The Securities and Exchange Commission will cast a wide net in its insider-trading probe of the $21 billion energy merger involving Denver-based Western Gas Resources, former SEC officials and securities-law experts said Thursday.
They said regulators will focus on questionable call-options trades and try to link them to workers at the companies involved in the deal – Western Gas, Houston-based Anadarko Petroleum and Oklahoma City- based Kerr-McGee – or to third-party investment-banking, law and accounting firms that were hired to help with the merger.
“In a deal like this, which is more complex than normal with two companies being acquired, that means there’s at least three investment banks and at least three law firms,” said former SEC attorney Peter J. Henning. “The information can come from anywhere. It can come from a secretary or a low-level analyst.”
Last August, an SEC insider- trading probe into the merger between Reebok International and Adidas-Salomon resulted in charges against several people. Among those sued were a retired Croatian woman and her nephew, who was formerly associated with several broker-dealers and allegedly tipped off traders.
Illegal insider trading occurs when a person makes securities trades based on key information not publicly available.
Officials with Western Gas, Anadarko and Kerr-McGee said they have complied with informal requests from the SEC for information about the merger.
Western Gas disclosed in a regulatory filing that it hired Morgan Stanley & Co. and Denver-based Petrie Parkman & Co. as financial advisers on the deal, and Skadden, Arps, Slate, Meagher & Flom as legal advisers.
An informal SEC investigation “probably happens in a majority of mergers, because there is usually some run-up of trading, and you usually look first at the options market,” said John Coffee, a law professor at Columbia University in New York.
In the weeks before Anadarko announced June 23 that it would acquire Western Gas and Kerr- McGee, trading of Western Gas and Kerr-McGee call options surged.
Call options give investors the right to buy a chunk of stock at a set price before a given date. Options can be much more lucrative than regular stock transactions because traders can buy in large quantities at a discount.
The SEC will try to identify questionable options trades, such as those by people who had never traded options before, Henning said. The commission will also focus on out-of-the- money call options, which are options with strike prices that are higher than the stock’s current price.
“If someone bought an out-of- the-money call option, especially one that would expire in a short period of time, that’s going to get the commission’s attention in a hurry,” said Henning, a law professor at Wayne State University in Detroit.
A spike in those trades occurred with Western Gas call options on several occasions in early June. Specifically, on June 8, 630 options were traded with a price of $50 a share and an expiration date of July 22. Western’s stock closed at $44.91 on June 8.
The stock soared to $59.67 the day of the merger announcement.
Insider-trading investigations typically take months.
Staff writer Andy Vuong can be reached at 303-820-1209 or avuong@denverpost.com.
