The US Securities and Exchange Commission (SEC) sued unknown traders over “suspicious trading” in HJ Heinz Co just a day before Warren Buffett and 3G Capital Inc announced a US$23 billion takeover of the ketchup maker.
The commission alleged in a complaint filed on Friday in Manhattan federal court that the traders earned US$1.7 million by purchasing Heinz stock just before the announcement was made.
The trading in the deal, which Heinz and 3G said is the largest ever in the food industry, was carried out through a Zurich, Switzerland-based account and involved call-option contracts, the commission said.
Trading in the options gives the right to buy the underlying shares and profit when the stock rises.
The timing and size of the trades were deemed highly suspicious by the commission because the accounts through which the traders purchased the options had no history of trading Heinz securities in the last six months.
“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, of the commission’s enforcement division’s market-abuse unit, said in a statement.
The commission on Friday said it had obtained an emergency court order to freeze assets in the Zurich-based account. The account used by the defendants was identified in the complaint as “Switzerland GS Bank IC Buy Open List Options GS & CO c/o Zurich Office.”
Tiffany Galvin, a spokeswoman for Goldman Sachs Group Inc, said the bank is “cooperating with the SEC’s investigation.”
The order prohibits the traders from destroying any evidence and the commission seeks a final judgment ordering them to disgorge their ill-gotten gains with interest, financial penalties and a permanent ban from future violations.
“Despite the obvious logistical challenges of investigating traders 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 assets unfrozen,” said Sanjay Wadhwa, senior associate director of the commission’s New York Office.
The commission alleges the defendants invested almost US$90,000 in option positions the day before the deal was announced. As a result, their position increased to more than US$1.8 million, a rise of almost 2,000 percent in one day.
The commission said that the traders had material non-public information about the impending deal when they used an omnibus account in Zurich to buy 2,533 out-of-the-money call options, which had a strike price of US$65 on Wednesday. Shares closed that day at US$60.48.
The purchase of these so-called “June US$65 call options,” which expire on June 22, was highly unusual, the commission said. On Tuesday, only 14 were purchased, regulators said, while on Monday, no such options were bought. Since Nov. 14 last year, no more than 61 such contracts had been purchased on any other single day, the commission said.
Heinz shares jumped 20 percent to US$72.50 on Thursday following the announcement that Buffett’s Berkshire Hathaway Inc and Jorge Paulo Lemann’s 3G Capital agreed to buy the Pittsburgh-based company.
As a result of the takeover announcement, the price of the June call options jumped to a close of US$7.33 on Thursday from US0.40 the day before, an increase of more than 1,700 percent.
Trading volume skyrocketed on Thursday on news of the acquisition, the commission alleged, reaching more than 64 million shares, an increase of more than 1,700 percent.
The increase was the highest level since Jan. 31, according to data compiled by Bloomberg.
“The timing, size and profitability of the defendants’ trades, as well as the lack of prior history of significant trading in Heinz,” made the transactions “highly suspicious,” the commission said in its complaint, which accuses the unnamed defendants of violating the US’ Exchange Act.
Neither 3G nor any of its employees have been accused of wrongdoing.