[ by Howard Haykin ]

The SEC obtained an emergency court order freezing assets in a Goldman Sachs trading account that is suspected of insider trading in H.J. Heinz securities.  The SEC’s immediate action ensures that potentially illegal profits of more than $1.7 million cannot be siphoned out of this account, that's apparently registered to Zurich, Switzerland-based customers.  

In an SEC complaint filed in federal court in Manhattan, it's alleged that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company ("Heinz") 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% and trading volume increased more than 1,700% 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.”  -- Daniel Hawke, Chief of Enforcement’s Market Abuse Unit.

SEC Findings and Allegations.   This is an insider trading case involving highly suspicious trading in call option contracts ("calls") of Heinz by the unnamed Defendants just prior to the 2/14/13 announcement that Heinz had entered into an agreement to be acquired for $72.50 per share by an investment consortium comprised of Berkshire Hathaway and 3G Capital Partners Ltd.  The $72.50 per share price represented nearly a 20% premium to Heinz's closing share price on Wednesday, 2/13.

The Defendants - their identities unknown - in this action are either foreign traders or traders trading through foreign accounts whose timely purchases of Heinz calls generated unrealized profits of over $1.7 million.  On information and belief, the Defendants are either located or trading through accounts located in Zurich, Switzerland.  As set forth in the SEC complaint, the trading was conducted through an omnibus account located in Zurich, Switzerland in the name of GS Bank IC Buy Open List Options GS & Co c/o Zurich Office (the "GS Account").

The highly suspicious timing and size of the trades led the SEC to suspect that the traders were in possession of material nonpublic information about the impending acquisition.  They purchased out-of-the-money Heinz call options one day before the announcement even though they had no history of trading Heinz securities in the last 6 months, and overall trading activity in Heinz call options for the several days prior to the announcement had been minimal.  Specifically, the events flowed, as follows:

• On Wednesday, 2/13, Defendants purchased 2,533 out-of-the money June $65 calls costing nearly $90,000.
• Between 9/1/12 and 2/13/13, the account through which the Defendants traded had no prior history of trading in Heinz.
• The 213 trading represented a drastic increase in the volume of June $65 calls traded.
• On 2/12, for example, only 14 June $65 calls were purchased;  on 2/11, no options were purchased.
• After the announcement, the price of June $65 calls surged over 1,700%, making the initial $90K investment now worth over $1.8 million.

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.

SEC Staff Credits.   An expedited SEC investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David Brown, Diana Tani in the L.A. Regional Office, with substantial assistance from Charles Riely, Market Abuse Unit member in the NY Regional Office.  Mr. Riely will handle the SEC’s litigation. Assitance also provided by the Options Regulatory Surveillance Authority (ORSA).

For further details, go to:   [ SEC PR 13-24, 2/15/13 ]    [ SEC Complaint ]         [ Reuters, 1/15/13 ].