The Securities and Exchange Commission charged yesterday that unknown purchasers made more than $1 million in illegal insider trading profits by buying the stock and options of Contel Corp. in advance of a merger announcement Thursday that sent Contel's securities' prices soaring.
On Thursday, GTE Corp. said it would acquire Contel in a $6.2 billion takeover, creating a company rivaling Bell Atlantic Corp. and the other Baby Bells in size. Although the SEC does not know the identity of the investors who allegedly bought Contel shares through a number of European banks and U.S. brokerage firms, the agency moved quickly to prevent any illegal profits from flowing out of the country.
The SEC requested and received permission from a federal judge in New York to freeze "certain assets" related to the trading, which it said had occurred through accounts at four Swiss banks, two German banks and three New York brokerage firms.
The known profits from the transactions amounted to more than $1 million on an investment of about $200,000, the SEC said, adding that profits from other transactions could not be determined. The SEC said the most lucrative trading was in Contel "call option" contracts, which give investors the right to buy Contel shares at a future date and price.
The price of Contel call options skyrocketed this week before the merger announcement, suggesting that there were leaks and possible insider trading. One series of options rose from $37.50 on Monday to $43.75 on Tuesday to $93.75 on Wednesday to $550 on Thursday, the day of the merger announcement. The volume of Contel options trading also increased, from 88 contracts on Monday to 4,050 contracts on Wednesday, the day before the announcement, according to American Stock Exchange officials.
Shares in Contel stock rose, but more more modestly. The stock, traded on the New York Stock Exchange, closed at $26.50 on Monday, $26.87 1/2 on Tuesday, $28 on Wednesday and $35.12 1/2 on Thursday.
Spokesmen for Contel and GTE said in statements that the firms were "cooperating fully" with the SEC investigation, and SEC lawyers said no wrongdoing was being alleged on the part of either company. A spokesman for the American Stock Exchange, where the options trading occurred, said the exchange would not comment. In cases of this kind, the Amex, which tracks trading with its computer surveillance system, often alerts the SEC to suspicious trading.
It is unusual but not unknown for the SEC to charge defendants without knowing their identities. The technique is most often used when those suspected of trading on nonpublic information are overseas, experts said.
SEC lawyers said they hoped the defendants would come forward or be identified as the legal process moved forward, but in the meantime the agency intends to serve legal documents through their agents. The SEC has information-sharing agreements with many European countries, which could help to crack the case.
The pending GTE-Contel merger, which needs regulatory approval to be completed, would create a company with 17.7 million telephone lines nationwide as it blended the two firms' local-telephone systems. It also would allow the two companies to consolidate their satellite communications, cellular telephone and federal contracting operations.
The SEC complaint revealed, apparently for the first time, that GTE first considered acquiring Contel in late 1989 or early 1990, but did not contact the company then. GTE renewed its interest in May 1990 and preliminary discussions took place, but Contel terminated them in late May or early June. The talks that led to the merger announcement began in the middle of July, the SEC said.