Regulators are looking into possible insider-trading violations related to heavy volume in Loral Corp. options before Lockheed Martin Corp. announced its acquisition plans, sources familiar with the review said Wednesday.
Lockheed announced Monday that it would buy most of the defense electronics system maker and invest in its space division for a total of $9.4 billion, or $45.50 a share. New York-based Loral's stock rose $8.25 to close at $44.50 that day.
Last Thursday and Friday, volume in both call options and Loral stock was unusually heavy. Call options, which enable holders to buy stock at a set price by a specified date, are often used by investors speculating that a stock price will rise.
"It's reasonably well known that when there's an aberrational price or volume activity in any security, it wouldn't be unusual or surprising for us to take a look at it," said William McLucas, enforcement chief at the Securities and Exchange Commission. He declined to comment on whether the SEC is looking at the Loral case.
The Chicago Board Options Exchange is also investigating, sources said. Market surveillance systems at the SEC and self-regulatory organizations such as the CBOE often detect these aberrations, McLucas said. The number of SEC insider-trading investigations has increased markedly during the last two years as merger and acquisition activity has intensified, he said.
William Floersch, vice chairman of the CBOE, said the increase in trading volume in Loral shares is part of a long-standing pattern in which options trading intensifies shortly before the announcement of a takeover deal.
"Some of it may be based on good guessing by Wall Street people who make their living trying to interpret tea leaves, and the rest may be a result of knowing insider trading," Floersch said.
Trading in Loral stock rose to 1 million shares last Thursday and 1.5 million Friday, compared with an average daily volume of 533,000 shares during the previous three months. The stock price rose to a 52-week high of $36.25 on Friday.
Neither Loral nor Lockheed responded to requests for comment.
Some analysts said the spike in Loral options activity might have been related to Westinghouse Electric Corp.'s announcement of plans to sell its defense electronics business to Northrop Grumman Corp., rather than any inside trading. Loral, a jilted suitor for the Westinghouse unit, became a takeover candidate following its acquisition, they said.