May 7 (Bloomberg) -- While Kohlberg Kravis Roberts & Co., TPG Inc. and Bain Capital LLC meet behind closed doors to mount the world's biggest leveraged buyouts, their deals already are common knowledge in the stock options market.

Options trading jumped an average 221 percent in the three days before the 17 biggest U.S. takeovers of the past year were disclosed, compared with the average for the previous 50 days, data compiled by Bloomberg show. The acquisitions of Dallas-based electric utility TXU Corp., HCA Inc., the biggest U.S. hospital operator, First Data Corp., the world's largest processor of credit-card payments, and student loan company Sallie Mae were all preceded by a surge in seemingly well-timed options bets, according to the data.

The record $188 billion of LBOs announced in the first quarter is fueling U.S. investigations of insider trading. Prosecutors charged a Credit Suisse Group investment banker with leaking tips in about nine takeovers on May 3, the second major bust of the year. Seven of the 11 insider lawsuits filed by the SEC this year involve options.

``We are seeing deliberate, calculated misconduct by people who otherwise make a substantial livelihood from the very markets they're abusing,'' Linda Thomsen, enforcement chief at the U.S. Securities and Exchange Commission, said in an interview last week. ``The behavior is not only illegal, it's repellent, and we will be relentless in pursuing it.''

Borrowing Clout

Buyout firms have raised a record $250 billion since the start of last year, enough to afford $2 trillion of acquisitions, including borrowing money, according to Morgan Stanley. The deals in the first quarter included the biggest ever, the $32 billion acquisition of TXU. The 17 biggest takeovers are LBOs and corporate mergers and acquisitions valued at more than $10 billion, according to Bloomberg data.

Options volume in TXU more than doubled during the three days before New York-based KKR and TPG of Fort Worth, Texas, agreed to buy the utility on Feb. 26, Bloomberg data show. TPG was formerly called Texas Pacific Group.

KKR's $26 billion offer for Greenwood Village, Colorado- based First Data was preceded by a 650 percent increase in options during the three days prior to the April 2 announcement.

Trading in Reston, Virginia-based SLM Corp., known as Sallie Mae, climbed 71 percent in the three days before newspaper reports that New York-based J.C. Flowers & Co. would make a $25 billion buyout bid, unveiled April 16.

`Very Concerned'

HCA options volume rose 388 percent before July reports that LBO firms had contacted the Nashville, Tennessee-based company. Five days later, a group including Boston-based Bain Capital and Merrill Lynch & Co. in New York made a $21 billion bid.

``We are very concerned about that,'' SEC Chairman Christopher Cox said today in an interview, referring to the possibility that abuses have been increasing. He said the SEC pays ``close attention'' to data suggesting insider trading may have taken place.

``It's a big issue, and we're on it,'' Cox said.

The number of people involved in these deals raises the challenge for tracking down leaks, said Thomsen, who declined to say whether the SEC may increase its focus on LBOs. Deals are so big that funds often team up and each hires its own law firms and banks.

Too Many Hands

``The bigger the deals are, the more excitement there is, the more eager people are to know what's going on,'' said Alan Bromberg, a securities law professor at Southern Methodist University in Dallas.

At least 20 firms helped arrange New York-based Apollo Management LP and TPG's $17 billion bid for Las Vegas-based Harrah's Entertainment Inc., Bloomberg data show. In the three trading days before the deal became public Oct. 2, volume in call options increased 242 percent above the 50-day average.

Harrah's spokesman Alberto Lopez, First Data spokesman Colin Wheeler and HCA spokesman Ed Fishbough declined to comment. Sallie Mae disclosed last month that the SEC is probing trading of the company's shares and securities prior to the takeover announcement. The company is cooperating, spokesman Tom Joyce said in an e-mail.

Spokesmen for KKR, Texas Pacific, Apollo and Bain also declined to discuss the matter. J.C. Flowers didn't respond to a request for comment.

More Lucrative

Call options, the right to buy stock at a specified price by a certain date, can be more lucrative than speculating on shares of takeover targets. The value of the options contracts can multiply when the underlying shares rise by a few percentage points.

While shares of TXU rose 4.1 percent the last day before the deal became public, none of the other buyout bids were preceded by increases in their stock prices of more than 2 percent.

The potential for intentional leaks was underscored in March when federal prosecutors and the SEC accused Randi Collotta, a former compliance officer at New York-based Morgan Stanley, of feeding tips about mergers and acquisitions to a network of hedge funds and brokers in 2004 and 2005.

Collotta, who left the company in 2005, is expected to plead guilty at a hearing May 10, prosecutors said in a letter posted in the case docket. She ``is prepared to address the charges in court,'' her attorney, Kenneth Breen, said today, declining to comment further.

At Credit Suisse, prosecutors say Hafiz Naseem, a junior investment banker in New York, began giving tips to a banker in Pakistan weeks after he was hired last year. The scheme allegedly generated at least $7.5 million in proceeds.

`Let the Fun Begin'

``Let the fun begin,'' Naseem, 37, wrote in an e-mail after opening an account in Pakistan for his conspirator to use, prosecutors said.

Naseem may have obtained information from an office printer, which was shared by other bankers and stationed near his desk, prosecutors said. His conspirator placed illegal trades and fed the information to ``certain high-profile financial executives'' in Pakistan, the SEC said in a related civil suit.

Naseem's lawyer, Marc Mukasey, said May 4 his client is innocent. Zurich-based Credit Suisse said it told regulators of the situation.

Increases before takeovers can occur for legitimate reasons such as unrelated announcements, analyst reports or news that affects an industry. Investors are also boosting their use of analytical tools to speculate on companies that may become takeover targets.

Not Just Options

The knowledge isn't confined to the options market. Traders who use credit-default swaps also determined that HCA and Harrah's were targets before the deals were announced.

Credit-default swaps, financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt, typically jump when LBOs are announced because the firms often borrow three-quarters of the purchase price, making a target's existing debt riskier.

When companies buy each other, options barely budge, according to the Bloomberg data. One exception was Dow Jones & Co., the publisher of the Wall Street Journal.

Trading in options to buy shares of Dow Jones surged to an 18-month high April 30, the day before Rupert Murdoch's News Corp. said it bid $5 billion for the company. Dow Jones said on May 5 that the SEC and the New York state attorney general were investigating.

Dow Jones spokesman Howard Hoffman said the company received the New York subpoena and a request for information from the SEC. He declined to elaborate.

41% of Acquisitions

Trading in options to buy shares of Armor Holdings Inc. also surged to a record May 3, before today's announcement that BAE Systems Plc agreed to buy the Jacksonville, Florida-based company. An Armor Holdings spokesman didn't immediately return a phone call. BAE spokesman John Measell declined to comment.

A study by Measuredmarkets Inc. in August showed that insiders may have traded illegally before 41 percent of the largest U.S. acquisitions the previous year. The review examined stocks in deals bigger than $1 billion.

``As the merger market has heated up in the past year, we have seen an uptick in insider trading that has victimized major investment banks, harmed the average investor, and undermined public confidence,'' said U.S. Attorney Michael Garcia in New York.

``We will move quickly against those who steal confidential information and trade on it,'' Garcia said.

To contact the reporter on this story: David Scheer in Washington dscheer@bloomberg.net

Last Updated: May 7, 2007 19:45 EDT