TXU Deal Spawns Insider-trading Charges

More than 8,000 call options for TXU stock were bought through foreign accounts before the buyout deal was made public. Now the SEC is on the trail...
Marie LeoneMarch 5, 2007

The Securities and Exchange Commission received permission from a U.S. District Court in Chicago to freeze the assets of unknown individuals who allegedly purchased call options of TXU Corp. ahead of the power company’s $45 billion merger announcement. In its complaint, filed on March 2, the SEC charges that “unknown purchasers” engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws.

The identities of the individuals are unknown, says the SEC, because they made their purchases in accounts at several foreign brokerage firms. Those brokerage firms, in turn, cleared the transactions through domestic firms, which purchased the orders through the Chicago Board Options Exchange, alleges the SEC. In addition to freezing approximately $5.4 million in assets, the court order requires the purchasers to identify themselves; provides for expedited discovery; and prohibits the defendants from destroying evidence.

The Commission’s complaint alleges that “highly profitable and suspicious purchases” of call option contracts for the common stock of TXU were placed by the unknown purchasers through overseas accounts in late February 2007. According to the complaint, the purchases were made in advance of a public statement on February 26, announcing that TXU entered into a buyout agreement with private equity groups headed by Kohlberg Kravis Roberts & Co., Texas Pacific Group, and Goldman Sachs. As a result of the buyout announcement, TXU’s common stock jumped more than 13 percent over its previous trading day closing price, noted the SEC document, thereby placing the unknown purchasers, “in a position to gain substantial profits.”

The SEC claims that the transaction worked in the following manner: On February 21 and February 23, while in possession of material, nonpublic information related to the acquisition, the purchasers used overseas accounts to buy more than 8,000 call option contracts for TXU stock in accounts at three broker-dealers in the United States. According to the complaint, the call option contracts were “out of the money” and most were set to expire in March, within weeks of the purchase date.

The complaint contends that a result of the increase in price of TXU stock, the “unrealized illicit profits on the option contracts total approximately $5.4 million.” The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and civil monetary penalties against the purchasers, according to a press statement.