A wave of merger-related insider trading


If history is a useful guide, the industry might be in for a massive increase in insider trading--as if we didn't have enough such investigations underway already.

The thinking goes like this: We may be on the brink of a new wave of mergers (the Dell deal seems to have sparked a mini-revival) and that wave will likely bring with it a lot of new temptations that some people just can't quell.

The SEC has already noted some highly questionable options trades around the announcement by Berkshire Hathaway and private equity firm 3G Capital that they will buy Heinz for $23 billion. Via a Goldman Sachs account in Switzerland, someone bought up call options on Heinz that surged when the deal was made public. The account has been frozen, and the hunt for the actual humans behind the trade is on. That people traded ahead of a big deal announcement is hardly shocking.

Mergers in fact have long been prime crime opportunities for people in the know--bankers, lawyers, accountants, IT guys and all their friends and families. Several studies of past merger booms have found unusual options and stock volume in the weeks before big merger announcements, and there is no reason to think that this will not happen again. The costs here are subtle.

But it's fair to say that in past merger boom periods, bidding companies have been forced to pay more than they would have if it hadn't been for insider traders. The SEC ought to be gearing up.

For more:
- here's a Reuters article on Heinz

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Another insider trading ring busted