M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

A Member of the Law Professor Blogs Network

Tuesday, June 17, 2014

Equity options and insider trading

I am shocked! Shocked that there is insider trading in advance of merger announcements! OK, so I'm not.  But, what is surprising is just how much of that insider trading happens via equity options.  Seriously.  I know you can make a lot of money in equity options, but you're also going to get caught.  Anyway, there is a new study by Augustin, Brenner and Subramanian, Informed Options Trading Prior to M&A Announcements: Insider Trading?  I think that's a rhetorical question.  Here's the abstract: 

Abstract: We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash offers for large target firrms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.

Three in a trillion?  Those are pretty long odds.  You'd be better off buying a lottery ticket than replicating the results they find here in the absence of material inside information ... a lottery ticket! It's odd, because it's so dumb of the traders, but the authors find that in the run-up to an announcement of a merger, there is increased abnormal trading volume in single equity options of the target.  If it's not obvious, that means if you are in possession of material non-public information and you are trading in single equity options prior to a merger announcement, you might as call the SEC and tell them to arrest you.

-bjmq

 

 

June 17, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, June 2, 2014

Athletes, celebrities and insider trading investigations

The news over the weekend that Phil Mickelson is subject of an insider trading investigation is surprising and not surprising at the same time.  Celebrities and high profile athletes will naturally attract a lot of investigator attention when their names show up on lists of suspect trades.   Imagine you are a FINRA staffer and your job involves scanning lists of hundreds of names of people involved in suspect trades.  Frankly, it can be a boring job.  Not all that different from doc review or a never ending diligence exercise.  Of course, if a name that looks familiar pops up on a list, you are definitely going to stop and take a look.  Who wouldn't? 

Add to that the pedagogic effect of possibly catching a high profile athelete/celebrity with their hand in the cookie jar. Prosecution of such cases doesn't only make a career, but it's also going to send a much bigger message to the trading public about insider trading than prosecuting an anonymous hedge fund trader.  So, there are real incentives for prosecutors to run down every lead when the name of a high profile individual pops up on a suspect trade list. 

Of course, having one's name on a suspect trade list is not the same as actually engaging in insider trading. Don't get me wrong.  If you are a deal lawyer, you never want to see you father's name turn up on a suspect trade list of a deal that you've been working on.  That will take you down a long, dark road to be sure. 

No, what I mean is that since the news of the Phil Mickelson investigation has leaked, precious little evidence beyond the fact that Mickelson may have traded in Clorox stock options in the week before Carl Icahn announced his intent to acquire Clorox in 2011.  Given how thin the market for single stock options are, it's not good - really not good - that Mickelson happened to buy call options just before announcement of a potential acquisition.  That's going to mean a huge legal bill for Mickelson as he explains himself to the SEC, but that, in and of itself, is not going to be enough to tag Mickelson with any liability.  

To get to liability - exam review for students who just took my exam - the SEC will first have to find someone with a fiduciary duty to the source of the information.  Second, the SEC will have to prove that the person with the information about Icahn's bid actually tipped Mickelson (let's make this sumple and not daisy-chain the information, yet).  Third, that the when tipping Mickelson the source of the information received a "personal benefit" and therefore breached his or her fiduciuary duty to the source.  And then finally, that when Mickelson traded on the information, he knew or should have known that the information he received was tainted because it was inside information received via a breach.  That's a lot of dots to connect. And  so far, there's not a lot of ink to connect them.

-bjmq 

 

June 2, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, May 12, 2014

This time ... LinkedIn

This time it's LinkedIn!

It was late on a Tuesday in September last year when one of his young client service team handed him the daily transaction report and said: ''Boss, you better take a look at this.''

