Federal regulators' filing says traders had inside information on acquisition
February 16, 2013 10:00 AM
At a press conference Thursday, Alex Behring, right, managing partner at 3G Capital was presented with a Heinz red Terrible Towel by William R. Johnson, chairman, president and CEO of Heinz.
By Len Boselovic Pittsburgh Post-Gazette
The Securities and Exchange Commission obtained a court order Friday freezing assets in a Swiss bank account that regulators said was used to generate more than $1.7 million in profits from trading H.J. Heinz securities in advance of news that the Pittsburgh company will be acquired.
The SEC said it does not know who the traders are, but that they are either foreigners or traders investing through foreign accounts. An SEC filing says the traders had inside information about the pending announcement that Berkshire Hathaway, whose chairman is legendary investor Warren Buffett, and 3G Capital, a New York private equity firm, intended to acquire Heinz for $28 billion. The purchase price includes the assumption of Heinz's debt.
The proposed acquisition was announced Thursday. On Wednesday, the traders purchased Heinz options whose price skyrocketed after the announcement was made, the SEC said.
The timing of the trades, the size of the purchases and the large profits "make these trades highly suspicious," the SEC said in a civil complaint filed in U.S. District Court in Manhattan. The SEC said the bank account used to make the purchases had not traded 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 M. Hawke, the head of the SEC's enforcement unit, said in a statement.
A Heinz spokesman declined comment. A spokesperson for 3G Capital did not return a phone call.
Punishing insider trading has been one of the SEC's top priorities in recent years, said Robert A. Mintz, a former federal prosecutor and white-collar crime defense attorney.
"We would expect to see this level of scrutiny continue," he said.
Mr. Mintz said it is unusual, but not unprecedented, for the SEC to seek permission to freeze a bank account so quickly after an acquisition is announced. One reason it does so is to prevent the money involved from being moved. He said that after large mergers or acquisitions are announced, the SEC routinely reviews trading activity in the securities of the companies involved in the days leading up to the announcement.
"The spike in trading just prior to this acquisition is apparently what flagged this trade for regulators," Mr. Mintz said.
The Heinz trades the SEC is reviewing involve call options, which give investors the right to acquire 100 shares of a company at a specified price by a certain date.
If the stock price rises above that price before the expiration date, the options holder profits from the difference. If it doesn't, the options are worthless.
According to the SEC complaint, the unknown traders purchased 2,533 options Wednesday that gave them the right to buy Heinz shares at $65 between now and June 22. Heinz stock closed Wednesday at $60.48, leaving the options worthless, or out of the money, at that time. The SEC said that on Tuesday investors only traded 14 of the same Heinz options. None was traded on Monday, the agency said.
Berkshire Hathaway's and 3G Capital's plans to purchase Heinz for $72.50 per share caused Heinz stock to close at $72.50 Thursday. The nearly 20 percent increase caused the value of the options to go through the roof. Priced at 40 cents at the close Wednesday, they were worth $7.33 Thursday, the SEC said.
As a result, the nearly $90,000 the unknown traders invested Wednesday was worth more than $1.8 million Thursday, the SEC said.
In addition to freezing assets in the account, the court order prohibits owners of the account from destroying evidence. The SEC also wants the traders to give back their profits and pay interest and penalties.
It is not the first time the SEC has frozen the assets of someone accused of insider trading in a deal involving 3G Capital.
In September, the SEC got a court order freezing the assets of Waldyr Da Silva Prado Neto, a Brazilian whom the agency accused of using inside information to profit by trading shares of Burger King in advance of 3G Capital's 2010 offer to acquire Burger King's stock and take the fast food operator private.
He made $175,000 by purchasing Burger King shares in advance of the offer and tipped off at least four others to the pending announcement, the SEC said.
A letter the SEC filed in December in federal court in New York indicated he had fled to Brazil and the agency was trying to locate him.