SEC sues over trading in Heinz; Fitch cuts company's rating to junk
The Securities and Exchange Commission sued unknown traders over “suspicious trading” in H.J. Heinz Co. just a day before Warren Buffett and 3G Capital Inc. announced a $28 billion takeover of the ketchup maker.
The SEC alleged in a complaint filed on Friday in Manhattan federal court that the traders earned $1.7 million by purchasing Heinz stock just before the announcement was made. The trading in the deal, which Heinz and 3G said is the largest ever in the food industry, was carried out through a Zurich, Switzerland-based account and involved call-option contracts, the SEC said.
Trading in the options gives the right to buy the underlying shares and profit when the stock rises. The timing and size of the trades were deemed highly suspicious by the SEC because the accounts through which the traders purchased the options had no history of trading Heinz securities in the last six months.
“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” Daniel Hawke, of the SEC enforcement division's market-abuse unit, said in a statement.
Meanwhile, Hannon's Inc., a Maryland company that owns Heinz stock, sued on Friday in Pittsburgh federal court to block the purchase.
The shareholder lawsuit against the Heinz board of directors, Berkshire Hathaway Inc. and 3G Capital Management claims that their deal shortchanges shareholders because it keeps other interested parties from offering a higher price for the company.
In another development related to the acquisition, Fitch Ratings cut the company's credit grade three levels to junk. The credit grade was cut to BB+ from BBB+ because “Heinz's leverage could increase,” the ratings firm said. “Fitch views this substantially higher level of financial risk as not being commensurate with an investment-grade rating.”
The SEC said it obtained an emergency court order to freeze assets in the Zurich-based account. The account used by the defendants was identified in the SEC complaint as “Switzerland GS Bank IC Buy Open List Options GS & CO c/o Zurich Office.”
Tiffany Galvin, a spokeswoman for Goldman Sachs Group Inc., said the bank is “cooperating with the SEC's investigation.”
The SEC alleges the defendants invested almost $90,000 in option positions the day before the deal was announced. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent in one day.
“The timing, size and profitability of the defendants' trades, as well as the lack of prior history of significant trading in Heinz,” made the transactions “highly suspicious,” the commission said in its complaint, which accuses the unnamed defendants of violating the Exchange Act.
Neither 3G nor any of its employees have been accused of wrongdoing.
Michael Mullen, a spokesman for Heinz, declined to comment on the suit. Buffett didn't immediately return an email.
Bloomberg News and Trib Total Media staff writer Brian Bowling contributed to this report.