Regulators have escalated an investigation into suspicious trades placed ahead of the $23 billion takeover of H. J. Heinz, focusing on a complex derivatives bet routed through London, according to two people briefed on the matter.
The development builds on a recent regulatory action on a Goldman Sachs account in Switzerland that bought Heinz options contracts. It also comes a week after the Federal Bureau of Investigation said it opened a criminal inquiry.
An unusual spike in trading volume in Heinz options a day before the deal was announced first attracted the scrutiny of investigators. The Securities and Exchange Commission is also examining fluctuations in ordinary stock trades. The Financial Industry Regulatory Authority, Wall Street’s self-regulatory group, recently referred suspicious stock trades to the S.E.C., a person who was briefed on the matter said.
Now the S.E.C. is looking into a more opaque corner of the investing world, examining a product known as a contract-for-difference, a derivative that allows investors to bet on changes in the price of stocks without owning the shares. Such contracts are not regulated in the United States, but are popular in Britain.
The expansion of the Heinz investigation illustrates the growing challenges facing American regulators. Charged with policing the American exchanges, authorities increasingly find themselves having to hunt through a dizzyingly complex global marketplace.
Following a number of prominent crackdowns on insider stock trading, a campaign that scared the markets, investors are seeking subtler and more sophisticated tools to seize on confidential tidbits. Trading operations also flocked overseas, a careful move that forces the S.E.C. to navigate a maze of international regulations before identifying suspect traders.
The Heinz case illustrates the shift, as the S.E.C. relies on Swiss authorities to expose the trader behind the Heinz options bets.
The suspicious options trades were routed through a Goldman Sachs account in Zurich, where laws prevent the firm from sharing details of the account holder’s identity. In a complaint filed two weeks ago, the S.E.C. froze the account of “one or more unknown traders.” A federal judge upheld that freeze last week, a move that will prevent the traders from spending their winnings or moving the money.
The series of well-timed options trades, bets that produced $1.7 million in profits, came just a day before Berkshire Hathaway and the investment firm 3G Capital announced that they had agreed to buy the ketchup maker. News of the deal sent the company’s shares, and the value of the options contracts, soaring.
The S.E.C. called the trading “highly suspicious,” given that there was scant options trading in Heinz in previous months.
“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag,” Daniel M. Hawke, head of the commission’s market abuse unit, said recently.
While the identity remains a secret, the account holder is a Goldman private wealth management client, according to a person briefed on the matter who was not authorized to speak on the record. Goldman executives in Zurich know the identity of the person, but laws prohibit those executives from sharing the name with American regulators and even Goldman executives outside of Switzerland.
Finma, the Swiss regulator, is the gatekeeper for American regulators. The S.E.C. contacted Finma in an effort to learn more about the trading, and the Swiss regulator has promised to help. It could take weeks to identify the traders.
Goldman has hired outside counsel to advise it on the situation, according to people briefed on the situation who were not authorized to speak on the record. The bank, which is not accused of wrongdoing, is cooperating with the investigation.
An S.E.C. spokesman declined to comment.
The agency’s inquiry may cast a cloud over the Heinz deal. After the traders are identified, the focus will turn to the many insiders who had information on the deal and could have leaked details. Dozens of people had confidential information about the deal, including bankers, lawyers and executives for both the buyers and the seller.
As the agency continues to build its case against the options trades, it also is examining suspicious contracts-for-difference.
Investors increasingly favor the contracts because they require little capital investment and can be traded on margin. They are popular on the London Stock Exchange, where regulators are now focusing some attention.
In essence, the derivatives contracts are a side bet on the price of a stock. They have drawn criticism for being opaque, in part because users are not actually trading the shares of a company, but rather a contract linked to those shares.
Regulators have examined the use of the contracts before when accusations of insider trading have arisen. In 2008, the British Financial Services Authority fined an investor for market abuse, saying the investor had used a contract-for-difference to profit from inside information on the Body Shop, a retailer. The person was making a bet in this case that the shares would fall in value.
Despite the focus on such complex products in the Heinz case, the S.E.C. is also examining more mundane activity in equity trades ahead of the deal.
Finra is helping the agency build its investigation. The group created an Office of Fraud Detection and Market Intelligence as a sort of clearinghouse of information.
A Finra official declined to comment on Wednesday.
DealBook: Heinz Case May Involve a Side Bet in London
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DealBook: Heinz Case May Involve a Side Bet in London
