U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20028 / March 2, 2007
SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp., Civil Action No. 07C1208 (N.D. Ill.)
SECURITIES AND EXCHANGE COMMISSION OBTAINS EMERGENCY ASSET FREEZE AGAINST UNKNOWN PURCHASERS OF CALL OPTIONS FOR TXU CORP. STOCK PRIOR TO ACQUISITION ANNOUNCEMENT
Orders Placed From Foreign Accounts Just Prior to $45 Billion Acquisition Announcement; as much as $5.4 Million Frozen
On March 2, 2007, the United States District Court for the Northern District of Illinois in Chicago, entered a Temporary Restraining Order freezing assets of certain Unknown Purchasers of Call Options for the common stock of TXU Corp. ("Unknown Purchasers"). The Commission's complaint alleges that the Unknown Purchasers engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws. In addition to freezing approximately $5.4 million in assets, the Court's order (i) requires that the Unknown Purchasers identify themselves, (ii) provides for expedited discovery, and (iii) prohibits the defendants from destroying evidence.
The Commission's complaint alleges that highly profitable and suspicious purchases of call option contracts for the common stock of TXU Corp. were placed by the Unknown Purchasers through overseas accounts in late February 2007. These purchases were made in advance of a public announcement (the "Announcement") on February 26, 2007, that TXU had executed a merger agreement with private equity groups headed by Kohlberg Kravis Roberts & Co., Texas Pacific Group and Goldman Sachs & Co. The Complaint further alleges that as a result of the Announcement, TXU's common stock jumped more than 13% over its previous trading day closing price, placing the Unknown Purchasers in a position to gain substantial profits.
The Commission further alleges that between February 21 and February 23 - prior to the public disclosure of the merger agreement - while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 8,020 call option contracts for TXU stock in accounts at three broker-dealers in the United States. As the complaint alleges, the call option contracts were "out of the money" and most were set to expire in March, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of TXU stock following the Announcement, the unrealized illicit profits on these option contracts total approximately $5.4 million. The Commission alleges that the Unknown 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 injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.
The Commission wishes to thank the Chicago Board Options Exchange, the Financial Services Authority of the United Kingdom and the Swiss Federal Banking Commission for their assistance in this matter.