It has been a long time coming.
The Securities and Exchange Commission's investigation of suspicious options trading before Berkshire Hathaway Inc. announced its $23 billion deal to buy H.J. Heinz Co. is an encouraging move and long overdue.
Prescient trading in the options markets on the eve of market-moving announcements has been common for years. And though regulators have brought cases involving some trades, most seem to come and go.
It might be that the trades are investigated and found to be legal. Some might hit a dead end with a lack of cooperation or evidence.
In 2007, a record-breaking year for M&A activity, I tracked options trading before big announcements and wrote about them in my column for MarketWatch.com. In a weekly feature called the "Big Coincidence," I charted suspicious trades before mergers, earnings or other important announcements such as regulatory approvals for drugs.
After tracking 17 of these trades, two things struck me. First, none of the unusual transactions seemed to register on the radar screens of regulators.
Readers didn't seem to care, either. We were in the last throes of a bull market, and many investors were enjoying the premiums paid for companies held in their portfolios. The deal-making frenzy was like the lottery.
It's also possible that the option trades were legitimate. Options are highly speculative by definition. While I looked for evidence of public information anticipating the deals and found none, there is the possibility I overlooked or missed something published in a newsletter or speech to which I didn't have access.
SEC officials reached out to me back then to discuss how they deal with such cases. Their story wasn't encouraging. They argued that these trades were extremely difficult to investigate. People sometimes hear things from the next table over lunch, I was told.
More disconcerting was that much of the trading activity I wrote about occurred after a new regulatory agency was formed to review trading in the options markets. The Options Regulatory Surveillance Authority was created in 2006 as part of the Chicago Board Options Exchange. It oversees activity on six major options-trading platforms.
Gail Osten, a spokeswoman for the exchange, declined to comment on the Heinz trading and wouldn't disclose how many suspicious trades have been passed on to the SEC.
"The options exchanges have, and thus ORSA has, audit trails with which to perform their regulatory functions," she said. "This audit trail and reporting is in place at all times, not just around corporate announcements and unusual activity."
A spokesman for the SEC said the agency has publicly disclosed the resolution of 20 such cases in the last five years, adding that the commission has recently asked that all suspicious trading cases, resolved or not, be forwarded to the commission by the options exchanges. Before that, the SEC only received unresolved cases.
Even if trading activity is passed on and the SEC acts on it, there are high legal hurdles.
A court in December found the SEC couldn't prove an investor had inside knowledge even though he made what turned out to be a winning options bet on Potash Corp. of Saskatchewan Inc. days before BHP Billiton made an offer for the company.
Since the financial crisis, the SEC has ramped up its enforcement efforts into insider trading. Until now, that effort has been mostly confined to stock trades and "expert networks," which connect insiders in fields like medicine and technology to investors willing to pay for information valuable to their trading decisions. But the effort has been encouraging, with investigators using wiretaps and other aggressive methods. And there have been results, most notably the conviction of hedge-fund executive Raj Rajaratnam.
But the SEC and options-market regulators haven't had a breakthrough case stemming from options trading around significant company announcements. That's why the SEC's quick response to options trades in advance of the Berkshire-Heinz announcement is encouraging.
This could be the case that sends a warning to a marketplace that doesn't seem to have had much in the way of warnings or accountability.
Write to David Weidner at david.weidner@dowjones.com
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