Mr Kerr’s team had noticed one of their clients, National Australia Bank associate director Lukas Kamay, was making sizable bets on the Australian dollar, minutes and sometimes seconds before the announcement of significant economic news. Mr Kerr, the founder and owner of Pepperstone Financial, looked up Kamay’s profile via his gold LinkedIn account and found he was friends with an Australia Bureau of Statistics employee Christopher Hill through Monash University. “That was when it suddenly clicked that this guy was only trading ABS data and had a man on the inside,” Kerr told Fairfax Media from his Gippsland farm on Sunday.

Years ago, connecting the dots for investigators was hard. It required lots of guys sitting around with index cards, cross-referencing names and schools and places of birth.  They were lucky to catch anyone.  Now?  They just look you up on LinkedIn.

OK, back to grading exams.

-bjmq

May 12, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, April 24, 2014

Ackman on insider trading

Just in time for final exams, Bill Ackman schools CNBC on insider trading rules and the misappropriation theory while discussing his combined bid with Valeant for Allergan. For those of you who can't do video, here's a write up care of the Times:

“The way the rules work is, you’re actually permitted to trade on inside information as long as you didn’t receive the information from someone who breached a fiduciary duty or a duty of confidentiality, et cetera”

-bjmq

April 24, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 19, 2014

Life tip: Insider trading edition

So, if you find yourself standing in the middle of Grand Central Station eating Post-It notes in order to destroy evidence, I have a life tip for you.  Something has gone terribly wrong and you should reconsider what you're doing.

That bit of million dollar advice alas comes a little too late for three characters involved in the latest insider trading shenanigans to be uncovered by the SEC.  As alleged by the SEC:

The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals. 

Here's the civil complaint and then the criminal complaint.

-bjmq

March 19, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 4, 2013

Waksal out and about

First day of classes...this semester, I've brought the traveling roadshow down Commonwealth Ave to BU.  They will soon get to know what I think about the following topic...  Sam Waksal - (memba him?!) is now out and about and making the rounds on Bloomberg TV.  He calls his insider trading conviction a "personal event." Okay, then.   Thankfully, his insider trading conviction appears to have changed his approach to business... 

 

-bjmq

 

September 4, 2013 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, July 1, 2013

Your boyfriend's a bum

Maybe it's just me, but there have got to be other fish in the sea.  You want my advice? Don't marry him, dump him. He's a bum.

On July 1, 2013, the Securities and Exchange Commission announced that it charged a former officer of The Dow Chemical Company (Dow), his long-time friend, and a broker with insider trading that generated more than $1 million in illicit profits based on confidential information ahead of Dow's acquisition of Rohm & Haas Co. (Rohm)....

The SEC's complaint alleges that [Mack] Murrell, who was the Vice President of Information Systems for Dow, obtained confidential details about the acquisition of Rohm from his then live-in girlfriend, now wife, who was the administrative assistant to Dow's Chief Financial Officer at the time. Murrell's girlfriend knew about and worked on the pending acquisition. The complaint alleges that the day after learning from his girlfriend of a special Board meeting at which the Rohm acquisition was discussed, Murrell tipped his long-time friend [David] Teekell during a telephone call. Immediately following the telephone call, Teekell called [Charles] Adams, his broker at Raymond James, and tipped him.

The complaint further alleges that the next business day after learning of the pending acquisition, Teekell and Adams began purchasing common stock and call options in Rohm. In addition to purchasing call options in his own account, Adams purchased stock in two discretionary customer accounts. Teekell's and Adams' purchases continued until the day before the acquisition announcement on July 10, 2008, when the price of Rohm stock jumped 64 percent. Teekell made an illicit profit of $534,526 and Adams and his discretionary customers made illicit profits of $107,043 through the insider trading. Raymond James made illicit profits of $373,497 when Teekell and Adams decided not to keep certain Rohm options that Adams had purchased in Teekell's account.

Here. Call options...again with the call options...sheesh.

-bjmq

 

July 1, 2013 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Thursday, June 6, 2013

FB bites idiot inside trader in ass

This came across the Twitter-machine while I was sitting in the 8th Annual Carroll School Finance Conference this morning:  

The Securities and Exchange Commission today announced an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.

