Monday, May 28, 2007

Keeping a Lid on Dow

First Dow Chemical fired a senior executive and a board member purportedly for holding secret talks with private investors about a possible buy-out of the company.  That has triggered dueling law suits in federal and state courts in Michigan and New York, and the centerpiece of the case is likely to be J.P Morgan Chase CEO Jamie Dimon, who tipped Dow's CEO, Andrew Liveris, that a couple of his company's investment bankers were part of the unauthorized discussion.  Now comes word that the SEC is probing trading in Dow shares and those of DuPont (actually E.I. DuPont de Nemours & Co.), which Dow approached in September 2006 about acquiring.  Even though no information about the talks was ever disclosed publicly, DuPont's stock popped up by about $10 per share during the period when the discussions took place, which may indicate a leak of inside information.  While most deal-based insider trading cases involve purchases of stock and call options in companies about which a transaction is at least announced (e.g. Rupert Murdoch's offer for Dow Jones) that causes the price to jump, Section 10(b) and Rule 10b-5 reach any scheme or artifice to defraud, which does not require the success of a particular trade.  With the SEC knocking on Dow's door, that opens another front for distracting litigation for the company.  A Reuters story (here) discusses the SEC's informal investigation. (ph)

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