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Probe of possible insider trading in Heinz deal widens

| Thursday, Feb. 28, 2013, 9:20 p.m.
REUTERS
Shareholders approved a $28 billion acquisition of Pittsburgh ketchup maker H.J. Heinz Co. on Tuesday, April 30, 2013, at a special meeting in Manhattan.

A probe of possible insider trading before the $28 billion H.J. Heinz Co. buyout widened to include suspicious purchases of stock and risky bets in London on changes in the stock's price.

The Financial Industry Regulatory Authority, an industry regulator known as Finra, and the FBI are reviewing an unusually high volume of trades in Heinz stock on Feb. 13, the day before Heinz's announcement sent its shares soaring, the Wall Street Journal reported. Additionally, the Securities and Exchange Commission broadened its investigation to include complex derivative trading in London, the New York Times reported.

The newspapers cited unnamed sources.

Finra and the SEC declined to comment Thursday. FBI spokesman Peter Donald reiterated an agency statement that it is investigating trading anomalies ahead of the Heinz announcement.

The probes follow a civil suit in federal court in Manhattan brought by the SEC against unknown traders who used a Goldman Sachs account in Zurich, Switzerland to purchase options on Heinz stock the day before Warren Buffett's Berkshire Hathaway and Brazilian investment firm 3G Capital said they would acquire the Pittsburgh food company.

The SEC won a court-ordered freeze on the Zurich account. The Swiss Financial Market Supervisory Authority, known as Finma, is assisting with identifying the unknown trader or traders.

On Wednesday, a sealed document was filed in Manhattan federal court in the Heinz options case. SEC spokeswoman Christina D'Amico declined to comment, as did the court.

Goldman Sachs spokesman Michael DuVally repeated that the investment firm is cooperating with the investigation but declined to comment further. Finma did not immediately respond to a request for comment.

The SEC said the unknown trader or traders paid about $90,000 for options to buy Heinz stock on Feb. 13, according to court records. The next day when the deal was announced and Heinz shares jumped 20 percent in value, the options could have been cashed in for about $1.7 million in profit.

Similarly, the volume of trades in Heinz stock more than doubled the day before the deal was announced, which could indicate some investors had advance knowledge of a pending deal, said John Coffee Jr., a professor at Columbia Law School in New York and an expert on securities regulation and white-collar crime.

In the month from Jan. 14 to Feb. 12, the number of Heinz shares changing hands ranged from 915,000 to 2 million a day and averaged 1.35 million a day. On Feb. 13, 3.5 million shares traded hands.

If the stock traders are in the United States, then it will be easy for the SEC to identify them, Coffee said.

“The difficulty is then can you find the link to Heinz,” he said. “You can freeze the account, perhaps, but before you can file a complaint you'll have to allege they were tipped by someone.”

If the stock traders are outside the United States — like the options traders using the Goldman Sachs account — it will take help from a foreign government to identify them, he said.

The London trades now examined by the SEC are like swaps in which an investor bets on a change in a stock's price without ever buying the stock, Coffee said.

Though the SEC can't force London brokerages to identify the traders, Coffee said, the agency likely will get cooperation from British regulators.

“They should be able to find the firm in London much more quickly,” he said.

The Heinz deal is not the first 3G Capital transaction to spawn allegations of insider trading. The SEC in September sued a Brazilian man working as a broker in Miami with tipping off a client in 2010 to 3G Capital's pending acquisition of fast-food chain Burger King.

The broker, Waldyr Da Silva Prado Neto, fled to Brazil and the SEC froze his assets in the United States.

Neto's client, Igor Cornelsen and his firm Bainbridge Group, reaped illicit profits of more than $1.68 million by trading Burger King options ahead of the deal, the SEC said. Cornelsen and Bainbridge Group paid $5.1 million last year to settle the SEC's claims.

3G Capital has said it is cooperating with authorities in the Heinz investigation.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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