OK, so this guy is an idiot of huge proportions.  Why?  Well, because he was asking to get caught.  It's really, really awful. OK, so first and foremost.  This guy doesn't have a trading account until May 10 when he opened one.  It seems he was in quite a hurry to get started trading, too. According to the complaint:

On May 17, 2013, Rungruangnavarat e-mailed Interactive Brokers and inquired whether the account was open. Rungruangnavarat wrote: "Please let me know if the account opening is done, so i can start funding the account. I want to trade US options, so please confirm if my account is readily trad-able [sic]."

R. then funded the account to the tune of $2.92 million. He immediately started trading -- however, only exclusively in Smithfield call options and futures.  Nothing else.  OK, so he's a little single minded. 

And when R. traded, he swamped the market - making up almost 80% or so of all July 29 call options and 99%(!) of all July 30 call option trades cleared in the month of May.  What?!  That's right, he might as well have put a "kick me" sign on his butt.  If that weren't enough, R. also purchases Smithfield futures.  There his purchases were 100% of the total cleared market. Ugh. He cornered the market in Smithfield options and futures and made a 3,400% when the acquisition was announced.

OK, so maybe he is just a bright guy sitting in Bangkok with a good idea.  Yeah, maybe.  The SEC complaint drops this little tidbit:

Rungruangnavarat has a Facebook friend who is a former employee ofthe company where Rungruangnavarat works, and who is an associate director at the Thai investment bank that advised Charoen on its contemplated Smithfield bid.

Bit in the ass by Facebook. Idiot.

-bjmq

June 6, 2013 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, January 4, 2013

Insider trading lawyer disbarred

You remember that former Wilson, Skadden, Cravath, Fried Frank associate who pleaded guilty to insider trading last year?  He got 12 years.  Oh, and he just got disbarred, too.  Word to the wise starting a new career...

-bjmq

January 4, 2013 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, November 26, 2012

Perfect Hedge Update

 

As the Feds turn their sites to big fish, Reuters talks to the FBI about Operation Perfect Hedge ... "only the tip of the iceberg":

Message:  "We're out there and we're going to continue to be out there."

-bjmq

November 26, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 20, 2012

High school buddies in alleged insider trading ring.

Be careful when you start thinking like this:

"At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."

Chances are, once the SEC picks that up, you'll be next.  That's the lesson this group of high school buddies is learning now.  

Here's the complaint.

-bjmq

November 20, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, September 28, 2012

Idiot investment analysts

OK, so you've heard this from me before....and this is directed at all those juniors about to start.  Don't do it.  Sure, there are lots of academic debates about why insider trading is ok. I get that.  But don't do it.  Today's installment:  idiot former investment analysts. Did you pick that up?  Former.   In any event, the SEC just charged Jason Lee and his friends from college, one of whom lived in the saame condo complex with him, with insider trading.  The complaint itself is full of lots of cicumstantial evidence.  It doesn't look like the giovernment had access to a wiretap or that any of the alleged co-conspirators has flipped, so the case is a series of internal investment emails lining up with times of cell phone calls and text messages, the kind of stuff you get from a pen register, and bank cash withdrawals and deposits.

In any event, this is where everything seems to go really south for Jason Lee:

JLee1

 

OK, so a decision point for Lee.  Come clean and say that you know Chen.  Or ... well ...

 

JLee2

 

 Yeah ... this isn't going to turn out well.  Don't do it.  It's not a good career choice.  Ok, off my soapbox.

-bjmq

September 28, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, August 2, 2012

Sigh ... more idiot inside traders

OK ... I know I've said that if you are going to trade on inside information that you should trade in call options, cause you're just going to swamp the market and put a target on your back.  But, here's a tip I thought I wouldn't have to give you.  If you are going to trade on inside information, please don't use your work computer to do the following searches: 

"can option be traced to purchaser?" 
"can stock option be traced to purchase inside trading" 
"how to detect can stock option be traced to purchase inside trading"
"insider trading options" 
"insider trading options trace"
"illegal insider trading options trace"
"insider trading options trace illegal"

Can you say "scienter"?  

