SEC files insider trading lawsuit after Martek sale

Unknown investors profited in transaction, agency says

December 27, 2010|By Lorraine Mirabella, The Baltimore Sun

The Securities and Exchange Commission has accused unknown investors in Martek Biosciences Corp. of engaging in illegal insider trading days before last week's announcement of the Columbia company's $1.1 billion acquisition by Dutch company Royal DSM.

The SEC filed a lawsuit in federal court in Manhattan one day after Martek, which makes algae-derived nutritional supplements for infant formulas, announced the deal with DSM, the world's largest producer of vitamins. DSM agreed to acquire all of Martek's outstanding common stock for $31.50 per share in cash, a 35 percent premium over the previous day's closing price.

In the complaint, the SEC said the unknown buyers made "highly profitable and suspicious purchases" of Martek call option contracts between Dec. 10 and Dec. 15 through an account with UBS Securities and sold the options Dec. 21, the day the acquisition was announced. Regulators were able to trace the account used, but UBS records do not identify the owners, according to the lawsuit.

The transactions put the unknown buyers in a position to reap about $1.2 million in profits, the lawsuit alleges. In an order issued last week, the U.S. District Court in Manhattan froze the assets and trading proceeds of the UBS account and ordered the investors to identify themselves.

"We noticed unusual trading in the company stock options in the days leading up to the takeover announcement that resulted in significant profits within a matter of days," said Scott Friestad, associate director of enforcement for the SEC.

"Cases like this are unique because they tend to involve suspicious trading that originated overseas, and that's why there's a special need to try to go into court quickly to attempt to freeze the assets," he added. "If we don't act quickly, there's a significant risk the money could be wired offshore before we can more thoroughly investigate what happened."

In a statement e-mailed Monday by a DSM spokeswoman, company officials said it would be inappropriate to comment on the SEC's continuing investigation. "If we are contacted by the SEC, we will, of course, fully cooperate," the statement said.

Officials from Martek did not respond to requests for comment.

According to the lawsuit, the buyers purchased 2,615 Martek call option contracts, accounting for 90 percent of the volume for those contracts on the specified dates in December.

On the day the acquisition was announced, the price of Martek common stock rose 36 percent, sending the value of the call options held by the purchasers up by as much as 2,500 percent in value, according to the lawsuit. Call options are agreements that give an investor the right to buy 100 shares of a security at a specified price.

No public information was available about the planned acquisition of Martek before the accused investors bought the securities, the lawsuit states.

The SEC, which has accused the purchasers of violating antifraud insider trading regulations, asked the court to order the defendants to give up their illegal trading profits and pay fines.

Martek, founded in 1985 by scientists from the former Martin Marietta Corp., has become the leading provider of infant nutritional supplements. The company says its additive, DHA, can be found in about 99 percent of infant formula in the United States. Martek has added its DHA oil to other products in recent years, such as dietary supplements and salad and sandwich dressings at the Quiznos restaurant chain.

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