First, it was the leak of the massive Heinz-Unilever deal that may have scuttled the Warren Buffett-inspired transaction, now it appears that another recent megamerger was leaked 4 days ahead of the announcement. On Wednesday morning, the SEC froze brokerage accounts of several unnamed traders who made more than $3.6 million in profits by trading in the four days before the $3.3 billion takeover of Fortress Investment Group was announced by Japan’s SoftBank.
According to the FT, the traders placed “highly suspicious” orders for shares and contracts for difference, or CFDs, through Singapore-based Maybank Securities and a brokerage in London, R.J. O’Brien. Breaking the second cardinal rule of insider trading, i.e., never to buy stocks in bulk in the day ahead of the announcement (the first such rule is never to buy calls the before a deal is announced although the "insiders" did that too), all the trades through Maybank were made within a 24-hour period before the deal to buy the US-listed private equity firm was announced to the market; meanwhile trade through R.J. O’Brien took place between February 10 and 14, the day the deal was disclosed the SEC reported.
“The timing, size and profitability of these trades are highly suspicious,” the SEC said in a court filing asking for the freeze.
As the FT adds, the SEC is seeking a judgment to force the traders to disgorge the profits and pay a penalty. SoftBank’s offer for Fortress was a 30 per cent premium over the private equity firm’s closing share price that day. Also, as the SEC further notes, it appears that the rookie traders decided to really bring attention on themselves by also breaking Cardinal rule #1: a burst of option buying ahead of the deal. Just like in the case of the Unilever deal, which saw a surge in call option volume for both Unilever and Kraft Heinz ahead of the announcement...
... the size of bets in the options market prior to the deal raised eyebrows in the US, leading several market experts to believe that information had been leaked ahead of the deal.
The volume of options trading in Fortress was more than eight times the normal level ahead of the deal’s public announcement. Specifically, customers of Maybank bought 950,000 shares in Fortress hours before the announcement, selling them the next morning for $1.7 million. R.J. O’Brien’s customers bought CFDs and shares in Fortress, which they sold on February 15 for $1.9 million, according to the SEC’s complaint seeking the freeze.
Also notable is how quickly the leak appears to have emerged: the Maybank clients began placing the trades on February 14, building up a $5 million position, 33 minutes after Fortress’s board of directors received an email with draft resolutions approving the deal, according to the SEC. Only two days before, there was “serious doubt” as to whether the deal would even go through, the SEC complaint said.
Discussions between SoftBank and Fortress had begun in December, and the two companies initially planned to finalise the deal over the weekend of February 10-12, putting it to a board vote at Fortress on February 12. The R.J. O’Brien clients began buying CFDs on February 10, through an account with Merrill Lynch, just before that weekend. The only other time Maybank bought any Fortress stock through its account at UBS was in February 2016, when 10,000 shares were bought and later sold in April.
As the FT notes, the emergency court order obtained by the SEC on February 24 will prevent the traders from accessing any of those gains. As yet, the SEC said they do not know the identities of the traders, but said in the complaint they are “believed to be foreign traders trading through foreign accounts”.
In recent years, suspicious trading before deals has been under increased scrutiny by the SEC and regulators around the world after insider trading prosecutions in New York over the past decade exposed the extent of the crime. The SEC has yet to launch a probe into the far larger Unilever leak(s).