Recently, the shadow of illegal insider trading hit close to home with the recent news that Berkshire Hathaway and 3G Capital Partners agreed to purchase Pittsburgh-based Heinz for $72.50 per share. Following the announcement of the potential acquisition, Heinz’s stock rose nearly 20 percent from the prior day’s close of $60.48 on February 13, and trading volume increased more than 1,700 percent from the prior day. The SEC filed a complaint, freezing the assets of a Zurich, Switzerland based account, alleging that unknown traders took risky investing bets to purchase call options at a strike price of $65, reaping over $1.7 million in profits following the announcement. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
Insider trading is often associated with illegal conduct, similar to the above alleged scenario; however, the term insider trading includes both legal and illegal transactions. Legal insider trading refers to corporate insiders - officers, directors, and employees - who buy and sell stock in their own companies. These insiders are required to report purchases and sales of their company stock to the SEC through reporting on Forms 3, 4 or 5.
Illegal insider trading refers to a practice in which an insider or a related party trades based on material, non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence, or where the non-public information was misappropriated from the company. Illegal insider trading undermines investor confidence in the fairness and integrity of the securities markets, and recently the SEC has made insider trading enforcement a top priority.
In the instance of the sale of Heinz to Berkshire Hathaway and 3G Capital Partners, not all details are known at this time. The SEC is investigating the sale in light of what appears to be dubious practices. More details will continue to be revealed as the investigation continues, and we will post additional information as updates warrant.
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