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Glamis Takeover Smacks of Insider Action

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...all signs seem to point toward some in-the-know folks trying to find their own pot of gold before the rest of the world even saw the rainbow that would lead to it!

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"Better an ounce of luck than a pound of gold!" – Yiddish Proverb

As regular readers of my firm's information know, there's luck and then there's something more. Something tempting like insider information! Anytime we see one company buying another one for a 30% premium to where shares closed in the previous trading session, we start looking into whether someone (an insider, a member of the investment bank, a lawyer who signed off on the deal -- anyone who had custody of that valuable, insider information) may have taken advantage of that intelligence by purchasing call options ahead of the announcement.

Such is the case with Thursday's $8.6 billion takeover of Glamis Gold (GLG) by Goldcorp (GG). Two weeks before the announcement, my firm saw some very suspicious trading taking place in Glamis.

As we analyzed our data for out-of-the-ordinary options trading activity, we found several days' worth of extremely heavy call buying in Glamis that -- when overlaid against typical trading patterns fueled by insider intel -- strongly implies that someone may have acted on material non-public information. In my mind's eye, that's the textbook definition of insider trading.

My firm's study of call activity showed 67,114 calls trading in August in Glamis. We divided those 67,114 calls by the month's 22 trading days and got an average of 3,050 calls trading daily in GLG. But, looking at individual days, we found five that had significantly greater volume than this average.

Of particular interest was Aug. 17, when 21,000 calls -- or nearly 1/3 of the entire monthly volume -- changed hands. What's more, if we take out the five suspicious days, the volume for the remaining 17 days was 21,814. That would mean the average daily volume (absent the unusual-volume days) was just 1,283 contracts.



So, is this the end of the story about the surge in call-buying or will we hear about this again somewhere down the road? Given that there was no catalyst at the time for that kind of off-the-charts trading activity, all signs seem to point toward some in-the-know folks trying to find their own pot of gold before the rest of the world even saw the rainbow that would lead to it!

Personally, I imagine that regulators will take a look at the larger trades done on Aug. 17 to see where those transactions cleared. One would hope the regulator would check the name on the trading account against employees at either of the two companies to see whether someone was dumb enough to give their brother, sister, father or mother a hot tip. After that, the regulators would make a call to the branch manager or Registered Options Principal (ROP) of the brokerage where the trades cleared to see whether the activity in this particular account was unusual versus the customer's trading pattern.

An article in the Aug. 27 New York Times ("Whispers of Mergers Set Off Suspicious Trading") cited an analyst's work that found 41% of companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks prior to the announcement of a deal being struck.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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