It Sure Looks Like Insider Trading

Furious market moves preceded three recent deals

Are insiders involved in global mergers using information about deals to make a killing in the market? Stock and option movements in a few recent high-profile deals strongly suggest that they are. Trading patterns for AirTouch Communications Inc. and Transamerica Corp., two recent U.S. targets for offshore acquirers, are drawing the scrutiny of stock exchange monitors in San Francisco and Philadelphia, respectively. And heavy trading in a third company, security service Pinkerton's Inc., before the Feb. 22 news of its purchase by a Swedish company, surely set off alarms at the New York Stock Exchange. Federal regulators won't say if they are investigating, but they are concerned about insider trading on cross-border deals.

The warning bells were especially loud in advance of the Feb. 18 purchase of Transamerica by Aegon, a Dutch insurance company. Transamerica's stock rose about 3%, to 57 5/8, the day before the $10 billion deal was announced, as its volume quadrupled from the previous day, to just over 1 million shares. Even more revealing was the movement in call options, with some rising 900% on soaring volume before word of the deal was released publicly.

The movement of the Transamerica options--first reported by BUSINESS WEEK Online--was so dramatic that the Philadelphia Stock Exchange has launched an investigation. A spokeswoman for the exchange, which handles Transamerica options, said its market-surveillance department tracks all unusual movements. The NYSE also monitors unusual activity but declines to say if it's investigating any of the cases.

Market traders, too, were picking up on the Feb. 17 movements of Transamerica while they happened. Market watcher Paul G. Foster, chief options strategist of, a Web site that tracks trading in stocks and options, alerted his 6,000 subscribers that the action on the options suggested a deal was in the works. "I'm not saying I triggered it, but I watch and can understand," says Foster, adding his alert may have accelerated the movements.

Two sets of Transamerica options posted the most dramatic gains the day before Aegon's announcement. Options to buy the company's stock at $60 a share jumped from 1/16 to to 5/8, while the number of contracts climbed to 180 from 10. (Each contract gives the holder the right to buy 100 shares of stock.) Options to buy the stock at $55 a share nearly doubled, to $3, as volume jumped to 961 contracts from 26--including 470 contracts in a single trade.

On Feb. 18, Aegon priced its deal for Transamerica at $78, so options owners made out like bandits. The $60 option contract traded as high as $13, up more than 200-fold from its low of 1/16 the day before. "The timing is somewhat suspicious," says Jon Najarian, the Chicago hedge fund manager who founded His suspicion: Insiders in Europe, who are used to more lax practices on insider trading, may have acted on knowledge not commonly available. Spokespeople for Transamerica and Aegon declined comment.

PROBE. Just two days after the peculiar trading in Transamerica, the stock of Pinkerton's drew an unusual number of buyers. Nearly 400,000 shares of its stock changed hands on Friday, Feb. 19, in advance of the Feb. 22 announcement that Sweden's Securitas was buying the company. Normally, trading volume is less than 10,000 shares a day. (The stock price didn't move much until after the deal was disclosed, when it jumped 69%, to 28 9/16.) Pinkerton's general counsel, C. Michael Carter, says the firm is not investigating because top officials are confident that the leak did not come from any of its 18 people who had advance knowledge of the deal. Says Carter: "The people who were aware of it were on a need-to-know basis, and they were very much attuned to their responsibility under securities laws."

A month before the Securitas-Pinkerton's merger, hints that a deal was in the works seemed to swirl around AirTouch, too. It announced its $56 billion purchase by Britain's Vodafone Group PLC after the close of trading on Jan. 15, but its stock rose 4 5/16, or 5.5%, on that day--on a volume of over 6 million shares, nearly twice the volume of the previous day. AirTouch executives declined comment.

Movements in the options for AirTouch, too, have triggered scrutiny. The Pacific Exchange, based in San Francisco, has launched a probe of the AirTouch options trading. A spokesman for the exchange won't say what drew the eye of the market-surveillance unit. But the volume of options to buy AirTouch for $90 rose to 9,255 contracts in the trading session before the merger announcement, up from 118 the day before. Officials of the American Stock Exchange and Chicago Board Options Exchange, which also saw heavy trading in AirTouch options, declined comment.

While insider trading is illegal both in the U.S. and Europe, practices vary country by country. The Netherlands, where Aegon is based, didn't even set up a securities-regulation department until 1988 and didn't give it responsibility for insider-trading cases until 1996. So far, only a handful of cases have been successfully prosecuted there, says Anita Berntsen, spokeswoman for the Securities Board of The Netherlands.

While federal regulators won't say whether they, too, are curious about these deals, they have acted before. The Securities & Exchange Commission in 1997 brought insider trading charges against a London trader and two Singapore associates for trading in advance of the acquisition of APL Ltd. by Singapore-based Neptune Orient Lines Ltd. It has frozen the U.S. accounts of the men while the case proceeds.

It Sure Looks Like Insider Trading

The SEC and its counterparts abroad are getting tougher on insider trading, cross-border or otherwise. "The era where corporate directors could argue that this is just another form of remuneration has gone by the boards," says Michael D. Mann, a Washington securities lawyer who formerly directed the SEC's international affairs unit. When the trading takes place on U.S. exchanges, he adds, the U.S. can move on its own against suspected inside dealers, no matter where they live.

It's hard to believe that the unusual trading in Transamerica, AirTouch, and Pinkerton's is due to chance. But the inside dope--if that's what it was--could just as easily have come from the U.S. as from overseas. With cross-border mergers on the rise, regulators will have to cast their nets wider than ever.

Before it's here, it's on the Bloomberg Terminal.