Fifth Third Bancorp. is reviewing trading last week in hybrid securities that the bank said it plans to redeem after they plunged the most in two years on volume that surged to 54 times the prior year’s average.
Its $400 million of 8.875 percent trust preferred securities fell 3.7 percent to $25.68 on May 18 in the two hours before the Cincinnati-based bank released a regulatory filing at 11:29 a.m. saying it would repurchase the shares at $25 plus a pro-rated dividend.
“Fifth Third is reviewing the facts and the trading activity surrounding this announcement to determine if any further actions would be appropriate,” spokeswoman Debra DeCourcy said today in an e-mailed statement in response to questions from Bloomberg News.
The bank informed the trustee, Wilmington Trust, on May 16 of its intention to redeem the 8.875 percent securities next month, DeCourcy said. Fifth Third then released a regulatory filing with the Securities and Exchange Commission and a news release two days later. Megen Morris, a spokeswoman for Wilmington Trust, didn’t return two telephone calls seeking comment.
“It stinks,” said Carl Barnick, an independent trader at Great Point Capital LLC, a broker dealer based in Chicago that provides investors with technological support to access markets.
Barnick said he alerted the Securities and Exchange Commission and the Financial Industry Regulatory Authority about the situation after his investment in the so-called TruPS dropped 5.5 percent.
John Nester, a spokesman for the SEC, and Nancy Condon, a spokeswoman for Finra, declined to comment.
A public company “wouldn’t send a notice to the trustee and the noteholders without issuing a press release,” said Mark Sokolow, a partner at law firm SNR Denton in New York, speaking generally about the process of redeeming trust-preferred shares. “They wouldn’t give information to some noteholders and not others.”
Nasdaq Stock Market halted trading in the hybrids about 4 minutes after the regulatory filing was issued. Nasdaq allowed trading to resume the next day, according to its records.
Barnick, based in Miami, said he called Fifth Third’s investor relations unit after the shares had been halted to ask what was happening, and spoke to Rich Rosen in that office.
“He told me after they saw the stock trading erratically they decided to put that press release out,” Barnick said.
Rosen didn’t return a call for comment.
Volume in the so-called TruPS between 9:30 a.m. and 11:20 a.m. on May 18 was 2.03 million, compared with a daily average of 37,145 trades in the previous year, according to data compiled by Bloomberg. Within 20 minutes of the opening, 107,194 shares had changed hands, compared with 1,779 shares over the same period the day before, Bloomberg data show.
“We have a pretty deep set of laws and cases where some kind of insider trading was alleged, and the warning signs are usually volume spikes or price gaps up or down,” said Bruce Weber, a professor of information management at the London Business School who teaches about U.S. insider trading law. “This has all the tell-tale signs.”
A test for regulators investigating potential insider trading is whether an investor using only publicly available information could have inferred what was happening regarding the price movement, Weber said. The infrequent trading in the Fifth Third TruPS will make the investigation more difficult because they most likely are bought and sold through market makers and dealers, he said. “It looks very suspicious,” Weber said.
The SEC regulates how companies communicate with investors and other market participants. In 2000, the agency passed Regulation FD, standing for fair disclosure, barring officers from intentionally slipping market-moving news to favored investors before general dissemination. The rule was part of a package of measures aimed at curbing insider trading.