US federal regulators on Friday secured a court order freezing more than $5m in assets belonging to unknown traders who bought TXU call options a few days before the $45bn sale of the US utility to private equity groups.
The Securities and Exchange Commission said the buyers of the options “engaged in illegal insider trading”. The SEC said the “highly profitable and suspicious purchases” were made through overseas accounts late last month ahead of the deal announced on February 26.
In a sign of the global scope of the case, the SEC was helped by the UK’s Financial Services Authority and Swiss counterparts. It comes in the same week that current and former employees of three top Wall Street banks were charged by federal prosecutors with insider trading.
Regulators uncovered the use of overseas accounts to trade options at the Chicago Board Options Exchange in advance of the announcement of TXU’s purchase by Kohlberg Kravis Roberts, Texas Pacific Group and Goldman Sachs.
The SEC said unknown traders made purchases of call-option contracts three times last week through accounts at Credit Suisse in Zurich, broker Fimat in Frankfurt and UBS in London.
The price of TXU shares jumped by 13 per cent after the deal was announced, netting the traders more than $5.3m.
The SEC has contacted the firms that handled the trades to try to identify the traders, but lawyers said they had enough evidence of insider trading without knowing who the perpetrators were.
Kevin Edmundson, trial counsel in the SEC’s Fort Worth office, said: “The presumption is based on the timing and the sizes of the trades, particularly on February 23, which strongly suggests that a person or entity was acting on confidential information.”
The TXU deal stands apart from traditional mergers and acquisitions because the companies involved engaged in a fairly widespread lobbying campaign to line up support for the transaction before it was announced.
A few days before the deal was first leaked on the CNBC television channel on Friday after the close of the market, representatives for the buy-out groups involved pitched the takeover to the Environmental Defense Fund, Public Citizen, and the Natural Resources Defense Council.
Then, on Thursday – a day before it was first reported – the buy-out groups reached out to legislators and the governor of Texas. It is far from clear whether the lobbying campaign is connected to the insider trading allegations.
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