Saturday, August 6, 2005

Does This Sound Like Insider Trading?

The SEC filed an emergency action in the U.S. District Court for the Southern District of New York (it's favorite jurisdiction) to freeze an account that traded in call options in Reebok stock in the two days before the company announced that it would be acquired by Adidas in a friendly takeover, which caused Reebok to rise approximately 30%.  According to the Commission's Litigation Release (here), an account in the name of Sonja Anticevic, who lives in Croatia, purchased 1,997 out-of-the-money Reebok call options on Aug. 1 and 2 at a cost of approximately $130,000.  On Aug. 3, after the Adidas-Reebok announcement hit the market, the account sold out its options position for a profit of approximately $2.04 million.  That is a 1,500% gain on a two-day investment, and I won't even try to figure out what that is annualized, but  be assured that ponzi schemes have promised a whole lot less.  Needless to say, this type of trading gets the SEC's attention in a hurry, mainly because the options market makers are out a whole lot of money and demand some measure of protection.

The Commission received a temporary restraining order (here) preventing the proceeds from being transferred out of the account after the broker received an order to wire $870,000 into an account in Salzburg, Austria.  Adidas is headquartered in southern Germany, only a couple hours drive from Salzburg, so it would not be surprising if a leak about the deal came from that side of the deal.  If form holds, the Commission will seek to have Ms. Anticevic or any other claimant to the account appear at a deposition in the United States, thereby submitting to the jurisdiction of the U.S. Courts and, more ominously, risk having FBI or Postal Inspectors waiting with an arrest warrant.  That prospect is usually enough to result in a default judgment and forfeiture of the proceeds, which can be returned to the options market makers. (ph)

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