Suspicious trading cases typically center around large trades of stock or options timed to a significant corporate event such as an acquisition or takeover. Specifically, the trading frequently takes place shortly before the transaction is announced and often involves large positions. The traders are typically overseas, purchasing the securities through a local institution that has a U.S. affiliate or connection where the stock and cash is held. Once the transaction closes, the positions are closed, and the cash transferred out quickly – unless the SEC steps in with an action and secures a freeze order. When the agency is able to bring its action before the profits leave the U.S. the traders are often identified and charged – hiding overseas these days is not quite as effective as the bank robbers who quickly rode out of town in the late 1800s and hid in the hills.
The Commission’s latest action in this area focuses on the proposed acquisition of Anadarko Petroleum Corporation by Chevron Corporation. SEC v. One or More Unknown Traders, Civil Action No. 1:19-cv-03785 (S.D.N.Y. Filed April 29, 2019). The shares of both firms are listed on the NYSE. The proposed deal price is set at $65 per share, a 38% premium to market over the April 11, 2019 closing price. Trades in Anadarko shares were placed through two foreign institutions. One is Cowen International Ltd., a boutique investment bank based in London, England. Clearing was done by Pershing, LLC. The second is Renaissance Securities Ltd., an investment banking and securities brokerage services firm in Cyprus. Clearing was done by Interactive Brokers, LLC. None of the traders have been identified.
The trading through the two international accounts closely tracts the transaction:
Deal: February 6, 2019: Chevron’s CEO delivers a letter to Anadarko’s CEO with an acquisition proposal.
Trades: February 8, 2019 and April 1, 2019: Defendants purchase a total of 1,650 calls for Anadarko, almost half of which are out of the money.
Deal: March 22, 2019: CEO of Occidental told the CEO of Anadarko that Occidental would send a competing offer. On March 23, 2019 the officer was received; Chevron was informed that Anadarko would consider the competiting proposals.
Trades: March 22, 2019: One account at Cowen purchased 500 out-of-the money calls with a strike price of $45. On March 25 ,2019 the other account purchased 250 calls with a strike price of $45. On April 1, 2019 the Renaissance account purchased 650 calls with a strike price of $50.
Deal: On April 6, 2019 discussions between Chevron and Anadarko which had halted on March 24, 2019, resumed and ran parallel to Anadarko’s discussions with Occidental. On April 11, 2019 Anadarko and Chevron publicly announced an agreement for Chevron to acquire all of the outstanding shares of Anadarko through a tender offer. The price was $65 per share in cash and stock. The share price for Anadarko closed on April 12, 2019 at $61.78, up 32%. On April 24, Occidental issued a press release announcing a competing proposal for Anadarko at $76 per share.
Trades: On April 16, 2019 one account at Cowen liquidated its positions, securing a profit of $824,5000. The same day the other account was liquidated, yielding a profit of about $419,250. The day before the Renaissance Account liquidated its positions, yielding a profit of $727,350. Overall the traders had profits of nearly $2 million for trading over a two-and-one-half month period.
The complaint alleges violations of Exchange Act Section 10(b). The Court entered a freeze order nine business days after the accounts were liquidated when the Commission filed its complaint and made the request for the freeze order. See Lit. Rel. No. 24462 (April 29, 2019).
Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).