SEC Investigates Suspicious Options Activity in DRS

The Securities and Exchange Commission [SEC] is investigating suspicious trading activity that surfaced in Parsippany, NJ-based DRS Technologies (DRS) options shortly before it received a takeout offer from Italy’s Finmeccanica SpA. According to regulators, some players in the options market bought call options on DRS based on inside information during the six trading sessions prior to the announcement. The actual takeover announcement was first made public on May 8, 2008 and official word from Finmeccanica came on May 12th.

Most of the suspicious activity seems to have been in the May 65, June 65, and June 70 call options. For example, from April 30 to May 8th, open interest, which measures the number of open positions in an options contract, in the May 65 calls increased from 206 to 3,701 contracts.

In the June 65s, open interest increased more than tenfold, from 344 contracts on April 29th to 3,824 on May 8th. In the June 70s, open interest rose from 71 contracts to 2,281 during that time.

By May 8th, total open interest in the May 65s, June 70s, and June 75s had risen to 9,806 contracts, which represents call options on 980,600 DRS shares.

The stock rallied $10.15, or 15.9 percent, to $73.89 on May 8th on news of the deal.

The surge in the share price was good news for DRS call holders. For example, the owner of the May 65 call saw the value of their options contract increase from $1.10 on May 7 to $8.80 on the 8th, for a one-day 700 percent gain. By May 12th, that contract was trading for more than $12.00.

The identity of the call owners in this case is still unclear. The Securities and Exchange Commission brought the case to a US District Court in New York against “one or more unknown purchasers”. The SEC did identify an account at UBS. It now hopes to identify the owners, freeze the account, and possibly seize millions in profits from any illegal trading activity.

Disclosure: none

Comments

[omooc:]

I admire the way you gathered the supporting data. Though I do not know the stock, your presentation is superb.

2008 Jul 28 09:10 AM

[Nforce:]

That doesn't surprise me since the guy in HR who fielded the ethics violation calls on his "hotline telephone" fired whistleblowers. And relatives of the one officially charged with receiving whistleblower reports were those charged by the SEC for criminal activity recently. The IT department that keeps all archived documents was given a budget increase as announced by Pothoff in a conference call when they fought for every dollar they got before that. Execs who were trumpeting they were going to retire before the DRS offer stayed on. And there are still people employed at DRS who help this kind of thing to happen. Who have personally caused these kinds of things to happen. They keep their retirements and whistleblowers lose theirs because whistleblower and labor laws are not being followed in STL. That this keeps happening is no surprise then. Darn shame because not half of the things have probably been discovered yet.

2008 Aug 02 01:55 AM