SEC, Amex Checking Sterling Drug Trading

From Reuters

The Securities and Exchange Commission is investigating the possibility of insider trading in connection with F. Hoffmann-La Roche & Co.'s hostile $4.2-billion bid for Sterling Drug Inc., government sources said Monday.

The American Stock Exchange said it is also investigating suspicious trading patterns in Sterling options, listed on the American Stock Exchange, shortly before the Swiss-based pharmaceutical giant's $72-a-share tender offer was announced after the close of trading Jan. 4.

Separately, Sterling said that it filed a lawsuit in U.S. District Court in Dover, Del., charging violations of U.S. insider trading laws and disclosure requirements in connection with the bid. Sterling alleges that two affiliated Hoffmann-La Roche companies traded Sterling stock and options at the same time they were privy to confidential non-public information before the Hoffmann-La Roche bid was announced.

Of interest to the SEC is that Sterling's stock price climbed $1.75 to $56.875 on the New York Stock Exchange Jan. 4 just before the tender offer was announced. It had traded as low as $36 a share on Oct. 19 when the Dow Jones industrial average fell 508 points.

But the day after the announcement was made Sterling shares shot up $17.25 to $74.125 a share. On Monday, Sterling stock fell 25 cents to $73.75.

Options Volume

Sterling, whose large stock of over-the-counter drugs includes such well-known brands as Bayer, Midol and Phillip's Milk of Magnesia, said that it planned to respond to Hoffmann-La Roche's offer by Jan. 19.

Hoffmann-La Roche, whose head office is based in Basel, Switzerland, is best known for its Valium tranquilizer.

The Amex review of Sterling stock options trading was automatically triggered by market surveillance computers, which detected unusually high volume in the weeks before the tender offer was announced, an exchange official said.

Holders of options have the right, but not the obligation, to "call," or buy shares of stock, or to "put," or sell stock at a particular price. They pay a fee, usually of several dollars, for this right.

On Jan. 4, volume in February options to buy Sterling stock at $55 a share was 533 contracts and for $60 call options it was 1,226 contracts, compared to normal daily volume of 10 to 40 for each of the contracts, the Amex official said. Each contract is for 100 shares of stock.

February options to buy Sterling stock at $60 a share rose to $2.75 a contract on Jan. 4 from $2 on Dec. 31, before soaring to $15.38 on Jan. 5.

Typically, when exchange reviews of trading patterns find enough evidence to warrant further investigation, the cases are referred to the SEC.

Streamlining Requests

SEC investigators were drawn to the Hoffmann-La Roche case because of the possibility of insider trading under the veil of Swiss secrecy laws, sources said.

Recently, however, Swiss authorities have signaled that their secrecy laws may not be airtight.

U.S. and Swiss authorities have a bilateral agreement that gives the SEC access to evidence during its investigations, including documents and testimony from witnesses, subject to Swiss government approval.

The agreement, which was renewed and broadened Nov. 10, was also aimed at streamlining information requests between the two governments. In the past, U.S. requests from Switzerland have taken as long as three years to process.

Switzerland's Parliament gave final approval Dec. 16 to a bill that would for the first time outlaw insider trading in the country.

A spokesman at Sterling's New York headquarters said the company had not been contacted by the SEC.

Officials at Hoffmann-La Roche's U.S. office in Nutley, N.J., referred calls to the Kekst & Co. public relations firm in New York, but a spokeswoman there said that she did not know if the company had been contacted by the SEC.

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