The Securities and Exchange Commission has sued "One Or More Unknown Traders" it says made "highly suspicious" investments in Alaska telecom firm General Communications Inc. (GCI), in the days before it agreed to be bought by Liberty Interactive Corp. on April 3. (Liberty, based in Colorado, owns West Chester-based QVC, the home-shopping channels.)
The SEC says the buyers "misappropriated" insider information when they bought out-of-the-money call options on GCI, unhedged, at prices up to $25 a share — while the stock was trading at around $20 a share.
That's a bet only a person trading illegally on nonpublic information, and who knew the stock was going to rise, would make, the SEC argues in its New York federal court complaint.
Liberty agreed to buy General Communications at $32, nearly 60% above its recent trading value. The unknown traders, who bought futures contracts giving them any profits above the share's face value, scored gains of more than $1 million when General Communications made the deal public and its price shot up, the SEC says.
The suspicious options buys "began 10 days after" General Communications set up a committee to negotiate a possible deal with Liberty, and after it hired the New York investment bank Lazard Freres & Co., the SEC says in its complaint.
No one at Liberty, General Communications, or Lazard has been accused of wrongdoing. But someone leaked and traders illegally traded on their information: the SEC says there's no other reason traders would have purchased those options.
The unknown traders worked through brokerage accounts at Cedrus Investment Bank SAL in Beirut, Lebanon, and at Nomura International Plc in London, the SEC said.
The case goes a step beyond last winter's charges against a Wharton School grad and his investor contacts in China for allegedly buying up DreamWorks SKG shares in advance of the company's purchase by Philadelphia-based Comcast Corp.
In the DreamWorks case, the SEC admits it doesn't know how insider information got out -- but they identified Shaohua (Michael) Yin as the man who used it illegally to earn $29 million in illegal profits.
Trading patterns gave the agency enough information to seize his phone when he tried to fly to China, and to convince a federal judge in New York to freeze $81 million in Yin's, his parents', and three China-based associates' bank accounts. The SEC filed civil charges accusing Yin and his group of scoring "highly suspicious" profits from DreamWorks and at least five other stocks before each announced corporate mergers in recent years.
A Comcast official told the SEC his firm found out DreamWorks was for sale, and ultimately bought it, based on information from a law firm that represented both Comcast and an investment bank associated with a rival offer, as I reported Feb. 21.
(This story has been updated to clarify the relationship between Liberty Interactive and QVC.)