SEC Files Another Suspicious Trading Case

The SEC filed its third “suspicious trading” case this year as last week drew to a close. SEC v. One or More Unknown Traders, Civil Action No. 17 CV 2659 (S.D.N.Y. Filed April 13, 2017). As with its earlier suspicious trading cases, the identity of the traders is not known. Whether the traders actually had inside information is not known. Also not known is how the traders would have acquired inside information. What is known is that the traders (it is assumed there is more than one but nobody knows) took large, risky option positions prior to the announcement of a corporate transaction.

Earlier this year the SEC filed a suspicious trading case centered on the acquisition of Mobileye, N.V. by Intel. SEC v. Darvasi, Civil Action No. 17-cv-2088 (S.D.N.Y. Filed March 23, 2017). The month before the Commission filed a similar action centered on the acquisition of Dreamworks by Comcast. SEC v. Yin, Civil Action No. 17 cv 972 (February 10, 2017). The point of these cases is to obtain a freeze over the accounts while the facts are sorted out as was done here. If effective insider trading enforcement, as has been the case in recent years, is supposed to dampen enthusiasm for such transactions, the spur of outsized trading profits seems to have kindled heated interest.

The SEC’s most recent suspicious trading action centers on the acquisition of General Communication, Inc. by Liberty Interactive Corporation, announced on April 4, 2017. General Communications provides residential and business telecommunications services in Alaska. Liberty competes in the video and digital commerce industries.

The trading discussed in the complaint took place through two accounts. One account was in the name of Cedrus Invest Bank SAL, Beirut, Lebanon. Trades were placed in the bank’s master account at Interactive Brokers, Inc. in the U.S. The master account had subaccounts. The other account was in the name of Nomura Securities plc, a UK based subsidiary of Nomura Europe Holdings plc. Nomura UK has a trading account at Nomura Securities International, Inc., in New York City.

Liberty approached General Communication on December 2, 2016 about a deal in which the firm would be acquired. Several days later a non-disclosure agreement was executed. By January 21, 2017 a written proposed for a business combination was delivered to General Communication.

Between the time of the initial proposal and the April 4 announcement date the deal progressed toward conclusion:

  • On February 9, 2017 the General Communication board considered the proposal;
  • A special committee was established by General Communication on March 3, 2017 with the charge to consider and negotiate a deal;
  • The special committee retained Lazard Freres & Co. as financial advisors on March 11, 2017;
  • Moody’s and S&P were informed about aspects of the proposed deal on March 31, 2017; and
  • Lazard made a fairness presentation to the General Communication special committee on April 3, 2017.

All of the trading through the Cedrus and Nomura accounts was in options. A table of the trades shows five purchases were through the Nomura account and three through the Cedrus account shortly before the deal announcement:

  • Trade one: Cedrus on March 20;
  • Trades two and three: Both through Nomura on March 22;
  • Trade four: Cedrus on March 23;
  • Trade five: Cedrus on March 29;
  • Trade six: Nomura on March 30;
  • Trades seven and eight: Both through Nomura on March 31.

The Nomura account purchased a total of 753 options at a cost of $21,434 while the Cedrus account acquired 540 option contracts at a cost of $26,675. All of the options purchased were out of the money. The option purchases represented a significant amount of the volume in those options. Neither account was hedged. Between October 1, 2016 and March 19, 2017, neither account purchased General Communication options.

When the deal was announced the share price rose 62.4% compared to the prior day’s close. The initial investment in the two accounts, which totaled $48,109, was worth over $1 million. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.