Saturday, March 3, 2007

SEC Alleges Insider Trading in TXU Call Options

The SEC filed an insider trading case against unknown purchasers of TXU Corp. call options in another example of transactions in foreign accounts buying ahead of an acquisition.  The deal to take TXU private by Kohlberg Kravis Roberts, Texas Pacific Group, and Goldman Sachs was announced on February 26, but the stock began rising the previous Friday, and eventually gained over $10 per share.  According to the Litigation Release (here):

[B]etween February 21 and February 23 -- prior to the public disclosure of the merger agreement -- while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 8,020 call option contracts for TXU stock in accounts at three broker-dealers in the United States. As the complaint alleges, the call option contracts were "out of the money" and most were set to expire in March, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of TXU stock following the Announcement, the unrealized illicit profits on these option contracts total approximately $5.4 million.

The trading occurred through three firms in Europe, according to the SEC's complaint (here).  On February 21, 1,060 March 60 call options were purchased through the Credit Suisse office in Zurich, for a profit of over $450,000.  The second trades, through Fimat International Banque S.A. Frankfurt Zweigniederlassung, an options firm in Germany, involved 40 March 60s and 220 April 62.50s, for a profit of approximately $150,000.  The largest trades were through the UBS London office, with the purchase of 3,500 March 37.50s and 3,200 March 60s, generating a profit of about $4.7 million.  There are no details in the complaint about the purchasers beyond account numbers, and it is not clear whether there is any connection between the three sets of trades.  The accounts have been frozen, and the Commission filed for a TRO less than a week after the announcement, which is not unusual in cases involving overseas trading if there is a danger that the assets will leave the country.  The issue now is ferreting out the actual purchasers to determine what connection, if any, they may have to the transaction.  (ph)

Civil Enforcement, Fraud, Securities | Permalink

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