You'd think it would go without saying, but apparently not everyone is smart enough to simply not trade on inside information.  In fact, some people are stupid enough to do internet research from the office computers before doing the deed.  You think I'm kidding?  Well, the SEC has just charged a Bristol-Meyers-Squib executive with trading on inside information in advance of a series of acquisitions.

Just don't do it.

-bjmq

 

August 2, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 9, 2012

Bad paralegal

What?! You think only lawyers can be idiots? The first two paragraphs of the SEC's complaint tells you more than you need to know:

This case involves insider trading in the securities of Semitool, Inc., a semiconductor manufacturer based in Kalispell, Montana that was acquired in a tender offer by Applied Materials, Inc. in December 2009. Beginning in at least October 2009, defendant Angela Milliard, a legal assistant at Semitool, learned confidential information regarding the terms and timing of the acquisition. Basedon this information, Angela Milliard secretly wired $38,000 to her boyfriend's account and purchased 5,400 Semitool shares in the account, as well as 300 Semitool shares in her own brokerage account. Angela also tipped her father, defendant Kenneth Milliard, about the then-secret acquisition, and he purchased 10,800 Semitool shares and helped other family members purchase another 4,000 Semitool shares.

When the acquisition was publicly announced on November 17, 2009, the company's stock price jumped over 30 percent, and defendants immediately profited that day, selling all of their Semitool shares for total realized profits of $68,160.

This being the end of exams and the start of graduation season, I suppose it's as good a time as any to give some good advice to recent law grads.  This year, I'll give it in the form of a link to a memo written seven years ago to employees of public corporations, titled Your Future (or Lack Thereof).

-bjmq

 

May 9, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, February 23, 2012

Insider trading - an insider's perspective

Thanks to Garrett Bauer for visting the law school today to speak with my students. Lessons worth learning early in one's career.

-bjmq

 

 

February 23, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 22, 2012

Insider trading investigations far from over

I don't usually troll the Fox Biz sites, but this caught my eye.  Apparently, the recent insider trading investigations are far from over.  According to Charlie Gasparino, the DOJ/SEC have only just begun:

   --They have “scheduled out” cases for the next five years, meaning that the use of wire taps and informants have netted far more cases than they had originally thought.

    --Though it’s difficult to predict future case loads, law enforcement officials are in general agreement that “hundreds” of additional people could be charged in the years ahead. “In five years, we can easily see hundreds of people arrested and charged,” another senior law enforcement official told FOX Business.

Scheduled out for years?  Wow.

-bjmq

February 22, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, February 9, 2012

Insider trading review -- 2011

MoFo has the definitive overview of insider trading prosecutions over 2011: Galleon, Octopussy, Kluger, all of it.  Get it here.

-bjmq

February 9, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 18, 2012

Galleon 2.0: Watch it live

You can watch Preet Bharara's press conference announcing the Galleon 2.0 insider trading arrests here (1:00pm, ET):

 

"A circle of friends who formed a lucrative club...to make $62 million in profits ..." That's as big as Galleon. That made all that money on trades related to Dell.  Wow.

Three of the seven defendants have already pleaded guilty and are cooperating.

Bharara says that the group's trading in advance of Dell earnings announcements was "the big illegal short". Too cute.

Bharara

"But cheating on the test and getting away with it are two different things."

Here is the civil complaint filed by the SEC against Level Global, Diambondback Capital, and the seven individual defendants in the criminal case.

-bjmq

January 18, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 17, 2012

Hedge funds, M&A, and private information

In their new paper, Hedge Funds in M&A Deals, Dai, et al find evidence "consistent with informed abnormal short selling" by hedge funds prior to M&A announcements. The authors observe larger stakes where there is evidence of private information.  I'm shocked. ... Actually I'm not really shocked, given what's come out over the past year or two.

