U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19778 / July 27, 2006
SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of Petco Animal Supplies, Inc., Case No. 06CV1446 DMS (LSP) (S.D. Cal.)
SEC Obtains Emergency Asset Freeze Against Purchasers of Call Options for Petco Stock Prior to Acquisition Announcement
The Securities and Exchange Commission ("Commission") announced today that on July 18, 2006, the United States District Court for the Southern District of California entered a temporary restraining order freezing assets of certain as-yet unknown purchasers of call options for the common stock of Petco Animal Supplies, Inc., and prohibiting the unknown purchasers from obtaining the options or the proceeds from the sale of the options. Petco, based in San Diego, Calif., operates over 800 retail stores around the country that sell pet food, supplies, and services.
The Commission's complaint, filed in federal court in San Diego, alleges that the unknown purchasers engaged in illegal insider trading in Petco call options shortly before the public announcement that Petco would be acquired by two private equity firms for $1.8 billion. In addition to freezing approximately $862,000 in assets, the court issued orders that provide for expedited discovery and prohibit the defendants from destroying evidence.
On Friday, July 14, 2006, before the opening of the market, Petco announced that it had entered into an agreement to be acquired by a company owned by two private equity funds. Under the acquisition agreement, the buyer agreed to pay shareholders $29 per share in cash. The $29 per share price represents a 49% premium above the $19.45 price at which Petco stock closed the previous day. The total value of the transaction, including assumed debt, is approximately $1.8 billion.
In its complaint, the Commission alleges that in late June and early July 2006, while in possession of material, nonpublic information about this acquisition agreement, one or more unknown purchasers, using financial institutions in Switzerland and England, purchased over 1,400 call option contracts for Petco stock. The options generally were "out of the money," representing a bet that the price of Petco stock would rise substantially, and were set to expire within weeks of the purchase date, representing a bet that the price rise would happen soon. The complaint further alleges that the unknown purchasers' illicit profit from these call options after Petco's July 14, 2006 announcement was a total of approximately $862,000 -- $482,325 for the purchaser buying through the Swiss account and $379,640 for the purchaser buying through the English account.
The Commission alleges that the purchasers in this case engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest thereon, and the imposition of civil penalties.
The Commission wishes to thank the Chicago Board Options Exchange for its assistance in this matter.