NEW YORK -- While Kohlberg Kravis Roberts & Co., TPG Inc. and Bain Capital LLC meet behind closed doors to mount the world's biggest leveraged buyouts, their deals already are common knowledge in the stock options market.
Options trading jumped an average 221 percent in the three days before disclosure of the 17 biggest U.S. takeovers of the past year, compared with the average for the previous 50 days, Bloomberg data show.
The acquisitions of Dallas-based electric utility TXU Corp.; HCA Inc., the biggest U.S. hospital operator; First Data Corp., the world's largest processor of credit-card payments; and student loan company Sallie Mae were all preceded by a surge in seemingly well-timed options bets, according to the data.
The record $188 billion of leveraged buyouts announced in the first quarter is fueling U.S. investigations of insider trading. Prosecutors charged a Credit Suisse Group investment banker May 3 with leaking tips in about nine takeovers, the second major bust of the year. Seven of the 11 insider lawsuits filed by the Securities and Exchange Commission this year involve options.
"We are seeing deliberate, calculated misconduct by people who otherwise make a substantial livelihood from the very markets they're abusing," said Linda Thomsen, enforcement chief at the SEC. "The behavior is not only illegal, it's repellent, and we will be relentless in pursuing it."
Buyout firms have raised a record $250 billion since the start of last year, enough to afford $2 trillion in acquisitions, including borrowing money, according to Morgan Stanley.
The deals in the first quarter included the biggest ever, the $32 billion acquisition of TXU. The 17 biggest takeovers are leveraged buyouts and corporate mergers and acquisitions valued at more than $10 billion, according to Bloomberg data.
Options volume in TXU more than doubled during the three days before New York-based KKR and TPG of Fort Worth, Texas, agreed Feb. 26 to buy the utility, Bloomberg data show. TPG formerly was called Texas Pacific Group.
KKR's $26 billion offer for Greenwood Village, Colo.-based First Data was preceded by a 650 percent increase in options trading during the three days before the April 2 announcement.
Trading in Reston, Va.-based SLM Corp., known as Sallie Mae, climbed 71 percent in the three days before newspaper reports that New York-based J.C. Flowers & Co. would make a $25 billion buyout bid, unveiled April 16.
HCA options volume rose 388 percent before July reports that LBO firms had contacted the Nashville, Tenn., company. Five days later, a group including Bain Capital in Boston and Merrill Lynch & Co. in New York made a $21 billion bid.
Shares of TXU rose 4.1 percent the last day before the deal became public. None of the other buyout bids were preceded by increases in their stock prices of more than 2 percent.
The number of people involved in these deals raises the challenge of tracking down leaks, said Thomsen, who declined to say whether the SEC may increase its focus on LBOs. Deals are so big that funds often team up and each hires its own law firms and banks.
"The bigger the deals are, the more excitement there is, the more eager people are to know what's going on," said Alan Bromberg, a securities law professor at Southern Methodist University in Dallas.
At least 20 firms helped arrange New York-based Apollo Management LP and TPG's $17 billion bid for Harrah's Entertainment Inc. in Las Vegas, Bloomberg data show. In the three trading days before the deal became public Oct. 2, volume in call options increased 242 percent above the 50-day average.
Harrah's spokesman Alberto Lopez declined to comment, as did First Data spokesman Colin Wheeler. Sallie Mae disclosed last month that the SEC is reviewing trading of the company's shares and securities before the takeover announcement. The company is cooperating, spokesman Tom Joyce said in an e-mail.
Spokesmen for KKR, Texas Pacific, Apollo and Bain also declined to discuss the matter. J.C. Flowers didn't respond to a request for comment. Spokesmen for HCA also didn't respond to requests for comment.
The potential for intentional leaks was underscored in March when federal prosecutors and the SEC accused Randi Collotta, a former compliance officer at New York-based Morgan Stanley, of feeding tips about mergers and acquisitions to a network of hedge funds and brokers in 2004 and 2005.
Collotta, who left the company in 2005, is expected to plead guilty at a hearing Thursday, prosecutors said in a letter posted in the case docket. She "is prepared to address the charges in court," her attorney, Kenneth Breen, said. He declined to comment further.
At Credit Suisse, prosecutors say Hafiz Naseem, a junior investment banker in New York, began giving tips to a banker in Pakistan weeks after he was hired last year. The scheme allegedly generated at least $7.5 million in proceeds.
Naseem's lawyer, Marc Mukasey, said Friday that his client is innocent. Zurich-based Credit Suisse said it told regulators of the situation.
Trading in options to buy shares of Dow Jones & Co. . surged to an 18-month high April 30, the day before Rupert Murdoch's News Corp. said it bid $5 billion for the company. Dow Jones said Saturday that the SEC and the New York state attorney general were investigating.
A spokesman for Dow Jones, which publishes The Wall Street Journal, said yesterday that it has received a subpoena from the New York attorney general's office and a request for information from the SEC regarding options trading. Dow Jones will "cooperate fully" with the authorities, spokesman Howard Hoffman said.
Trading in options to buy shares of Armor Holdings Inc. also surged to a record Thursday, before yesterday's announcement that BAE Systems PLC agreed to buy the Jacksonville, Fla., company. An Armor Holdings spokesman didn't immediately return a phone call. BAE declined to comment.