The Federal Bureau of Investigation is working with the U.S. Securities and Exchange Commission in a criminal probe of trading “anomalies” before the announcement of a deal to buy H.J. Heinz Co., said Peter Donald, a spokesman for the FBI’s New York office.
“The FBI is aware of trading anomalies the day before the Heinz announcement,” Donald said. “The FBI is consulting with the SEC to determine if a crime was committed.”
The SEC on Feb. 15 sued “unknown” traders over “suspicious trading” of Heinz shares through what the regulator said was an account at Goldman Sachs Group Inc. The trades came a day before Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc. announced their $23 billion takeover, the SEC said.
The SEC alleged in a Manhattan federal court complaint that the unidentified traders earned $1.7 million by purchasing the ketchup maker’s stock just before the announcement.
The trading before the deal, which Heinz and 3G called the largest ever in the food industry, was done through a Zurich- based account and involved call-option contracts, the SEC said.
U.S. District Judge Jed S. Rakoff in Manhattan, who on Feb. 15 granted an SEC request for a temporary freeze on the assets in the Goldman Sachs account, directed anyone connected to it to appear before him on Feb. 22 and explain why the assets shouldn’t be permanently restrained.
Sanjay Wadhwa, senior associate director of the SEC’s New York office, said the agency swiftly identified the Goldman Sachs account used to conduct the trades.
“Despite the obvious logistical challenges of investigating traders involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want assets unfrozen,” Wadhwa said.
The FBI’s Donald declined to comment when asked if agents had identified the individuals who used the account.
Besides the asset freeze, Rakoff ordered that the unidentified holders of the account be prohibited from “destroying, mutilating, concealing, altering or disposing of records of any kind” related to the account.
The account used by the defendants was identified in the SEC complaint as “Switzerland GS Bank IC Buy Open List Options GS & CO c/o Zurich Office.”
Tiffany Galvin, a spokeswoman for Goldman Sachs Group, has said the bank is “cooperating with the SEC’s investigation.”
The defendants, using the Goldman Sachs account, invested almost $90,000 in option positions the day before the deal was announced, the SEC said. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent.
The SEC said that the traders had material nonpublic information about the impending deal when they used an omnibus account in Zurich to buy 2,533 out-of-the-money June call options, which had a strike price of $65 on Feb. 13. Shares closed that day at $60.48.
The purchase of these so-called “June $65 call options,” which expire on June 22, 2013, was highly unusual, the SEC said. On Feb. 12, only 14 were purchased, regulators said, while on Feb. 11, no such options were bought. Since Nov. 14, no more than 61 such contracts had been purchased on any other single day, the commission said.
Trading in the options gives the right to buy the underlying shares and profit when the stock rises. The timing and size of the trades were deemed highly suspicious by the SEC because the accounts through which the traders purchased the options had no history of trading Heinz securities in the last six months.
Heinz shares jumped 20 percent to $72.50 following the announcement that Berkshire Hathaway and Jorge Paulo Lemann’s 3G Capital agreed to buy the Pittsburgh-based company. As a result of the takeover announcement, the price of the June call options jumped to a close of $7.33 on Feb. 14 from 40 cents the day before, an increase of more than 1,700 percent.
Trading volume skyrocketed on Feb. 14 on news of the acquisition, the SEC alleged, reaching more than 64 million shares, an increase of more than 1,700 percent, the SEC said. The increase was the highest level since Jan. 31, according to data compiled by Bloomberg.
Next page: Suspicious Trades
“The timing, size and profitability of the defendants’ trades, as well as the lack of prior history of significant trading in Heinz,” made the transactions “highly suspicious,” the commission said in its complaint, which accuses the unidentified defendants of violating the Exchange Act.
Neither 3G nor any of its employees has been accused of wrongdoing.
The SEC has been increasing its focus on insider trading by overseas buyers of U.S.-traded securities. As of December, the SEC had filed three times as many emergency asset-freeze requests in such cases since 2010 as in the prior two years. The regulator cited suspect trading patterns, typically before mergers or other market-moving news.
The case is U.S. Securities and Exchange Commission v. Certain Unknown Traders in Securities of H.J. Heinz Co., 13-cv- 1080, U.S. District Court, Southern District of New York (Manhattan).