Here’s Why the SEC May Suspect Insider Trading in the Berkshire-Heinz Deal

On Thursday, Heinz (NYSE:HNZ) announced that it had entered into an agreement with Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) and 3G Capital to be acquired for $72.50 per share. The total value of the transaction, which will take the iconic American food company private, is about $28 billion, which would make it the largest recorded acquisition in the food industry if it stands up to regulatory scrutiny.

Unsurprisingly, the news made tremendous waves. The buyout price represented a 20 percent premium over the stock’s all-time high. Investors were already attracted to the company because of its highly-reliable growth over the past few years — shares advanced 120 percent from March of 2009 through this February, climbing with a beta of just 0.36, indicating that the stock was resistant to market fluctuations. The price movement was supported with steady annual revenue gains and consistently strong earnings.

All in all, the deal came as a surprise but it was not shocking. Heinz fits the profile of companies that Warren Buffet, who heads Berkshire Hathaway, likes to focus on. 3G Capital also signaled its interest in getting more involved in the food industry a while ago. And while the premium may be high, there’s little doubt that it’s worth every penny.

But like every good story, the Heinz deal, which helped curb broad market pessimism on Thursday, is surrounded by an air of scandal. Reports have circulated indicating that the Securities and Exchange Commission has begun investigating unusual trading activity on the day preceding the announcement…

Given the gusto with which the SEC has been pursuing insider trading over the past few years, inquiries into trading activity surrounding major deals is to be expected. And to be clear, the inquiry is still in a preliminary, informal phase, and could very well remain there and dissipate without any formal charges. Nobody has been accused of anything just yet, but there’s some data on the table that’s being scrutinized.

What investigators and curious investors are looking at is an abnormal increase in options trading activity on Wednesday. Total call options volume surged to 3,400, about four times the average volume of 820 per day. On the other side of the equation, just 249 put options were traded, about half their average volume. The volume disparity, falling just one day ahead of the announcement, is what likely set off warning bells at the various institutions that monitor options trading activity.

In and of itself, the activity is suspicious, but nothing to write home about. But some 2,262 call options with a June strike price of $65 might be. The stock closed at $60.48 on Wednesday, and while analysts were generally bullish on the stock, the mean price target was just $61.90. Options traders often increase their positions ahead of major catalysts, but the only event on the radar is the company’s earnings report, still two weeks away.

Basically, whoever took those call options was betting on a big move when there didn’t seem to be much of a reason to expect a big move…

After the deal was announced, the stock naturally shot up about 17 percent to the buyout offer price of $72.50. All told, the one-day gains on the call options were worth as much as $1.5 million in paper profit, according to Trade Alert, a real-time market intelligence platform.

Of course, this could just be a savvy bit of investment or a lucky pick. Crazier things have happened, but its the SEC’s job to pull out the microscope when something seems odd. The evidence says loud and clear that trade activity was abnormal, but abnormality has a well-established home in the markets.

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