Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, December 28, 2010

SEC Obtains TRO Alleging Insider Trading in Martek Acquisition

On December 22, 2010, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Martek Biosciences Corporation (the “Unknown Purchasers”).  The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the December 21, 2010 announcement that Royal DSM N.V., a Dutch company, and Martek, a Columbia, Maryland company, had entered into an agreement under which DSM would acquire all of the outstanding common stock of Martek at a 35% premium over the previous day’s closing price.  According to the SEC, between December 10, 2010 and December 15, 2010, the Unknown Purchasers bought 2,615 Martek call option contracts through a UBS account.  The Unknown Purchasers’ buys comprised over 90% of the volume for these contracts on those days.  The complaint further alleges that, after the acquisition announcement, the price of Martek common stock increase 36% from the previous day’s closing price.  The value of the call options held by the Unknown Purchasers rose dramatically during the day.  In one instance, the options increased 2,500% in value.  The complaint alleges that, as a result, the Unknown Purchasers are in a position to realize total profits of approximately $1.2 million from the sale of the call options.

In addition to freezing the assets relating to the trading, the Temporary Restraining Order requires the Unknown Purchasers to identify themselves, imposes an expedited discovery schedule, and prohibits the defendants from destroying documents.

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