SEC brings lawsuits against insider-trading
26 Jul 2008
The US securities and Exchange Board yesterday filed insider trading charges against "unknown individuals" whom it accuses of having made purchases of call options in DRS Technologies Inc and American Power Conversion Corp, before they announced multibillion-dollar mergers.
While the $3.94-billion deal for the acquisiton of DRS by Italy's Finmeccanica SpA, is still pending, French engineering group Schneider Electric acquired American Power for $6.1 billion last year.
The SEC initiates legal proceedings against unknown defendants when it susupects unusual trading activity in a trading account with a broker-dealer without knowing the identity of of the account holder. To prevent such anonymous account holders from benefitting from the suspect transactions, it then obtains a court order to try to have have the account frozen.
In thei instance, the Securities and Exchange Commission filed an emergency action in the United States district court for the southern district of New York against one or more unknown purchasers of the call options for the common stock of DRS Technologies, Inc. and American Power Conversion Corp. (unknown prchaser).
The SEC complaint alleges that the unknown purchaser reaped more than $3 million in profits by engaging in illegal insider trading, prior to announcements of the acquisitions of DRS and American power through an account with the beleaguered Swiss banker and wealth manager, UBS AG, curently facing prosecution and Comgressional scrutiny in other cases.
The commission also filed an application for a temporary restraining order in order to freeze the unknown purchaser's assets, US district judge Alvin K. Hellerstein has issued a temporary restraining order freezing the unknown purchaser's assets.
The commission's complaint alleges that while in possession of nonpublic information regarding merger talks between DRS and Finmeccanica S.p.A, the unknown purchaser acquired DRS call options. According to the complaint, between 29 April 2008 and 7 May 2008, the unknown purchaser bought 1,820 DRS call options that were out-of-the-money and set to expire in the near term for slightly more than $456,200. The complaint alleges these purchases constituted a very significant percentage of the series volume for DRS call options on the days in question.
The complaint further alleges that immediately following an 8 May Wall Street Journal article reporting the advanced merger negotiations between Finmeccanica and DRS, and after confirmation by DRS that it was engaged in talks regarding a potential strategic transaction, the unknown purchaser liquidated all DRS call options and made an ill-gotten profit of approximately $1.6 million.
Finmeccanica later announced on 12 May 2008 that it would acquire DRS for $5.2 billion, or $81 a share.
Additionally, the commission alleged that, while in possession of material, nonpublic information regarding Schneider Electric SA's plans to acquire APCC, the unknown purchaser acquired APCC call options. According to the complaint, between 21 September and 20 October 2006, the unknown purchaser bought 2,830 APCC call options at $343,000. The complaint alleges these purchases constituted a very significant percentage of the series volume for APCC call options on the days in question.
The complaint further alleges that following Schneider's announcement on 30 October 2006, that it would acquire all of APCC's outstanding shares for $31 a share, the unknown purchaser liquidated all APCC call options and made an ill-gotten profit of approximately $1.7 million.
By virtue of this conduct, the commission said int its complaint that the unknown purchaser violated Rule 10b-5 of Section 10(b) of the Securities Exchange Act of 1934.
The complaint has sought "a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil money penalties".
The SEC had previously filed a complaint alleging that an Italian citizen had been engaged in insider trading in DRS securities ahead of the same 8 May disclosure of the merger negotiations between DRS and Finmeccanica.
The Swiss Federal Banking Commission, the US Department of Justice, and the Chicago Board Options Exchange were involved in providing information to the SEC enabling it to file charges.