The US Securities and Exchange Commission has launched legal action against unknown traders over claims they broke rules when trading in Heinz options before the US$28bn deal to buy the food giant was announced.
The SEC claims traders had information about the transaction ahead of the announcement when they bought call options on Heinz's shares on Wednesday (13 February), 24 hours before the ketchup firm revealed the takeover bid.
A Swiss account through which the SEC claims Heinz options were traded has been frozen. The SEC said the account reaped over $1.7m from trading in the options before Heinz's deal with Warren Buffett's Berkshire Hathaway and private-equity firm 3G Capital was announced on Thursday.
The regulator said the timing and the size of the trades was "highly suspicious". It said the account through which the options were purchased had not traded in in Heinz securities in the last six months. Trading in Heinz call options in the days before the deal was announced had been "minimal", it said on Friday.
"Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential non-public information," Daniel Hawke, chief of the SEC's market abuse unit within the regulator's division of enforcement, said.
The SEC wants the court to order the traders to pay back their "ill-gotten gains with interest" and pay financial penalties.
SEC Freezes Assets in Swiss-Based Account Used in Suspected Insider Trading Ahead of Heinz Acquisition
FOR IMMEDIATE RELEASE
2013-24
Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.
Additional Materials SEC Complaint
The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.
In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.
“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen.”
The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.
The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.
The SEC’s expedited investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles Regional Office with substantial assistance from Charles Riely, Market Abuse Unit member in the New York Regional Office who will handle the SEC’s litigation. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority (ORSA).
