Goldman Sachs Group Inc. (GS) doesn’t have “direct access” to information about the beneficial owner behind transactions in an account in which the U.S. Securities and Exchange Commission said suspicious trading of H.J. Heinz Co. (HNZ) occurred, the bank told the regulator.
The SEC on Feb. 15 sued “unknown” traders over suspicious trading of Heinz’s options through what the regulator said was an account at Goldman Sachs. The SEC will ask a federal judge in Manhattan at a hearing set for today to freeze the account’s assets until the case is resolved. The New York-based bank told the agency the account holder is a Zurich private-wealth client, the SEC said in a court filing.
“Goldman informed me that it does not have direct access to information about the beneficial owner or owners behind any particular transaction or position” in the account, SEC senior counsel Megan Bergstrom wrote.
The trades at issue in the SEC’s lawsuit came a day before Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) and 3G Capital Inc. announced a $23 billion takeover of Pittsburgh-based Heinz, the agency said in its complaint. Using a Zurich-based account that involved call-option contracts, the unidentified traders’ unrealized profit was more than $1.7 million, according to the SEC.
The SEC has also asked Swiss authorities for assistance in the effort to identify the traders. Swiss Financial Market Supervisory Authority, known as Finma, will cooperate with the SEC’s request “within the framework of our mandate,” Christina Buergi, a spokeswoman for Finma, said in a phone interview. Buergi said the request had been made “recently” and declined to comment further.
U.S. District Judge Jed Rakoff scheduled an initial conference in the case today. Rakoff temporarily froze the assets in the account on Feb. 15 at the SEC’s request and also issued an order prohibiting the defendants from destroying or disposing records of any kind related to the transaction.
The SEC on Feb. 20 asked Rakoff to keep the assets frozen until the case is resolved, saying there is a “serious risk that the substantial proceeds from the defendants trading will leave the jurisdiction of the U.S. courts in the next few days and may never be recovered,” according to a court filing.
Rakoff said any traders who object to a permanent asset freeze must appear before him today to explain why he shouldn’t grant the SEC’s request.
The unidentified traders are “foreign traders and trade through a foreign account,” the SEC said.
The commission provided a redacted copy of a trade blotter for the account described as “a Goldman Sachs omnibus firm customer facilitation account,” which shows that from Sept. 1 through Feb. 13, the only trading in Heinz occurred on the day before the takeover of the ketchup maker.
The SEC described the account as “GS Bank IC Buy Open Listed Options, GS & CO C/O Zurich Office.”
Since the Heinz takeover announcement, the traders’ option purchases have settled and can be liquidated at any time, the SEC said. SEC staff attorney David Brown said that on Feb. 15, he informed Goldman Sachs representatives about the agency’s plans and also asked the bank to “use whatever means they have” to contact the traders.
The defendants, using the Goldman Sachs account, invested almost $90,000 in option positions the day before the deal was announced, the SEC said. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent.
The SEC said that the traders had advance material nonpublic information about the impending deal when they used an omnibus account in Zurich to buy 2,533 out-of-the-money June call options, which had a strike price of $65 on Feb. 13. Shares closed that day at $60.48.
The purchase of the options, which expire on June 22, was highly unusual, the SEC said. On Feb. 12, only 14 were purchased, regulators said, while on Feb. 11, no such options were bought. Since Nov. 14, no more than 61 such contracts had been purchased on any other single day, the commission 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.
The case is U.S. Securities and Exchange Commission v. Certain Unknown Traders in Securities of H.J. Heinz Co., 13- cv-1080, U.S. District Court, Southern District of New York (Manhattan).
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