Thursday, November 3, 2005
It's an oft-repeated scenario: an offer is made for a company at a premium to its market price, and a few days later the SEC files a suit in the U.S. District Court for the Southern District of New York (effectively its home court) for a freeze on brokerage accounts through which options in the target were purchased right before the announcement. The latest example is a suit filed over the purchase of 10,000 call options in Placer Dome 5-6 days before Barrick Gold announced an unsolicited $9.2 billion bid for the company on Oct. 31. Placer Dome's stock increased by 20%, and the options increased in value by $1.9 million. Needless to say, the options market makers for Placer Dome raised the roof over that kind of gain in only a few trading days, and the SEC responded by filing an emergency action to freeze the accounts. According to a Bloomberg story (here), the trading was through accounts at a Swiss asset management firm, and it is unlikely the true owners will identify themselves any time soon. Once again, it's not free money, but it's awfully tempting to reach for it. (ph)
UPDATE: The SEC Litigation Release is now available (here), and it states:
The Commission further alleges that on October 25 and 26, while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 10,000 call option contracts for Placer stock in an account at a broker-dealer in the United States. As the complaint alleges, over 5,000 call option contracts were "out of the money" and set to expire in November, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of Placer stock following the Announcement, the unrealized illicit profits on these option contracts total over $1.9 million.
Large purchases of out-of-the-money call options + $1.9 million in profits almost overnight = SEC TRO. (ph)