No company is immune to the risk of insider trading. As Heinz recently found when the day before an acquisition of the company by Warren Buffet’s Berkshire Hathaway and 3G Capital its stock was abnormally traded on the market causing the SEC to question if there was any foul play involved.
As shown in the graph fromthe Wall Street Journal on February 13th, the day before the deal was announced, there was a large volume of trades among the ‘call’ option contracts. Without prior knowledge of a deal the stock price activity should have been relatively quiet until after the announcement. The stock had been steady for months, which made the volume of trading suspicious. This news of a merger also reflected in the stock prices raising over ten dollars in one day.
The merger between Heinz and 3G Capital is the second to draw the attention of the SEC. Not all investigations of insider trading actually lead to lawsuits, but shouldn't the SEC take special care in looking into these claims since it is the second suspicion?
The larger question in the lawsuit is how will the SEC prove either side of the merger leaked information to day-traders? The people who sold the stock made over 1.8 million dollars, which is an obvious motive. As shown in a You Tube post, the SEC has no solid proof at the moment. Although, it did freeze a Switzerland- based account that was connected to the merger that was under Goldman Sach’s name.
According to Corgentum, the SEC and the FBI are involved in the investigation, but it is hard to track the identity of the trader. The problem isn’t whether insider trading was done, but who did the actual act. The SEC can track the volume of stock trading before and after a merger, but they can’t always tell who the leak originated from. It seems to be a flaw in the SEC’s system of heavy acts about fair disclosure.
According to CNBC the perfect way to avoid being caught by insider trading, is to not sell shares at all. Yet, if people don’t sell the shares they won’t make the money that insider trader is hoping to make. The key to insider trading they insist is to not get caught, but any insider trader can do that as long as they keep a paperless trail and are ambiguous.
In an investor relations class we went over the importance of knowing who the investors are in a company, but it is also important to know the key players in a company and their connections to the investors as to minimize the risk of insider trading. No company is immune to the possibility of insider trading when big mergers come along, but to keep the flow of information fair investor relations professionals need to err on the side of caution when it comes to fair disclosure.
Investor relations professionals should know the people they work with, as they are the boundary spanners both internally and externally. It is managing the relationships with investors and the employees to ensure that the right people know the information at the right time. Since 3G Capital had just run into the same issue when they acquired Burger King, there should have been more preventive measures taken for the Heinz acquisition.