[ by Howard Haykin ]

Goldman Sachs had discouraging news for the SEC which, along with the FBI, is investigating stock options trades in H.J. Heinz & Co. that may have been based on insider information. The word from Goldman Sachs is that is has no 'direct access' to information about the beneficial owner(s) of the account in which the trades took place. 

All that's been established is that the Goldman account holder is a Zurich private wealth client.  This information was related to the SEC.  The SEC included the information in a filing to the federal district court in Lower Manhattan;  Judge Jed Rakoff is presiding over the case. 

A Time Line of Events.   On 2/13, Goldman Sachs customers purchased a large number of out-of-the-money stock option contracts in H.J. Heinz & Co. - one day ahead of the public announcement that the company had accepted a $23 billion offer from Warren Buffett's Berkshire Hathaway and 3G Capital Inc.  The options were not only out of the money, but were due to expire on Friday, 2/22. 

On Friday, 2/15 - one day after the public announcement - the options positions in this Goldman account, which by now had risen in value, were sold for a net gain of almost $1.8 million.  The trades have since settled and the account can conceivably be liquidated.

On that same day - Friday, 2/15 - the SEC filed a civil lawsuit in federal district court against “unknown” traders over the suspicious trading of Heinz’s options through what the regulator said, at the time, was an account at Goldman Sachs.  SEC staff attorney David Brown informed Goldman Sachs representatives about the agency’s plans and asked the bank to “use whatever means they have” to contact the traders.

The SEC also requested that presiding U.S. District Judge Jed Rakoff issue an emergency order temporarily freezing the assets in the account.  HE did so and the freeze took effect on 2/15.

On 2/20, SEC senior counsel Megan Bergstrom filed an update with the court.  Whatever information was known about the Goldman customer was provided to the court, along with copies of trade blotters and other documentation of the transactions.  This included a redacted copy of a trade blotter for the account described as “a Goldman Sachs omnibus firm customer facilitation account,” which shows that from 9/1/12 through 2/13/13, the only trading in Heinz occurred on the latter date. This supposedly confirmed that the timing and size of the trades were deemed highly suspicious by the SEC because the accounts through which the traders purchased the options had no history of trading Heinz securities in the prior six months.

The SEC further noted in the filing  the following:  “Goldman informed me that it does not have direct access to information about the beneficial owner or owners behind any particular transaction or position” in the account.

Lastly, on 2/20, the SEC filed a request with Judge Rakoff that he keep the assets frozen until the case is resolved, saying there is a “serious risk that the substantial proceeds from the defendants trading will leave the jurisdiction of the U.S. courts in the next few days and may never be recovered."

Rakoff said any traders who object to a permanent asset freeze must appear before him today to explain why he shouldn’t grant the SEC’s request.

Additional Information About the Trades in Question.   The trades at issue in the SEC’s lawsuit came a day before Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc. announced a $23 billion takeover of Pittsburgh-based Heinz - according to the SEC filing.  Using a Zurich-based account that involved call-option contracts, the unidentified traders’ unrealized profit was more than $1.7 million, according to the SEC.

The traders bought 2,533 out-of-the-money June call options, with a strike price of $65.  The options were due to expire the following week on Friday, 2/22.  The purchases took place on Wednesday, 2/13.   Almost $90,000 was spent purchasing the option contracts.  At the close, Heinz shares closed at $60.48. 

The SEC noted that such a large purchase of these options was highly unusual.  On 2/12, one day earlier, only 14 option contracts were purchased, while on 2/11, no such options were bought.  Since 11/14/12, no more than 61 such contracts had been purchased on any other single day, the commission said.

After the announcement the options positions rose in value to more than $1.8 million - almost a 2000% increase.

The case is U.S. Securities and Exchange Commission v. Certain Unknown Traders in Securities of H.J. Heinz Co., 13- cv-1080, U.S. District Court, Southern District of New York (Manhattan).

For further details, go to:   [Bloomberg, 2/22/13].