Category Archives: Insider Trading

Search Company Buys Into Waste-Management Business

I was reminded of the bizarre tale of Liberate Technologies today when I read that Copernic, operator of the search engine, will pay approximately C$3.5-million dollars in cash and stock to get into the waste management equipment business.

Really, you couldn’t make up this stuff.

Apparently Copernic has signed a letter of intent with Fanotech Manufacturing Group to buy three of its subsidiaries: Fanotech Enviro Inc., Fanotech Waste Equipment Inc, and FanoCore. The companies supply garbage trucks and trash bins, among other refuse-related products.

I wonder whether Mark Cuban approves.

Questions Surface About Irregular 3Com Options Trading Before HP Acquisition Announced

Questions are surfacing regarding unusual trading patterns in 3Com options ahead of yesterday’s announcement of its $2.7-billion acquisition by HP.

Dow Jones Newswires reports that, under normal circumstances, 3Com’s options are rarely traded, with just a few hundred contracts changing hands daily. On Wednesday, however, 3Com options activity spiked to 13 times the normal volume.

Coincidence? Jon Najarian, co-founder of OptionMonster, said he doesn’t think so:

“Since I do not believe in coincidences on Wall Street, I would bet that these unusual call option trades will spark an investigation.”

As reported by Bloomberg:

Volume in contracts to buy shares of the Marlborough, Massachusetts-based company surged to the highest level since September 2007 before Hewlett-Packard Co. said it would buy the maker of computer-networking equipment for $2.7 billion.

“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”

Call options, conveying the right to acquire stock for a given price by a certain date, usually offer higher returns to traders speculating on takeovers. The Securities and Exchange Commission (SEC) is responsible for policing the options market to discourage and identify insider trading, which — if you think about it, and as Mr. Claussen contends — is a form of larceny.

Regrettably, the SEC apparently wasn’t policing anything yesterday, having been closed for Veteran’s Day.

More from Bloomberg:

More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.

Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal- computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to yesterday’s closing price.

More than 22 million shares of 3Com changed hands in the stock market yesterday, compared with this year’s daily average of 4.85 million and the most since March 2008. Trading was heaviest in the hour after 11 a.m. in New York, data compiled by Bloomberg show.

Some have suggested that the call trades might have resulted from “calendar spreads,” in which an investor sells contracts expiring in one month and buys options with the same strike price for a future date. However, that seems unlikely considering that November contracts would not have expired for another nine days.

According to Bloomberg, Goldman Sachs Group Inc. advised 3Com on the transaction and Morgan Stanley served as HP’s agent.

As reported by the New York Times, 3Com is one of several companies that featured in the insider-trading case involving Raj Rajaratnam and the Galleon Group. Traders from Incremental Capital allegedly gained information on 3Com’s previous attempt to sell itself from a lawyer working on the aborted deal with Bain Capital and Huawei, formerly 3Com’s business partner in the China-based H3C joint venture.

The SEC needs to seriously and thoroughly investigate this matter.

Polycom Places SVP/GM on Administrative Leave in Galleon Fallout

If publicly traded companies must deliver bad news, they do it on Friday nights. That’s because stock markets aren’t open on Saturday, at least in North America.

Tonight Polycom had some bad news to deliver, announcing in an SEC filing that Sunil K. Bhalla, the SVP and general manager of its Voice Communications Solutions, would be placed on administrative leave, effective immediately. His duties will assumed by Polycom CEO Robert Hagerty.

The announcement is connected to the insider-trading scandal involving the Galleon Group, a technology hedge fund founded and run by Raj Rajaratnam.

As recounted in a story published in the UK’s Guardian, Polycom was one of the companies on which Rajaratnam allegedly received inside information. The FBI confirmed last week that a Polycom executive had passed on information regarding the company’s quarterly results.

Technology Hedge-Fund Billionaire Charged with Insider Trading

Raj Rajaratnam, billionaire founder of technology-focused hedge fund Galleon Group, was among six people charged today in a $20-million insider-trading scheme, according to a Bloomberg report.

Among the others arrested were Rajiv Goel, a director of strategic investments at Intel Capital; Anil Kumar, a director at McKinsey & Co.; and IBM Corp. executive Robert Moffat.

Many of the illicit trades were said to involve information-technology companies, including Akamai Technologies Inc., Advanced Micro Devices (AMD) , Polycom, Clearwire, Google, IBM, Sun Microsystems.

Prosecutors called it the largest-ever insider-trading case involving a hedge fund. U.S. Attorney Preet Bharara told a Manhattan press conference it was the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases.

It’s long overdue, as far as I’m concerned. Incidents such as this one confirm that public markets have become rigged games where those with advance inside knowledge of material corporate events conspire to enrich themselves at the expense of those who lack access to such information. As trades involve buyers and sellers, those buying or selling with inside information are perpetrating grand larceny.

For a long time now, I have said that the racetracks of Santa Anita and Goodwood offer a better chance of an honest outcome than the public markets of New York and London. Greed is rampant on Wall Street, and it too often runs riot in the boardrooms of the information-technology industry.

Ask yourself: How often have you observed a technology stock whose shares have moved up or down sharply and unaccountably, well in advance of meaningful news? Sadly, it happens all the bloody time.

These individuals deserve their day in court, and it isn’t my place to pass judgment on them. That said, the wiretap evidence cited today appears damning. If they are guilty, I hope they are sent up the river for a good long time.

The integrity of the public markets depends upon the markets being honest and transparent. Justice must be done, and it must be seen to be done.