Trading in the U.S. markets through foreign accounts does not shield the trader from SEC scrutiny and potential liability. On Friday, the SEC reaffirmed this point, filing another insider trading case based on international trading. SEC v. One or More Unknown Purchasers of the Call Options for the Common Stock of DRS Technologies, Inc., Civil Action No. 08-cv-6609 (S.D.N.Y. Filed July 25, 2008). This case is based on trading in advance of the announcement of the merger talks between DRS Technologies, Inc. and Finmeccanica S.p.A., the same takeover transaction which is the predicate for an earlier insider trading case. SEC v. De Colli, Civil Action No. 08-civ-4520 (S.D.N.Y. May 15, 2008), discussed here.

The emergency action filed Friday froze assets related to option trading in the shares of DRS Technologies. The complaint also alleges insider trading in options of American Power Conversion Corp, two years earlier. The trading was through an account at UBS AG.

As to the DRS options, the complaint claims that an unknown purchaser acquired 1,820 out of the money and soon to expire call options for over $456,200. Immediately following a May 8th Wall Street Journal article reporting advanced merger negotiations between Finmeccanica and DRA, the unknown purchaser liquidated all of the options, making an illegal profit of about $1.6 million. Subsequently, on May 12, 2008, the merger of the two companies was announced. The allegations here are similar to those made in the De Colli case filed earlier this year.

The complaint also alleges that the unknown purchaser traded on inside information when acquiring 2,830 American Power call options at a cost of about $343,000 in September and October 2006. On October 30, 2006 Schneider Electric SA announced the acquisition of American Power for $31 per share. The unknown purchaser subsequently liquidated the options at a profit of about $1.7 million.

This case is another example of the SEC working closely with other regulators to quickly bring an insider trading case that involved international trading. In filing this action, the SEC worked with the Swiss Federal Banking Commission, the Department of Justice and the Chicago Board of Options Exchange.

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