Monday, June 19, 2006

SEC Files Insider Trading Suit Over Maverick Tube Option Purchases

As identified in a St. Louis Post-Dispatch article and discussed in an earlier post (here), suspicious trading in Maverick Tube call options right before the company announced it agreed to be taken over at a 30%+ premium has triggered an SEC civil action for insider trading (complaint here).  The purchaser is Tenaris S.A., a company headquartered in Luxembourg and controlled by a parent company in Argentina.  And, not surprisingly, the trading comes from Argentina, with two sets of purchasers identified by the SEC as trading in Maverick Tube call options and stock during the relevant period.  According to the SEC complaint, the two sets of defendants are the Cavalleros of Buenos Aires and the Millers, who list a permanent address of Buenos Aires and apparently reside in Uruguay. 

The complaint does not set forth any connection between the various defendants (there are five individuals) and Tenaris, going with the geographic connection and the timing to assert "on information and belief" that they were in possession of material nonpublic information in breach of a duty of trust and confidence.  The timing evidence certainly is striking, with each group purchasing large numbers of June 06 out-of-the-money call options less than ten days before they would expire worthless -- a very risky bet, or a sure thing if you know the deal is about to be announced.  The defendants also purchased Maverick Tube common stock, transactions that were much less lucrative.  On the call option trades, the Cavalleros had a profit of over $850,000 on a $55,000 investment, while the Millers' profits were over $220,000 on an investment of a little less than $20,000.  If you annualize those investment gains, they make Warren Buffett look like a minor leaguer.

Typical of insider trading cases involving overseas defendants, the Commission obtained a Temporary Restraining Order and Asset Freeze (order here) to prevent the money from leaving the United States while the Enforcement Division continues its investigation.  Each group of defendants traded through the overseas offices of U.S.-based brokerage firms (Merrill Lynch and Wachovia), so the funds were on deposit in this country after the execution of the sale orders at the time the SEC filed suit.  The case will now move forward on an expedited discovery basis in which the Commission will try to identify the source of the material nonpublic information, if any.  I would expect Tenaris to cooperate in the investigation because it hardly does the company any good to have the SEC angry at it while it tries to complete the purchase of a U.S. corporation whose shares are publicly traded. 

As part of the SEC's discovery, the various defendants will be noticed for depositions in the United States, at which they can try to explain why their trading did not involve material nonpublic information.  If they were to show up, however, they would likely risk an immediate arrest and criminal insider trading charges.  The SEC case is being conducted out of its Chicago office, which means the U.S. Attorney's Office for the Northern District of Illinois likely would be involved on the criminal side, and somehow I expect U.S. Attorney Patrick Fitzgerald's securities/commodities group will be quite aggressive if given the chance.  A default judgment in the SEC civil action is a real possibility, leaving over $1 million on the table. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/06/sec_files_insid.html

Civil Enforcement, Insider Trading, Securities | Permalink

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