Questions Arise Over Trading of FHP Options
Unusually heavy trading in FHP International Corp. securities two trading days before its sale to rival PacifiCare Health Systems Inc. was announced is sparking concern among market watchers about possible abuse of inside information.
On Thursday, more than 2,000 FHP call options were traded, some that give investors the right to buy FHP shares at as low as $25 a share before Aug. 17.
“Thursday’s numbers were more than 10 times the usual volume, which is something of a warning sign,” said Larry McMillan at McMillan Analysis Corp., a New Jersey firm that tracks options trading. “Seems someone knew something and they got greedy.”
PacifiCare announced Monday that it would purchase FHP for $2.1 billion, paying investors $35 a share in cash and stock. FHP stock jumped $7.375 to close at $35.25 a share after the announcement.
The sharp price increase meant potentially big profits for some of Thursday’s option buyers--as much as 41%.
Call options give investors the right to buy shares in a company at a certain price by a certain time. By purchasing options, an investor can speculate that a firm’s stock price will rise above the level of the options.
Unusually heavy option trading just before a merger or acquisition can trigger regulatory review.
Earlier this year, a spike in call options of New York-based Loral Corp. on the two trading sessions before Lockheed Martin Corp. announced on a Monday that it was buying most of the defense electronics firm sparked an insider-trading investigation by the Chicago Board Options Exchange.
Other companies have come under similar scrutiny. In May, federal authorities accused six people of illegally profiting from insider trading of Intuit Inc. securities before the software company’s merger pact with Microsoft Corp. in 1994.
“We don’t comment on insider-trading investigations, but that [the FHP activity] would certainly be something we might look into,” said Stephan Beauchesne, spokesman for the National Assn. of Securities Dealers, which regulates the brokerage industry.
Beauchesne said such a spike in call option trading could signal “that someone seemed to know beforehand that the merger was going on.”
An official at the Securities and Exchange Commission, which regulates securities trading, said he could not comment on such investigations.
Ria Carlson, a spokeswoman for FHP, said the company’s executives have not been contacted by regulators and couldn’t comment on the surge in options trading.
Officials at the Chicago Board Options Exchange, where FHP options are listed, could not be reached for comment Tuesday.
Bernie Schaeffer, president of the Investment Research Institute, a newsletter publisher in Cincinnati, noted that there was also an increase in the price of FHP options just days before the merger.
“It seems like from the prices being paid for the calls, someone felt a sense of urgency to be buying those options,” he said.
Trading of FHP stock was also very heavy on Thursday and Friday. There were 1.64 million shares traded on Thursday and 1.09 million shares traded Friday. Trading during the last three months has averaged 342,313 shares a day.
