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Regulators froze a Swiss account at Goldman Sachs yesterday after unearthing activities suggestive of insider trading in the $23 billion acquisition of H J Heinz, taking an abrupt action after one of the biggest deals in recent years.
The action, by the Securities and Exchange Commission, illustrates the temptation that such big takeovers may present. Despite a number of prominent crackdowns on insider trading, regulators continue to uncover cases involving traders who spin confidential tidbits into illicit profits ahead of deals.
On Thursday, Berkshire Hathaway and the investment firm 3G Capital agreed to buy Heinz, a deal that sent the company's shares soaring.
In a complaint in Federal District Court in Manhattan, the agency took aim at a Zurich-based account that on paper reaped $1.7 million in gains after the stock jumped. Freezing the account, the SEC said, will prevent the traders from spending their winnings or moving the money.
But the identity of the traders, who funneled their bets through a Goldman Sachs customer account, is not yet clear. An SEC statement referred only to "unknown traders" who bought a series of options tied to Heinz's stock. The agency's investigation is continuing. Goldman, which is not accused of wrongdoing, was the conduit for the trades. "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, head of the commission's market abuse unit.
The agency's complaint portrayed a brazen attempt by traders to abuse their position as keepers of market-moving secrets. Dozens of people had knowledge of confidential information about the deal, including bankers, lawyers and executives at both the buyers and the seller.
The inquiry may cast a cloud over the Heinz deal. Once the traders are identified, the focus will turn to the universe of insiders who could have leaked details of the deal.
The account that prompted the inquiry belonged to investors who traded through Goldman. In its complaint, the SEC referred to "GS Bank" and "GS & Co c/o Zurich Office," an apparent reference to an account at the bank.
The agency called it an "omnibus" account, meaning that it potentially serves as a portal for multiple traders and firms. The investors may not have direct access through Goldman, a person briefed on the matter said, but instead routed their trades through another bank that then passed the bets to Goldman. It could take days to unravel the multiple layers, the person said, preventing the SEC from immediately identifying the traders.
Goldman said it was "cooperating with the SEC's investigation." A regulator close to the case said the firm was not currently suspected of any wrongdoing.
The SEC opened the inquiry on Thursday, focusing on a "highly suspicious" spike in options trading. Using what is known as a call option, the traders the previous day had placed a bullish bet on Heinz without actually committing to buy its shares. Instead, the investors have the opportunity to buy at a given price in June.
The unnamed traders bought 2,533 call options on Wednesday. The SEC called it a "drastic" uptick in trading. For months leading up to the deal announcement, there had been scant activity in Heinz options. On Tuesday, for example, only 14 call options were bought. A day earlier, there was no trading.
The SEC was alarmed by both the volume of trading and the origin of the bets. "The timing, size and profitability of the defendants' trades, as well as the lack of prior history of significant trading in Heinz" in the account, the commission said in the complaint, "makes these trades highly suspicious."
The agency also highlighted the "well timed" nature of the trade. The anonymous investors spent nearly $90,000 on the call options Wednesday. The position rose in value to $1.8 million on Thursday after the deal was announced, and Heinz's stock rose to $72.50, up 20 percent from Wednesday, matching the offer price.
But with the SEC's asset freeze, the traders have few good options to collect their cash. Sanjay Wadhwa, Mr. Hawke's deputy at the commission, said in a statement that the traders "now have to make an appearance in court to explain their trading if they want their assets unfrozen."
The SEC's inquiry mirrors an action it took last year in another deal involving 3G Capital, a New York-based firm with Brazilian roots. In September, the agency obtained an emergency court order to freeze the assets of a Brazilian man suspected of insider trading ahead of 3G Capital's takeover of Burger King. The trader, who worked at Wells Fargo, reportedly received the tip from a 3G investor.
Neither the company nor any individual at 3G has been accused of any wrongdoing in that case or in the Heinz inquiry. A spokesman declined to comment.
The SEC has had repeated success in pursuing insider trading. It filed 58 such actions last year and secured major convictions, including that of a former Goldman board member, Rajat Gupta.
The SEC's complaint against the Heinz traders landed before a familiar judge: Jed S Rakoff. The judge, who heard the Gupta trial, has nudged the agency to ramp up its prosecution of Wall Street wrongdoing.
2012 The New York Times News Service