Were options traders lucky? Did Goldman, Sachs & Co. (NYSE:GS) tip them? Speculation and rumor are flying in the wake of call-option trading on 3Com Corp. (NASDAQ:COMS) jumping to a 26-month high before Hewlett-Packard Co. (NYSE:HPQ) announced it would acquire 3Com, a provider of Ethernet switching, for $7.90 per share in cash or about $2.7 billion. The unusual spike in November and December $5 calls has Wall Streeters thinking insider trading.
For you nontrading types, TheOptionsGuide.com has a
simple definition. Basically, having a bunch of call options at $5 in for a specified time allows you to buy said stock in the specified time at $5 and resell it right away. So if you think something, say a merger or an amazing earnings report will be announced, buy away, wait for the price to spike and take a nice profit. But, warns the SEC, no tipping any pitches.
More than 8,000 3Com calls changed hands Wednesday, 17 times the four-week average. This isn't the first time 3Com has been in the middle of possible insider trading around its M&A dealings. Widening the scope of the
Galleon Group trading scandal, The Wall Street Journal notes federal prosecutors alleged that a group of traders associated with hedge funds Galleon and Schottenfeld Group
obtained insider information about Bain Capital LLC's $2.5 billion acquisition of 3Com in September 2007. That deal eventually failed.
ZeroHedge.com had an interesting take on the 3Com options trading, saying Goldman Sachs may have
inadvertently tipped people off to a strategic announcement. Apparently, in a limited distribution note, Goldman advised selected clients a day before the acquisition that 3Com had withdrawn at the last minute from its Data Center Techtonics Conference in New York.
Insider trading is a juicy news topic, but it doesn't move markets and it's hard to prove. Check out this Knowledge@Wharton item for a
deep dive into to the topic. Wharton says insider trading is tough to prove, with a conviction often pivoting on a judge's or jury's view of whether a defendant really knew that information was not yet public. -
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