The Kraft Heinz – Unilever Merger Leak Will End Up Being Another Example Of A Toothless SEC

Early this morning, the FT leaked news of a takeover bid to be launched by the American food conglomerate Kraft Heinz to acquire the British-Dutch Unilever.  Unilever quickly rejected the proposal, as seen below:

But as Zerohedge covered, the news from the deal already had a profound impact on the share prices of both companies, sending Unilever shares up 11%, and Kraft Heinz shares up 4% in pre-open trading.

Zerohedge provided additional analysis, detailed below:

As Bloomberg points out, on Unilever’s U.S. ticker, 10,909 calls traded on Feb. 15, the most since 2011 and compared with 232 puts; 5,186 bullish contracts changed hands on Feb. 16 versus 31 bearish bets. March $45 and $40 calls were the most active on Feb. 15; March and May $45 calls were the most traded on Feb. 16.  On the Dutch ticker, call volume jumped to 24,649 on Feb. 16, the most since September and more than double put trades. March EU40 calls were the most traded on Feb. 16.

Kraft also saw a surge in options activity…

The activity details the obvious – someone got tipped off before the pending takeover bid was made public, and traded accordingly.  It wouldn’t take a rocket scientist to see that a company offering $50/share to a firm trading in the $42 area would push the value of UN up significantly.  Without looking at the volume in the individual shares themselves, there would likely be plenty of price/volume action there as well; though it is much easier to lever up using options, no one should be so naive to think those with this information weren’t also buying shares of KHC and UN.

This should be a fairly open-and-shut case to figure out, even if it requires cross-border cooperation with the British and Dutch authorities.  There was a significant bump in the option volume on February 15th and 16th in both shares, particularly Unilever, which was the takeover target being bid for.  Analyzing the options volume and who profited (and conversely, who got screwed over and lost) from this transaction should be fairly easy.  With much higher share volumes (with both UN and KHC averaging over 2 million shares traded daily), it will be more difficult to look at the volume in the shares themselves, though it will hardly be impossible.

However, expecting the SEC (and/or CFTC) to nail down obvious cases of insider trading and prosecute the offenders in question is about as likely as Israel and Palestine all of a sudden coming to terms on a peaceful two-state solution and end to hostilities.  Search “Securities and Exchange Commission toothless” or “CFTC is toothless” if you don’t already know how powerless these regulators are in regard to punishing banks and large institutions for obvious offenses.  The general rule is – the smaller of an institution you are, the more likely you are to be caught/punished for insider trading.  The big guys almost always get away with it.

Insider trading has become such a commonplace activity among Wall Street elites, it is now dramatized in a popular television show on the Showtime network.  Starring Paul Giamatti and Damian Lewis, Billions (which starts its 2nd season on Sunday) is loosely based on hedge fund mogul Steven A. Cohen of Point72 Asset Management (formerly SAC Capital), and attempts to prosecute and financially punish him for insider trading and criminal activity by U.S. Attorney for the Southern District of New York Preet Bharara.  While it’s anyone’s guess as to how a television series will change and embellish events for their viewers, you’ll have to take a look at Zerohedge’s coverage of Steve Cohen to see what he’s up to these days:

But more to the point, and as noted above, we were hoping that Mr. Cohen, who surely would not want his name dragged back into another insider trading scandal as he prepares to move back to managing other people’s money which he will be allowed to do again in 2018, now that the SEC has granted him a reprieve from the isolation of a family office, will provide us with the required information, the same information which several years ago was material enough for the Feds to unleash the most historic crackdown on a legendary hedge fund in modern capital market history.

Because the alternative is all too obvious: Steve Cohen is back to his “neither admit nor deny criminal guilt” days of investing in biotech stocks on “hot tips” acquired by insiders through “expert networks” or otherwise. Then again, we doubt even he would be so bold as to file a 13G on the same day a company has soared by 400% on a successful Phase 3 trial.

So don’t expect the SEC to all of a sudden grow a backbone and/or become remotely competent, and get to the bottom of today’s blatant insider trading related to the Kraft Heinz takeover bid for Unilever.  Even though it should be blatantly obvious to everyone that there was serious misconduct, the SEC and all other related financial authorities seem far too preoccupied to give it any consideration.