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March 9, 2009
The Merck Deal and the SEC: Not a Joke
Posted by Derek
And I thought that I was kidding, at least a bit, in my post where I warned some of the folks buying into Schering-Plough last week that they might be hearing from the SEC. Well, maybe not - whenever a deal like this goes through, the first place they look is in the options market:
Some lucky option players appeared to have reaped a windfall with Schering-Plough call options rocketing after Merck on Monday announced a proposed $41.1 billion takeover of the drugmaker.
. . .a burst of activity in the stock's call options last Tuesday and again on Friday may be too much of a coincidence to overlook and prompted some option traders to ask if inside word of the pending deal reached some investors.
"Our examination of the data suggests a high degree of likelihood that someone did indeed place what I will be politically correct and call nicely timed trades," said Jon Najarian, a founder of Web information site optionmonster.com, in an email to Reuters.
Good luck explaining these, is all I can say. Telling them how lucky you felt that day won't make the folks from the enforcement division go away. As a lawyer in this business once said to me at a meeting, "I have to make sure that no one in this company trades our stock on material information. And material information is defined as something that makes you think about trading the stock."
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1. Anonymous BMS Researcher on March 10, 2009 10:27 PM writes...
Most of my money is in places other than the pharmaceutical industry for two main reasons:
1. Ethics: the best way I know to avoid unintentionally using insider information is to invest in places where I do not have inside information.
2. Diversity: my wife and I both work in this industry, so our careers represent a substantial personal investment in pharma. On the "don't put all your eggs in one basket" principle, we therefore feel safer putting our money elsewhere.
Permalink to Comment2. Anon on March 11, 2009 1:52 PM writes...
It tickles my heart that the same SEC that couldn't do anything to stop the $65 billion Madoff debacle (after they were informed years before) spend their time worrying about a few 'well timed trades.' Not that insider trading is alright, but with the recent disaster on Wall Street one might think that there would be better things to prosecute...
Permalink to Comment3. Hap on March 11, 2009 5:28 PM writes...
Why'd MLB spend so much time going after Pete Rose while players left and right were juicing themselves into the record books? Steroids suck because the players screwed their own (more talented) compatriots for cash and records, but neither the players, the owners, the press, or the fans seemed to much care - they could trust (mostly what they saw) and that the games were honest. Betting on baseball brings up the possibility that you could fiddle the outcomes of games for your own (or your bookies') benefit - so all of a sudden, fans can't trust that the outcome of games is legitimate but is instead being controlled from elsewhere.
Madoff seems to have been a thief, but he didn't compromise the market - he just depended on his victims' greed and trust to rob them blind. Insider trading, on the other hand, brings the possibility that a few people could use their knowledge to control the market - once the game is rigged (or people believe it to be so), there ceases to be a point in people playing it, and the exchanges and the SEC no longer have a mission (and a lot of people don't have jobs or money). Madoff's acts don't necessarily threaten the trust of people in the market, but insider trading does, which might explain the differing outcomes. (Plus the criminal people can handle Madoff - I'm sure he'll meet lots of new friends where he goes).
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