A jump in trading of Transamerica Corp. call options the day before Aegon NV agreed to acquire Transamerica is raising questions about whether insider trading occurred, according to Business Week magazine's online edition.
Wednesday, the day before the $10.8 billion deal was announced, volume in call options with a "strike" price of $60 and with an expiration date of last Friday surged to 180 contracts from 10.
Also Wednesday, volume on February Transamerica call options with a strike price of $55 a share shot up to 961 contracts from 26 the day before.
'Something is amiss'
"That is a pretty heavy-duty volume in options," said Abba D. Poliakoff, chairman of the Maryland State Bar Association's committee on securities.
"The trading activity jumping to that kind of level is a clear signal to a regulator that something is amiss."
A spokesman for the Securities and Exchange Commission said he could neither confirm nor deny whether an an investigation had begun.
Officials at Transamerica did not return phone calls.
Each call option contract gives the investor the right, but not the obligation, to buy 100 shares at a predetermined price (the strike price) by a certain date.
Options always expire the third Friday of the month. Eighty-five percent of options expire worthless, according to numerous academic studies.
The unusual trading activity involved options that gave investors the right to buy the stock at $55 and $60 a share. The call options with a strike price of $60 were bought for 6.25 cents per option.
When the price of Transamerica's stock shot up to $73, the underlying options soared in value from 6.25 cents to $13 -- the difference between the pumped-up takeover price of the stock and the exercise price of the option. An investor who bought 10 contracts, or 1,000 options, spent $62.50 and made about $12,937.50, minus any commissions.
Aegon, which has its U.S. headquarters in Baltimore, is buying Transamerica for $78 a share. Transamerica's shares closed at $72.875 Thursday, when the deal was announced.
The SEC and the stock exchanges have surveillance groups that watch for unusual trading patterns, especially before big announcements, Poliakoff said.
"When the SEC senses that some insiders have capitalized on information that is nonpublic the SEC will investigate and bring action," he said.
Investors who cash in using insider information must surrender their gains and face penalties up to three times the amount of their illegal profit, plus criminal sanctions, Poliakoff said.
Pub Date: 2/23/99