Online Extra: A Steady Drip of Buyout Leaks
By Emily Thornton
There's nothing like a little collusion and insider trading to spoil the fun of a red-hot market. As companies chase after bigger game, they're working together in more and more joint deals with many more investment bankers, increasing the chances of information-security breaches. In October, the Justice Dept. sent several private-equity firms letters as part of an antitrust probe.
At the same time, there's mounting evidence that people connected to buyout deals may be trading on nonpublic information. This year unusual stock-trading preceded 15 of the 31 going-private deals worth more than $1 billion, according to a study conducted for BusinessWeek.com by Measuredmarkets, which tracks stock-trading patterns.
Among them: the $25 billion-plus buyout of casino giant Harrah's Entertainment (HET ) and the $8 billion takeout of Aramark Corp. (RMK ), the food management services provider. Harrah's and Aramark declined to comment.
Suspicious activity has also been alleged in options and credit default swaps markets. "There's heightened interest in misuse of information in going-private transactions," says Daniel Hawke, district administrator for the Philadelphia office of the Securities & Exchange Commission.
Justin "Dusty" Huscher knows this all too well. On June 22—nearly two years after the 52-year-old founding partner of the Chicago private-equity firm Madison Dearborn Partners retired—the SEC charged him with insider trading. The allegation: an ill-gotten gain of $54,692 in November, 2003. Huscher hasn't admitted or denied wrongdoing, according to the SEC. Neither he nor his lawyer returned phone calls seeking comment.
According to the SEC, a JPMorgan managing director, whom Huscher has known since 1978, shared nonpublic information with Huscher on a deal to purchase Unisource, the Tucson (Ariz.) power utility. (Madison Dearborn had decided against joining the deal the previous October.) The SEC alleges that the banker, who was advising a group of private-equity firms on the Unisource purchase, told Huscher when the deal would be announced and that Huscher purchased 8,000 shares of the company's stock through his private online brokerage account. Huscher didn't disclose that he bought Unisource stock to Madison Dearborn, violating the firm's securities-trading policy. When the deal was announced, the company's stock jumped 26%, according to the SEC complaint. JPMorgan declined to comment.
Another case of alleged insider trading shows how leak-prone some buyouts may be getting. London property developer Taher Suterwalla and another person identified by the SEC only as a London-based trader allegedly made "spread bets" on options of the struggling San Diego retailer Petco Animal Supplies (PETC ) in late June and early July that would allow them to profit if the options rose.
On July 14, Petco announced rare good news: Its former private-equity owners, Leonard Green & Partners and Texas Pacific Group, were buying it for a second time at a 49% premium. Suterwalla and the other person earned $10 million from bets on the spreads, according to SEC court filings. Other people, also unnamed in the SEC complaint, had placed hundreds of bets on Petco options through a bank in Zurich, according to SEC court filings.
The SEC doesn't identify where the leak of nonpublic information came from in its complaint, and won't comment on it except to say that its investigation is ongoing. The firms say they have no knowledge of Suterwalla. Through his lawyer, Michael von Pommern-Peglow, Suterwalla says the SEC charges are "totally unfounded."
"The SEC's unfair behavior and its publication of unfounded allegations have done Mr. Suterwalla great damage," von Pommern-Peglow wrote in an e-mail message to BusinessWeek. Suterwalla is considering challenging the SEC's jurisdiction.
Thornton is an associate editor for BusinessWeek
With Stanley Reed in London