The President of the Pacific Stock Exchange said yesterday he has given government investigators evidence of possible illegal insider trading in stock options of Santa Fe International Corp. just before it was sold to Kuwait Petroleum Corp.
The Pacific Exchange completed its investigation of alleged improprieties in Santa Fe options trading and turned its case over to the Securities and Exchange Commission last Thursday, PSE President James Gallagher testified at a House hearing on the takeover of Santa Fe.
"The information which we have gathered seems to indicate a strong possibility that such illegal trading did occur," said Gallagher, who disclosed that the New York Stock Exchange is conducting a separate investigation of trading in Santa Fe stock.
Gallagher said he had been warned by attorneys not to disclose what the internal investigation came up with so he would not "blow the case" for the SEC.
The SEC is trying to determine whether insiders with advance knowledge of Kuwait's plans used that information to profit from stock and options trading. Generally insiders are forbidden to make investments on information that has not been disclosed to the general public.
Gallagher testified before the House Commerce, Consumer and Monetary Affairs subcommittee, which is also looking into the Santa Fe takeover. Chairman Benjamin Rosenthal (D-N.Y.) said he will hold another hearing Thursday on the Kuwaiti purchase of Santa Fe International, a major oil exploration firm.
Shortly after Santa Fe's takeover by the Kuwait government's oil company was announced, traders on the Pacific Stock exchange complained about unusually heavy buying of options on the stock.
A stock option gives an investor the right to purchase 100 shares of a company at some future date at a specified price. Just before the Santa Fe sellout, the company's stock was selling for about $24 a share and options to buy the stock for $30 a share were virtually worthless, selling for only $6.25.
After Kuwait offered to pay $51 a share for Santa Fe, the value of the options soared. Each $6.25 option became worth $1,418, giving buyers a profit of 22,700 percent in less than a week, Gallagher testified.
The Pacific Exchange official said the market specialists had no inkling of a possible takeover of Santa Fe and there was virtually no demand for the options.
But in the two weeks before the takeover was announced, there were "significant and unusual purchases" of the options, including one order for 1,000 options from a Swiss bank and others from customers in Kuwait, he said.