Warren buffet loves ketchup, and with his $23 billion acquisition of Heinz, he may love it even more. Apparently someone found out about the flow of ketchup before the deal was announced and profited handsomely on that knowledge. The Securities and Exchange Commission brought an emergency case when they discovered an astonishingly accurate trade that stinks of insider trading.
On February 13 the defendants paid $90,000 for 2,533 out of the money June $65 calls on Heinz stock. The stock was trading at $60. The very next day, Buffet’s Berkshire Hathaway announced the Heinz acquisition at a price of $72.50. That made the $90,000 investment worth over $1.8 million. Pretty good for one day’s trade.
To add to the suspicious nature of the trade, the account had not traded on Heinz stock in the six months prior. And those 2,533 calls are in sharp contrast to the usual volume. Over the past month, Heinz options had averaged just 1,300 contracts traded daily.
“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 M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.
The SEC has the suspicious trade. But it does not have the identity of the trader or any evidence of a relationship that would tie the trade to material non-public information. However, the emergency freeze on the big gain at least stops the money from disappearing to the overseas account that made the trade. That gives the SEC time to gather the evidence and tie the trade back to the owner and the relationship that could have yielded inside information.
One aspect missing from the story is who noticed the unusual trade: the broker’s compliance unit or the SEC. I would guess the broker’s compliance unit. That was a big pop that should have raised red flags for a compliance officer monitoring trading activity.
On the other hand, it was such a big trade on call options that the SEC could have easily taken a look at the trading before the Heinz deal was announced and noticed that trade. Supposedly the SEC now has the technology in place to better monitor trades in real time. This enforcement action could be an sign that the technology is up and running.
Either way, I assume we will hear more about this case.
- SEC Freezes Assets in Swiss-Based Account Used in Suspected Insider Trading Ahead of Heinz Acquisition – SEC Press release
- SEC Complaint (.pdf)
- Risk vs. Greed: Making A Large Purchase of Heinz Securities Just Before the Deal Announcement by Thomas O. Gorman in SEC Actions
- Counterparties: How Warren Buffett sweetens his ketchup by Ben Walsh in Reuters
- Heinz traders netted 2,000% profit in one day: SEC in Investment News
- SEC Freezes Swiss Account Involved in Heinz Pre-Deal Trading by Paul Vigna in WSJ.com’s Corruption Currents
- Options Trader Wins Big With Heinz Bid