Unknown traders with inside knowledge of the coming acquisition of Alaska telecommunications company GCI reaped more than $1 million in insider trading profits when the deal was announced, the U.S. Securities and Exchange Commission alleged this week.
In a complaint filed Thursday in U.S. District Court in Manhattan, the SEC is suing "one or more unknown traders," either foreign traders or traders using foreign accounts, who the agency says bought GCI options "while in the possession of material, nonpublic information concerning the proposed acquisition of GCI."
The SEC announced Friday an emergency court order to freeze assets in two foreign brokerage accounts associated with the allegations.
Last week, GCI and Colorado-based media conglomerate Liberty Interactive Corp. announced that Liberty will acquire GCI in a $1.1 billion deal.
That April 4 announcement caused GCI's stock to shoot up more than 60 percent, "making the defendants' initial investment of $48,109 worth over $1 million," the complaint said.
The trading is "highly suspicious," the SEC said. Between Oct. 1 and March 19, "neither of the accounts through which defendants traded placed any trades in GCI." But then, from March 20 to March 31, the SEC said, the unknown traders purchased 1,293 options totaling nearly $48,109.
The defendants are "either located in or trading through accounts located in Lebanon and the United Kingdom," the complaint said. It identifies them as "certain unknown customers" of Beirut-based Cedrus Invest Bank SAL and London-based brokerage firm Nomura International Plc.
According to the timeline the SEC lays out in the suit, the purchases happened while the two companies were in talks about the acquisition.
"The purchases began 10 days after GCI's special committee to consider and negotiate a potential transaction with Liberty retained (financial advisers) Lazard Freres & Co.," the complaint said, "and continued for the two weeks immediately prior to the announcement of the acquisition."
[Colorado-based media conglomerate to acquire GCI for $1.12 billion]
Aside from Liberty and GCI, the parties that knew about the proposed acquisition included Lazard Freres and rating agencies Moody's Investors Service and Standard & Poor's, the SEC said. The rating agencies weren't brought into the deal until March 31, the SEC alleged, the day the final two trades were completed. The SEC didn't cite the time of day for the trades or when the rating agencies were contacted, but Beirut and London are hours ahead of New York.
Liberty first approached GCI to talk about the acquisition in December, the suit said, and the two signed a nondisclosure agreement about the proposal. On Jan. 21, Liberty delivered a written proposal for the acquisition to GCI's CEO, and the two companies then had confidential discussions about the proposal.
On Feb. 9, the SEC said, the GCI board of directors got a formal presentation of Liberty's business proposal. "Select GCI employees" were told about the proposal between Feb. 15 and April 3 "on a need-to-know basis."
On March 11, GCI's special committee considering the deal with Liberty retained Lazard Freres as financial advisers, the SEC said. At the end of that month, both Liberty and GCI told Moody's and S&P about "certain aspects" of the proposed deal in order to get credit ratings. The companies signed documents for the transaction on April 4 and announced the deal.
The traders "allegedly used foreign brokerage accounts in the United Kingdom and Lebanon to purchase call option contracts through U.S.-based brokerages and on U.S.-based exchanges in the days leading up to the April 4 public announcement of the acquisition," the SEC said in its prepared statement. The court's order freezes the foreign accounts' assets in those U.S. brokerages.
"The timing, size, and profitability of the defendants' trades, as well as the lack of prior history of significant trading in GCI, make these trades highly suspicious," the complaint said.
GCI spokeswoman Heather Handyside declined to comment on the SEC's allegations. Calls to Liberty and Lazard Freres were not returned.
In 2009, U.S. prosecutors filed criminal charges against a former vice president of Lazard Freres "for alleged insider trading that earned him and others $500,000 in illegal profits," Reuters reported at the time. And in 1986, in the largest insider trading case to that date, at least two Lazard Freres officials were investigated for their roles, with one pleading guilty to four felony counts of trading on inside knowledge.
In the GCI case, the SEC is seeking injunctions against the defendants that would prevent them from engaging in the business alleged in the complaint. The agency is also asking that the defendants repay the funds.
The emergency court order "requires the traders to repatriate any funds or assets located outside the U.S. that were obtained from the alleged insider trading," the SEC said.