NEW YORK ( TheStreet) -- In Heinz's (HNZ) $28 billion acquisition by Warren Buffett's Berkshire Hathaway (BRK.A - Get Report) and private equity firm 3G Capital, someone may have illegally made a $1.8 million profit using inside information, according to the Securities and Exchange Commission.
The SEC alleges a dormant trading account in Switzerland kicked into action buying up call options for Heinz just ahead of the ketchup maker's purchase by Berkshire and 3G Capital, in what it says is a violation of securities laws.
As it turns out, the SEC's allegation of insider trading and a court order to freeze the unnamed Zurich-based options account comes just as media reports indicate SAC Capital Management saw withdrawals of $1.7 billion, or a quarter of outside investor assets, as the hedge fund tries to battle allegations of insider trading levied against a handful of its former traders.
The separate news events, however, shouldn't be seen independently.In fact, the SEC's quick ability to catch what it suspects is potentially illegal trading just over 24 hours after Heinz's proposed acquisition and a multi-year investigation to levy insider allegations against SAC Capital traders may prove the rationale for more transparency on Wall Street. The SEC alleges that on Feb. 13, a day prior to Heinz's acquisition, the Swiss options account bought 2,533 out-of-the money June $65 calls for a total of nearly $90,000. "Between Sept. 1, 2012, and Feb. 13, 2013, the account through which the defendants traded had no prior history of trading in Heinz," the SEC states. When Heinz's $72.50-a-share acquisition was announced, those trades stood to gain nearly $1.8 million, a 1,700% return from the prior day when the contracts were traded. At the heart of the issue is whether fraud goes undetected by regulators like the SEC for the simple reason that trading occurs in hard-to-regulate over-the-counter markets, or so-called dark pools of opaque stock trading. Consider that the alleged illegal Heinz trades occurred on a highly regulated options exchange, the Chicago Board Option Exchange, where individual trades can be seen almost instantaneously. It took only a few moments after Berkshire Hathaway and 3G Capital announced their acquisition of Heinz for reporters, traders and regulators to see the suspicious options trades in the 144-year-old ketchup maker. By midday Thursday, Bloomberg had reported that regulatory officials were investigating the trades, and the New York Times had an even lengthier report by the end of the business day. Contrast that with the alleged insider trades that many suspect could cause SAC Capital to face increasing scrutiny with the SEC, after years of speculation that the hedge fund's outsized investment gains resulted, in part, from insider trading and so-called "black edge," as Bloomberg Businessweek reported. The SEC's allegations, brought in November 2012, indicate that a former SAC Capital trader, Mathew Martoma, was able to make $276 million in profit and avoided far greater losses on the shares of drugmakers Elan (ELN) and Wyeth by way of trading on illegal knowledge of negative trials in an Alzheimer's drug being developed by both companies in mid-2008. In Martoma's alleged fraud, algorithmic trading and dark pools appear to have played a key role in obscuring what the U.S. attorney says is the biggest insider trading profit in many years. The fact that the SEC could look at options trades on exchanges and freeze an account within days, and a four-year inquest that Bloomberg Businessweek reported culminated with tips, informants and wiretapped phone calls might indicate the degree to which opaque trading can be an aid to those with nefarious intent. Consider the magnitude of SAC Capital's alleged insider trades ahead of a market moving event and the report from Businessweek that the SEC's case wasn't the genesis of simply looking at stock-trading records.