Tags: Heinz | Trades | SEC | Lawsuit

Suspicious Heinz Trades Before Buffett Takeover Spur SEC Lawsuit

Friday, 15 Feb 2013 06:30 PM

 

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The U.S. Securities and Exchange Commission sued unknown traders over “suspicious trading” in H.J. Heinz Co. before Warren Buffett and 3G Capital Inc. announced a $23 billion takeover of the ketchup maker.

The SEC alleged in a complaint filed today in Manhattan federal court that the trading was carried out through a Switzerland-based account and involved call-option contracts. The trades netted $1.7 million, the SEC said. The agency said the traders’ names were unknown.

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“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 SEC enforcement division’s market-abuse unit, said in a statement.

Trading in the options, which give the right to buy the underlying shares and profit when the stock rises, increased Feb. 13 to the highest level since Jan. 31, according to data compiled by Bloomberg.

The SEC said it obtained an emergency court order to freeze assets in the Zurich-based account. Tiffany Galvin, a spokeswoman for Goldman Sachs Group Inc., said the bank is “cooperating with the SEC’s investigation.” The account used by the defendants was identified in the SEC complaint as “Switzerland GS Bank IC Buy Open List Options GS & CO c/o Zurich Office.”

‘Logistical Challenges’

“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 SEC’s New York Office.

The agency has been increasing its focus on insider trading by overseas buyers of U.S.-traded securities. As of December, the SEC had filed three times as many emergency asset-freeze requests in such cases since 2010 as in the prior two years. The regulator cited suspect trading patterns, typically before mergers or other market-moving news.

The SEC alleges that after not trading Heinz securities in the account for at least six months, the defendants invested almost $90,000 in option positions the day before the deal was announced. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent in one day.

Nonpublic Information

The SEC alleged that the traders had material nonpublic 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 $65 on Feb. 13. Heinz shares jumped 20 percent to $72.50 yesterday 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 $7.33 on Feb. 14 from 40 cents the day before, an increase of more than 1,700 percent.

“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 Exchange Act.

Michael Mullen, a spokesman for Heinz, declined to comment on the suit. Buffett didn’t immediately return an e-mail left with an assistant seeking comment on the complaint.

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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).


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