Abstract: This paper investigates recent allegations regarding the misuse of private insider information by hedge funds prior to the public announcement of M&A deals. We analyze this issue by using a unique and comprehensive data set which allows us to analyze the trading pattern of hedge funds around corporate mergers and acquisitions in both the equity and derivatives markets. In general, our results are consistent with hedge funds, with short-term investment horizons (henceforth, short-term hedge funds) taking advantage of private information and engaging in trading based on such information. We show that short-term hedge funds holdings of a target’s shares in the quarter prior to the M&A announcement date are positively related to the profitability of the deal as measured by the target premium. In addition, we also find that the target price run-up before the deal announcement date is significantly greater for deals with greater short term hedge fund holdings. We also find evidence consistent with informed abnormal short selling and put buying in the corresponding acquirer’s stock prior to M&A announcements. This is particularly evident when hedge funds take larger stakes in target firms. In addition, we show that such a strategy is potentially very profitable. We consider alternative explanations for such short term hedge fund holdings in target firms; however our results seem inconsistent with these alternative explanations but rather, seem to be consistent with trading based on insider information. Overall, our results have important implications regarding the recent policy debate on hedge fund regulation.

-bjmq

January 17, 2012 in Hedge Funds, Insider Trading, Mergers | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 11, 2012

Representative plaintiff sanctioned for improper trading

After Calix, Inc. announced its acquisition of Occam Networks, Inc. in September 2010 the by now usual lawsuit appeared to challenge the transaction. One of the representative plaintiffs in this case was Michael Steinhardt, a hedge fund investor, described as "one of the most successful investors in the history of Wall Street" and an Occam shareholder.  The suit alleged that the directors of Occam violated their fiduciary duties to the corporation when they agreed to sell the corporation to Calix at an "unfair price."  OK, so far, so good.  Well, not good, but expected. You know what I mean.  In any event, the plaintiffs pursued their case and were permitted to take discovery subject to a confidentiality order. That order read, in part:

Confidential Discovery Material, or information derived therefrom, shall be used solely for purposes of this Litigation and in an appraisal proceeding that Plaintiffs in this Litigation may file . . . . Confidential Discovery Material shall not be used for any other purpose, including, without limitation, for any business or commercial purpose or for any other litigation or proceeding. Confidential Discovery Material Parties and non-parties who receive Confidential Discovery Material shall not purchase, sell, or otherwise trade in the securities of any company, including but not limited to Occam and Calix, on the basis of confidential information contained in the Confidential Discovery Material to the extent such information is still confidential at the time of such purchase, sale or trade. 

Of course, with an order like this and with sophisticated investors like Steinhardt, you can only guess what happened next.  That's right, after Steinhardt was in possession of confidential information (via one of his co-plaintiffs) he began to short Calix common stock. When the Calix defendants found out that Steinhardt had shorted their stock they moved in the Delaware Chancery Court for sanctions against him. 

Last Friday, Vice Chancellor Laster sanctioned Steinhardt for trading in violation of the confidentiality order (Steinhardt Sanctions Opinion).  The sanctions Steinhardt and his funds for improper trading include:

 (i) dismissal from the case with prejudice and barred from receiving any recovery from the litigation; 
(ii) requirement to self-report their improper trading to the SEC;
(iii) requirment to disclose their improper trading in any future application to serve as lead plaintiff; and
(iv) an order to disgorge their trading profits (approximately $500,000).

Lesson?  If you are going to be a representative plaintiff in one of these transaction related lawsuits, you can't trade in the stock of the either the acquirer or the target during the pendancy of the litigation.  That seems pretty straightforward.  You'd have thought Steinhardt would have already known that.

-bjmq

January 11, 2012 in Insider Trading, Litigation | Permalink | Comments (0) | TrackBack (0)