Legal News

Suspicious Trading in Bear Options Prompts SEC Investigation

By Dan Slater

The SEC has raised the red flag on a surge in “put” options trading leading up to last week’s collapse of Bear Stearns. What’s a put option? The WSJ story offers a handy example: If a trader bought a put option for Bear at $60, and the stock fell to $50, the trader could buy Bear stock in the market for $50 and have the right to sell it back to the option underwriter for $60 — making a $10-a-share profit. The more a stock declines, the better off a put holder is.

Between last Monday, March 10, and last Friday, March 14, Bear stock dropped from $70 to $30. Coincidentally (or not), last week there was a surge in put options leading up to the sale of Bear to J.P. Morgan for stock now valued at about $278.5 million, or $2.32 a share. Last week, according to the story, the number of open put options leaped from 167,439 at the open of trading on Monday to 465,820 by the following Monday. That compares with open put contracts on Bear Stearns hovering around 155,000 the previous week.

For the Law Blog, those are way too many numbers to deal with this early in the morning. So here’s what we care about: Did anyone have inside knowledge of the collapse, or was anyone spreading false rumors about the state of Bear Stearns? “A trader has a right to speak and spread information. What a trader does not have the right to do is knowingly spread false information with the purpose of trading to take advantage of that,” said David Meister, a Clifford Chance partner and former federal prosecutor.

LB Readers: As the story points out, market manipulation cases are notoriously difficult to make out. Any idea what the SEC will need to find — beyond the mere surge in option contracts — in order to carry the investigation forward?

Full post as published by Law Blog - WSJ.com on March 20, 2008 (boomark / email).