Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

The Securities and Exchange Commission's complaint against hedge fund legend Leon Cooperman highlights a common trap that investors fall into when they (allegedly) can't resist acting on insider information: call options. They can be an alluring way to get the biggest bang for your buck, but trades that make big bucks on a thinly traded contract are often easy for regulators to spot afterward. 

The SEC contends that Cooperman received a tip from an executive at Atlas Pipeline Partners in 2010 that the company was planning to sell its Elk City, Oklahoma, operating facilities, a big asset sale that pushed the company's share price up 31 percent after it was announced. The tip prompted the 73-year-old investor to load up on the shares, call options and debt of Atlas Pipeline for various funds associated with his firm, Omega Advisors, according to the SEC complaint, which says Cooperman made about $4 million.

Cooperman responded in a letter to investors that he strongly disagreed with the SEC’s allegations and that the firm hasn’t engaged in any unlawful conduct. 

The first batch of call options contracts in question, which granted the owner the right to buy the shares for $15 by Aug. 21 of that year, did not trade frequently. But when Cooperman started buying after receiving the tip, if the SEC's narrative is accurate, the trades are easy to spot:

Like a Sore Thumb
The SEC contends Leon Cooperman traded in a call option contract for Atlas Energy Pipeline Partners based on inside information. The trade was easy to spot because the options weren't heavily traded.
Source: Bloomberg

The contracts -- each of which conveyed the right to buy 100 shares -- traded for 5 cents a share on July 7 and 10 cents on July 13. The prices of the contracts spiked after the asset sale was announced, trading as high as $3.20 by Aug. 4:

Pipeline of Profits
The price of the calls that the SEC said Cooperman bought jumped as much as 3,100 percent
Source: Bloomberg

There are similar suspicious spikes in volume for other calls with a higher strike price expiring in August and November that the SEC says Cooperman also bought before the deal was announced.  

In fact, some trades were so obviously suspicious that one of Cooperman's family members, also a hedge fund manager, traded emails with a colleague about how "fishy" the trading was -- after Cooperman told them about the deal the night before it was announced, the complaint said.

"Somebody should investigate that," the family member wrote about the call trading, according to the SEC.


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Michael P. Regan in New York at

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