SEC Suit Claims Insider Trading in GTE-Contel Deal
The Securities and Exchange Commission charged Friday that massive insider trading had occurred before GTE Corp. and Contel announced plans this week to merge, and the agency moved swiftly to freeze allegedly illegal trading profits.
In a lawsuit filed in U.S. District Court in Manhattan, the SEC said it didn’t yet know who the illegal traders are. But it said orders for Contel common stock and Contel and GTE options were placed through foreign banks, including several Swiss and West German financial institutions.
At the SEC’s request, U.S. District Judge Charles S. Haight Jr. issued a temporary restraining order, barring the foreign banks and the U.S. brokerages through which the orders were executed from distributing any profits from the trades. An SEC officials said the total illegal profits from the insider trading probably were “in the multimillion-dollar range.”
Rudolph M. Gerlich Jr., an SEC enforcement lawyer, said the order was necessary because foreign financial institutions are involved. “Once money is moved offshore it could be very difficult to get it back,” he said.
The SEC said some of the trades also apparently were made directly through U.S. brokerage firms, including Shearson Lehman Hutton Inc., Smith Barney, Harris Upham & Co. and Advest Inc.
GTE and Contel, both local exchange telephone companies, said Thursday that they had agreed in principle to merge through an exchange of stock. The transaction is valued at $6.2 billion. The news sent Contel’s stock soaring Thursday to $35.125 a share, up $7.125, and drove down the price of GTE’s stock.
American Stock Exchange figures show that the volume of Contel call options surged on Tuesday and Wednesday, the two days before the announcement. Volume on Tuesday was 2,027 contracts and on Wednesday, 4,050. Average daily volume for the options in June was 446 contracts, and only 88 contracts were written on Monday.
An option is the right to buy or sell stock at a fixed price by a certain time. Options can generate huge profits on relatively small investments if the purchaser correctly guesses how far the price of the stock is going to move up or down. The SEC said the suspected illegal options trading that the agency has uncovered so far would have brought a profit of over $1 million on a total investment of $205,000.
Gerlich said the SEC was moving swiftly to identify the individuals behind the suspicious trading. He declined to say how many individuals currently are suspected, or whether they are U.S. or foreign citizens.
Dorea Akers, a spokeswoman for GTE, said: “We are aware of the investigation and we’ll cooperate fully.” Brian Farley, director of corporate communications at Contel, said his company too is cooperating with the SEC. They declined to comment further on the case.
The foreign banks through which orders allegedly were placed include Credit Suisse, Compagnie de Gestion, Union Bank of Switzerland and Confide Finance SA, all Swiss-based, and two banks in Dusseldorf, West Germany--Simonbank AG and Deutsche Apotheker und Aerztebank. Officials reached late Friday in the New York offices of several of the banks declined to comment on the investigation.
