M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, September 22, 2009

Perot Systems Option Trading Raises Questions

By way of warning, I tell students in my Acquisitions Workshop that it's always a bad to start your legal career by engaging in insider trading.  Then we launch into a discussion of the David Li (News Corp/WSJ case) and the too-good-for-Hollywood Pacjin case and the Edelman case.  

The key lesson of the discussion is, obviously, that M&A lawyers need to learn discretion when it comes to their clients' confidences and pending transactions. If you have inside information about a pending transaction, of course, you don't trade on it.  Moreover, a discrete lawyer doesn't blab all about the transaction to their seat-mates on flights across the Pacific and certainly doesn't tell their good-for-nothing boyfriend about it.  

The second, less obvious, lesson is that if you are going to trade on inside information, well then, for heaven's sake don't trade options!  

Someone with inside information about the just announced Perot Systems/Dell transaction is going to learn that second lesson the hard way.  Bloomberg is reporting a spike in options trading just prior to announcement of the deal:

Calls volume climbed to 2,539 contracts, or 242 times the four-week average, according to data compiled by Bloomberg. Only 10 puts traded that day, the data show. The shares, which rose 0.1 percent to $17.91 on Sept. 18, surged 65% to $29.62 at 11:03 a.m. New York time today.

Options are usually so thinly traded that anyone greedy enough to try to make money on inside information by trading options ahead of an M&A announcement is just asking for trouble.  I suppose since one can make much more money on an equivalent investment using options rather than stock it's just too much to resist.  Better yet, if you've got inside information, sit on it.  



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