Well- timed trading bets raise suspicions

lion.”

Investment bank Goldman Sachs was among financial organizations on the other side of the transactions, said Peterffy, who said he did not know whether the organizations had traded for themselves, on behalf of clients or had simply cleared the trades. “But the regulators should have found out by now,” he said.

Market makers such as Timber Hill and others facilitate trading and provide liquidity because they’re willing to quote both bid and offer prices for many stocks and options.

The Options Regulatory Surveillance Authority responded to Timber Hill in a July 18 e- mail that said it was reviewing the issue “to determine if any exchange or SEC ( Securities and Exchange Commission) rules may have been violated.”

The Chicago Board Options Exchange, which leads the ORSA surveillance effort on behalf of all U. S. options exchanges, declined to comment directly on the complaint. “CBOE takes its regulatory responsibility very seriously and does investigate unusual trading activity. However, we do not comment on individual investigations,” the exchange said.

A Nasdaq spokesman did not respond to messages seeking comment. Goldman Sachs spokeswoman Tiffany Galvin declined to comment.

Leap Wireless stock traded as low as $ 6.58 a share in early July. But the price gradually rose in the following weeks before closing at $ 7.98 on July 12. The takeover, announced after the market closed that day, sent shares soaring to a $ 17.23 opening on July 15, the next trading day after an intervening weekend. That topped the $ 15- per- share takeover deal with AT& T.

Leap options trading, particularly call options, saw unusually heavy volume during the week leading up to the AT& T announcement. Information compiled by Nanex, a company that supplies real- time data to traders, shows that 15,749 Leap call contracts traded hands that week.

The volume easily surpassed that week’s 1,384 Leap put contracts, a negative options trading bet often used when the buyer believes the stock price will fall. Put options grant buyers the right to sell shares at a set price by a specific future time.

In all, 2,356 Leap call contracts were executed during slightly more than the final 15 minutes of trading on July 12. Nearly 80% of those contracts gave buyers the right to buy Leap shares for $ 9 apiece through Aug. 16. No similar put contracts traded during that period, the Nanex data showed.

“It was off the charts,” Nanex CEO Eric Hunsader said of the imbalance.

“Whoever was behind the options trading bought relatively small, oddsized blocks of the call options,” apparently attempting to avoid increasing the price and potentially alerting other investors, said Hunsader.

“They made sure the price didn’t go up. They only took the options that were there,” he said.

Peterffy said securities regulators should pursue examples such as the Leap Wireless options trading, “where it’s very clear what happens.”

“This has been going on for 20 years. It happens all the time, happens about 20- 30 times a year. And we’ve never seen a penny from this stuff,” said Peterffy.

That assertion notwithstanding, the SEC has recently taken action against unidentified traders who reaped potential profits before other major corporate announcements.

Last month, the SEC obtained an emergency court order to freeze foreign accounts of traders who took risky options bets in late June that the share price of Onyx Pharmaceuticals would rise. The transactions were executed days before Onyx announced it had received and rejected an acquisition offer from Amgen. ( On Sunday, Amgen and Onyx announced a $ 10.4 billion deal.)

Two men with assets in accounts at the Dubai branch of a private bank headquartered in Lebanon have asked a federal court to dismiss, vacate or modify the SEC complaint.

They “are confident that their trading did not violate U. S. law,” attorney Luis Mejia argued in a July 24 court filing.

Similarly, the SEC in June alleged that a Thai man reaped more than $ 3.2 million in profit from “highly suspicious” trading in shares of Smithfield Foods before the porkprocessing giant announced it would be acquired by a Chinese firm.

Badin Rungruangnavarat, a 30year- old plastics firm employee, tentatively gained a 3,400% return over an eight- day span by buying Smithfield call options, single- stock futures and stock shares, the SEC charged.

Federal court records in Illinois show that an attorney for Rungruangnavarat submitted a signed settlement order to SEC attorneys during a July 11 hearing. The SEC is evaluating the offer, the records show.

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