Friday, July 14, 2006
The "free money" that can be made when trading in the options of a company about to be acquired is just too darn tough to resist, at least for some. On the heals of last month's SEC filing alleging insider trading by purchasers of call options in Maverick Tube right before it announced it would be taken over (see earlier post here), the Enforcement Division is now looking at trading in the two companies -- Western Gas Resources and Kerr-McGee -- that Anandarko Petroleum Corp. announced on June 23 it agreed to acquire. A Denver Post article (here) confirms that Anandarko Petroleum is cooperating with an informal SEC request for information related to the two acquisitions, and a study of the call options in both companies shows suspicious spikes in the volume right around the days when executives of each were working out the final details of the acquisitions. The story gives the example of the purchase of 322 July 50 Western Gas call options, which were slightly out of the money, the day after executives met to discuss the merger and the day before the board held a special meeting to consider the transaction; over the prior two weeks, the average daily volume for that series was 17. A similar pattern is shown in the Kerr-McGee call options, and each transaction involved a substantial premium that sent the shares of both well above the call option strike prices, meaning the purchasers realized substantial gains.
Needless to say, the SEC doesn't view winners of the call option lottery in the weeks before the announcement of an extraordinary transaction to be just lucky, and we should expect to see an insider trading action filed in the none-too-distant future. As always, the key issue for the traders is whether the U.S. Attorney's Office is in the vicinity, and the safe bet is that federal prosecutors will be monitoring the SEC investigation. (ph)