SEC sues buyers of Duracell options Unidentified purchasers accused of insider trading before Gillette bought firm

September 17, 1996|By BLOOMBERG BUSINESS NEWS

NEW YORK -- The Securities and Exchange Commission yesterday sued unidentified purchasers of Duracell International Inc. securities, accusing them of insider trading.

The SEC said the trades occurred in the two days before the battery maker's announcement Sept. 12 that it would be acquired by Gillette Co. Agency officials said they expect to learn soon who the investors were.

The burst in trading in Duracell call options, which gained value as Duracell stock rose, left the clear impression that someone profited from advance knowledge of the acquisition, the SEC said.

"The trading was very suspicious," SEC attorney Paul Gerlach said in Washington.

In a civil suit filed in federal court in New York yesterday, the SEC said certain investors bought call options of Duracell through the offices of two financial institutions in Switzerland and the Bahamas before the announcement.

At the SEC's request, a federal judge in New York immediately froze the brokerage accounts containing $950,000 in trading profits.

The defendants made huge purchases of Duracell call options Sept. 10 and 11, betting that Duracell's underlying common stock would soar within days, the SEC said.

It did soar, when Boston-based Gillette, a maker of razor blades, deodorants and other household products, said it would buy the Bethel, Conn.-based Duracell for about $7.82 billion in stock and debt.

The defendants made the money by selling the call options after the merger announcement, the SEC said.

"They could have wired the money out of the country today had we not gotten the order to freeze the accounts," Gerlach said.

Gerlach said the agency expects to learn the identities of the investors with the help of the court and financial regulators in Switzerland and the Bahamas.

Duracell shares rose $9, or 18 percent, to $58.125 Sept. 12.

Trading in Duracell's call options increased in the preceding days, after weeks in which there were few transactions in the securities.

The holder of a call option has the right to buy 100 shares of a stock at a given price by a given date. So Duracell's $50 options expiring Sept. 21 -- which would have become worthless had the stock remained below $50 -- surged when Gillette announced its offer.

The options rose to $8, or $800 per contract, from $1.25, or $125 per contract, on the day of the announcement. They had already climbed to $1.25 from 12.5 cents the previous week.

Duracell stock also rose in advance, climbing 8.3 percent in the four sessions before Gillette and Duracell's announcement.

The two companies weren't accused of wrongdoing in the suit yesterday.

According to the SEC suit, some of the defendants' accounts were maintained by BSI-Banca della Svizzera Italiana, a financial institution in Lugano, Switzerland.

BSI placed the investors' call-option buy orders with Finbro Management, a brokerage firm in Lugano, and those purchases were cleared through the Pershing Division of brokerage firm Donaldson, Lufkin & Jenrette Securities Corp., the SEC said.

Those buy orders were executed on the American, New York and Philadelphia stock exchanges, the SEC suit said.

The defendants' other accounts were held at Nominees (Bahamas) Ltd., a trust holding company in the Bahamas, the SEC suit said. The purchases of those call options were made through Prudential Securities Inc. on the American and Philadelphia stock exchanges, the SEC said.

The judge froze the Prudential and DLJ accounts.

None of those companies was sued.

Pub Date: 9/17/96

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