legal and may not be anything questionable at all. Simply, this is just another question that has been raised since the deal has come to light; the trading activity of the firm could be completely harmless. After all, a wealth management firm buys and sells on behalf of its clients, not necessarily on behalf of its employees. However, the Director of Research, who pitches investment theses to clients, being this interwoven into a rather large M&A deal that affected the share prices of all three companies raises significant questions.

Of course, this is confidential information but it would be very intriguing to see on whose behalf Baldwin is buying and selling. If any of its clients are related to the any of the involved companies and thus form a closed information loop, then many more questions would need to be raised about the trading activity. Until then, uncertainty is the theme of the day.

With all of the questions being raised over the past week or so, there is only one certainty: the deeper that journalists (and potentially regulators) dig into the deal, questions become answered but also raise many more questions that require further answers. All relevant parties, including CLL and Baldwin, have been contacted for comment by Petainen and Kanterman but have not yet replied with comment.

Courtesy of Factset Research FDS, the holdings of the two stocks by Baldwin as disclosed in its latest SEC filing are below.

Disclosure: author is long FCX and was for more than a year prior to the deal being announced and is related to a bank that advised on the deal, however the employee had no direct dealings with the transaction.