SEC studies trades before Heinz deal

Officials say call options spiked as takeover was finalized

Saturday, February 16, 2013

— Regulators are scrutinizing unusual trading surrounding the planned $23 billion takeover of the food company H.J. Heinz Co., raising questions about potential illegal activity.

The Securities and Exchange Commission opened the insider-trading inquiry Thursday as Berkshire Hathaway and the investment firm 3G Capital agreed to pay $72.50 a share for Heinz, a person briefed on the matter said. Regulators first noticed a suspicious spike in trading Wednesday.

A spokesman for the SEC, Christina D’Amico, told The Associated Press on Friday that the agency does not confirm or deny the existence of investigations.

Representatives for Heinz, Berkshire Hathaway and the public-relations agency representing 3G and Berkshire in the deal did not immediately return messages for comment.

If the SEC’s preliminary inquiry turns into a broader investigation, it could cast a shadow over the deal. As part of the process, authorities would turn their focus toward the limited universe of insiders who could have tipped off traders about the deal.

The agency’s inquiry is expected to be centered on options trading in Heinz, activity that soared this week as news of the deal circulated Wall Street. In what is known as a call option, investors can place a bullish bet on a stock, without actually committing to buy the shares. Instead, investors have the opportunity to buy at a given price and future date.

As recently as Tuesday, there was scant activity in Heinz options. But by Wednesday, as the companies were putting the finishing touches on the deal, options trading jumped, data from Bloomberg show.

The price of Heinz’s stock soared after the deal was announced. The stock finished up nearly 20 percent on Thursday to close at $72.50, matching the offer price.

The SEC is focusing on the sudden leap in options trading Wednesday, building on a related case it filed last year that also involved 3G, a company with Brazilian roots. In September, the agency obtained an emergency court order to freeze the assets of a Brazilian man suspected of insider trading around 3G Capital’s takeover of Burger King. The trader, a Brazilian citizen who worked at Wells Fargo in Miami, purportedly received the tip from a 3G investor.

Neither the company nor any individual at 3G has been accused of any wrongdoing in that case or in the Heinz inquiry.

While the inquiry is in its early stages, the person briefed on the matter said that regulators could take relatively prompt action. If it is concerned that traders might move the money overseas, the SEC could ask a federal court to freeze the traders’ assets.

The SEC routinely opens inquiries into trading activity after major mergers are announced, but often does not bring charges. The agency, however, has renewed its focus on insider trading, mounting dozens of cases in recent years.

Bloomberg News also reported that SEC investigators were reviewing the surge in Heinz options trading.

Business, Pages 27 on 02/16/2013