The U.S. Securities Exchange Commission (SEC) has frozen a Zurich-based trading account as it investigates possible insider trading in connection with Berkshire Hathaway’s US$28 billion acquisition of H.J. Heinz Company.
The SEC said Friday that it obtained an emergency court order to freeze assets in a Swiss trading account that, it says, was used to reap more than US$1.7 million from trading in advance of the deal. The action ensures that potentially illegal profits cannot be siphoned out of the account while the investigation of the suspicious trading continues.
In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz, unknown traders took risky bets that Heinz’s stock price would increase by purchasing call options the day before the public announcement. After the announcement, Heinz’s stock rose nearly 20% and trading volume increased more than 1,700%, placing the traders in a position to profit substantially.
The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased the options. It says the timing and size of the trades were highly suspicious because the account had no history of trading Heinz securities in the last six months, and overall trading activity in Heinz call options in the days before the announcement had been minimal.
“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” said Daniel Hawke, chief of the division of enforcement’s market abuse unit.
The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with securities law violations, and seeks a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.