On March 4 , Warren Buffett (NYSE:BRK.A)(BRK.B) appeared on CNBC and was asked about some suspicious options trading that had occurred in Heinz stock the day before a deal to purchase the company was publicly announced; in response to a question from a viewer, Buffett said the following:
“I will guarantee you that that person that bought it on Wednesday, bought those options, I mean that is insider trading. I mean they're going to nail that guy at and they should… that options trading clearly reflected somebody that knew something, and it will be very interesting to see who it is.”
Well, the search is over, and the answer is Rodrigo & Michel Terpins.
Here’s the headline from the SEC’s press release on Oct. 10: “The Securities and Exchange Commission today announced that two brothers in Brazil have agreed to pay nearly $5 million to settle charges that they were behind suspicious trading in call options for H.J. Heinz Company the day before the company publicly announced its acquisition.”
As some may remember hearing earlier this year, the SEC had taken action to freeze the assets in the Swiss trading account that was used to make the timely traded in question; those trades consisted of buying $90,000 worth of June $65 calls the day before the announcement – an amount which resulted in $1.8 million in profit, or nearly 2,000 percent on the original investment (that's going to raise some red flags).
The order was (allegedly) placed by Brazilian Rodrigo Terpins while he was at Walt Disney World in Orlando, Florida; the material non-public information that he received prior to the trades came from his brother, Michel Terpins. The brothers come from a wealthy Brazilian family that controls a chain of department stores in the country (Marisa Lojas SA). Their mother, Denise Goldfarb Terpins, was ranked as the 73rd-richest person in Brazil by Forbes in 2012, with an estimated net worth in excess of half a billion dollars.
As noted in the SEC’s release, the timing, size and profitability of the trade were all inconsistent with the prior history in the account, which made the transactions highly suspicious; to put this in perspective, the number of options purchased by Mr. Terpins were 180 times greater than the combined volume of the prior two days.
The trades were placed through an omnibus account, which aggregates positions and transactions of a firm and its underlying customers without disclosing the actual identity of the beneficial owner of the individual positions. It turns out that this won’t stop the SEC from finding out what they need to know.
The brothers have agreed to forfeit the entire $1.8 million in illegal profits from the trades; in addition, they will pay $3 million in penalties. Both settlements are subject to court approval.
I would normally go into a discussion on why I believe that this is a grossly inadequate punishment (less than twice the realized profits on the trade), but I don’t know what legal issues the SEC faces with trying to charge foreign citizens, nor do I know the strength of the evidence in question (though they seem to have a solid picture of what happened); suffice it to say that I’m a proponent of much stricter penalties for market participants and executives that attempt to mislead investors or knowingly capitalize upon material non-public information.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.