SEC Wins Asset Freeze After Heinz Traders Fail to AppearPatricia Hurtado and Christie Smythe
A U.S. judge froze a Goldman Sachs Group Inc. account that regulators say was used to make suspicious trades in H.J. Heinz Co., after unknown traders failed to appear in court to defend their claims to the assets.
When the unidentified traders didn’t show up at a hearing yesterday in Manhattan, U.S. District Judge Jed Rakoff said he would grant the U.S. Securities and Exchange Commission’s request to freeze the Goldman Sachs account in Zurich until the case is resolved.
“They can hide, but their assets can’t run,” Rakoff announced, saying he had granted the SEC’s request and signed the freeze order.
The agency said in its complaint that the trades came a day before Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc. announced the $23 billion takeover of Pittsburgh-based Heinz, which Heinz said is the largest in the food industry. The suspicious trading involved call-option contracts, the SEC said.
Goldman Sachs told the regulator it doesn’t have “direct access” to information about the beneficial owner behind transactions in the account. 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 has said it’s cooperating with authorities.
The SEC on Feb. 15 sued “unknown” traders who used an “omnibus account” and invested almost $90,000 in Heinz option positions the day before the deal was announced. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent in one day.
The SEC, which obtained a preliminary freeze on the funds from Rakoff on Feb. 15, said that the traders had material nonpublic information about the impending deal when they bought 2,533 call options, which had a strike price of $65 on Feb. 13. Shares closed that day at $60.48.
Heinz shares jumped 20 percent to $72.50 on Feb. 14, following the announcement that Berkshire Hathaway and Jorge Paulo Lemann’s 3G Capital had agreed to buy Heinz.
As a result of the takeover announcement, the price of the June call options jumped to a close of $7.33 on Feb. 14 from 40 cents the day before, an increase of more than 1,700 percent.
Rakoff, who on Feb. 15 put a temporary freeze on the assets in the Goldman Sachs account, directed anyone connected to the trades to appear before him at 2 p.m. yesterday to explain why the assets shouldn’t be permanently restrained. After the judge’s clerk inquired if anyone was present on behalf of the unknown traders, the judge took the bench.
“It appears that the defendants known as ’Certain Unknown Traders in the Securities of H.J. Heinz Co.’ have chosen to remain unknown, at least in terms of any appearance today in court,” Rakoff said. “The matter is called. It’s now 2:22 and no one has appeared.”
Charles Riely, a lawyer for the SEC, said that neither the unidentified traders nor their representatives have contacted the agency since the suit was filed.
“So, there appears to be no opposition to the proposed order that would freeze on a more permanent basis pending further proceedings of the amount in question and also prohibits the destruction of records,” Rakoff said. “I find that the relief was very well warranted and so I have signed the propose order.”
Rakoff told the SEC’s lawyers yesterday that they must tell him if and when they learn the identities of the defendants. He directed them to report to him every two months and ordered the commission to make its next report to him by May 1.
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 as the accounts used had no history of trading Heinz securities in the previous six months and the only trading in the account involving Heinz occurred the day before the takeover was announced.
The purchase of the options for June was also rare: on Feb. 12, only 14 were bought, regulators said, while on Feb. 11, none were. Since Nov. 14, no more than 61 such contracts had been purchased on any other single day, the commission said.
The SEC said the unidentified traders are “either in Switzerland or trading through Swiss accounts,” and argued that an emergency application to freeze the assets was necessary to prevent the individuals from moving their “realized and unrealized profits of nearly $1.8 million overseas and out of this court’s reach.”
The SEC provided a redacted copy of a trade blotter for what it described as “a Goldman Sachs omnibus firm customer facilitation account” showing that from Sept. 1 through Feb. 13, the only trading in Heinz occurred on the day before the takeover announcement.
The SEC described the account as “GS Bank IC Buy Open Listed Options, GS & CO C/O Zurich Office.”
The SEC has asked Swiss authorities for assistance in identifying the traders. The Swiss Financial Market Supervisory Authority will cooperate with the SEC’s request “within the framework of our mandate,” Christina Buergi, a spokeswoman for the authority, said in a phone interview. Buergi said the request had been made “recently” and declined to comment further.
The Federal Bureau of Investigation in New York said this week that it’s also investigating the matter and is working with the SEC.
The SEC wants the assets frozen until the case is resolved because 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.
The SEC said the Heinz case is similar to other insider-trading cases in which the agency has obtained a preliminary asset freeze based on “circumstantial evidence.” The commission said federal judges in New York as well as the Manhattan-based U.S. Court of Appeals have upheld the legality of its actions.
The SEC has been increasing its focus on insider trading by overseas buyers of U.S.-traded securities. As of December, the agency had filed three times as many emergency asset-freeze requests in such cases since 2010 as in the prior two years. The regulator cited suspect trading patterns, typically before mergers or other market-moving news.
One SEC case involved another deal connected to 3G Capital. In November, a Brazilian ex-banker and his firm agreed to pay $5.1 million to settle SEC claims that he made illegal trades ahead of 3G’s 2010 acquisition of Burger King Holdings Inc.
Igor Cornelsen learned about the impending merger from a Wells Fargo & Co. broker, whose client had invested with 3G and knew about the acquisition, the SEC alleged.
Neither 3G nor any of its employees has been accused of wrongdoing in the Heinz matter.
Sometimes the accountholders do come forward. Last year, the SEC filed a suit in federal court in Manhattan seeking to freeze proceeds of the trades in Carlyss, Louisiana-based Global Industries.
The SEC said the unidentified owners of an account at Vienna-based Raiffeisen Bank International AG bought 685,840 shares of Global Industries days before a Sept. 12, 2011, announcement that the company would be acquired by Technip SA, Europe’s second-largest oil services business.
The account earned $1.7 million when shares were sold after the deal was announced, according to the SEC. The agency said it didn’t know who owned the account when it filed the lawsuit.
About 10 months after the SEC won a judge’s order freezing the funds, Ergoport Experts Ltd. responded to the SEC’s lawsuit, identifying itself in court papers as a unit of an entity called Interhold Ltd. Ergoport, which according to Robert Heim, a lawyer for the company in New York, managed at least $40 million, said it made the trades, denied acting on inside tips and continues to seek to recover the $5.3 million.
A federal judge in Manhattan agreed to stay the SEC’s case pending a criminal insider-trading probe by Brooklyn, New York, U.S. Attorney Loretta Lynch.
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).