Investigators trace Heinz insider trading to Goldman Sachs account
By Alex Nixon
Published: Thursday, Feb. 21, 2013, 1:51 p.m.
Investigators looking into suspicious trading in H.J. Heinz Co. stock before the company's $28 billion buyout by Warren Buffett and a Brazilian billionaire believe the trades originated with a Goldman Sachs private wealth client in Switzerland.
But knowing that doesn't guarantee investigators will be able to identify the investor they believe profited from knowledge of the Pittsburgh food giant's sale last week — underscoring the challenges that arise with transactions from overseas accounts.
The New York investment firm told authorities that the trades were made from an account in Zurich, but that it “does not have direct access to information about the beneficial owner or owners behind any particular transaction or position,” according to court documents.
John Coffee Jr., a professor at Columbia Law School in New York and an expert in securities regulation and white-collar crime, said the private wealth client could be a foreign brokerage house that executed Heinz trades for a client, whom Goldman Sachs would not know.
That would add a level of complication besides banking-secrecy laws in Switzerland that could stymie the investigation by the Securities and Exchange Commission and the FBI.
Outside the United States, “the SEC would have no way to compel the client to talk,” Coffee said.
SEC spokeswoman Christina D'Amico declined to comment. Officials with the FBI in New York could not be reached. Swiss federal police did not respond to questions about whether U.S. investigators contacted them.
The case is detailed in documents filed on Wednesday in federal court in Manhattan as part of the ongoing insider-trading investigation. The SEC won a court-ordered freeze on the account, which the agency said was used to buy risky bets that Heinz stock would skyrocket.
The SEC has not said how much money the account contains, but the investor stood to pocket $1.7 million by trading ahead of the Heinz deal. The SEC said the freeze — swift action by the agency — was intended to prevent the money from being moved overseas.
The purchases were made on Feb. 13, a day before Heinz announced its acquisition by Buffett's Berkshire Hathaway and Brazilian investment firm 3G Capital. Heinz stock jumped nearly 20 percent on Feb. 14 once the deal became public.
Goldman Sachs spokesman Michael DuVally said the investment firm is cooperating with investigators, but declined further comment.
Getting to the person or people who allegedly tried to use inside information to make money may be difficult because of Swiss banking-secrecy laws, said Peter Henning, a professor of law at Wayne State University in Detroit.
Henning, a former fraud investigator for the SEC and Justice Department, said a web of accounts or brokerage firms could be involved in executing the transaction that could shield the investor's identity.
“The question is, can they find that person and establish the link” between the trades and knowledge of the pending deal, Henning said. “It sure looks like insider trading. Now, can you gather the evidence?”
What is known, according to court documents, is that someone used the Goldman Sachs account to purchase 2,593 options, each of which gives the buyer the right to 100 shares of Heinz stock for $65 apiece. The options were purchased when Heinz traded about $60 a share, costing the buyer about $90,000.
Following announcement of the deal the next day, Heinz shares jumped to more than $72, giving the options' buyer the opportunity to buy 259,300 shares of Heinz stock at $65 and resell them for $72, pocketing the difference.
“This is a huge transaction, and it stands out like a sore thumb,” Coffee said. “There is every reason to believe that this wasn't an innocent investment.”
The size of the trades and the timing flagged the SEC, which most likely was alerted by options traders hurt in the deal, Coffee and Henning said.
There had been little trading in Heinz options in the months leading up to the suspicious transaction. On Feb. 12, for example, 14 options were purchased. The day before that, none was purchased, according to court documents.
Given all that, proving insider trading isn't a slam-dunk, Coffee said. “This on its face is an extremely suspicious trade,” he said. “The problem is finding the connections” between the original trader and those who knew the deal would be announced.
Though authorities are working to identify the traders, the options frozen in the United States can't be exercised without the buyer appearing in federal court. If that doesn't happen by the end of June, the options expire and the trader gets nothing, Henning said.
The SEC and FBI have successfully pursued insider trading cases in recent years.
In the past three years, the SEC filed more insider trading actions than in any three-year period, the agency says on its website.
Raj Rajaratnam, a hedge fund tycoon, was found guilty of insider trading in 2011 in the largest such case in a generation. Rajaratnam engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs, and gained $63.8 million on illegal trades.
Rajaratnam was brought down in part through FBI wiretaps, which recorded the trader receiving information from friends.
“The FBI has increasingly been involved in insider trading cases,” Coffee said.
Bloomberg News contributed to this report. Alex Nixon is a Trib Total Media staff writer. He can be reached at 412-320-7928 or firstname.lastname@example.org.
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