SEC Freezes Thai Man’s Assets Because Of Suspicious Trades, Facebook Friends

If you make more than 1,000 percent in trading profits right before a big announcement, the SEC might take an interest. And they might scrutinize your Facebook friend list.

Another huge merger, another insider trading allegation.

Today the Securities and Exchange Commission got a court order to freeze more than $3 million worth of a Thai man’s trading profits in stock and futures trades made in advance of the announcement of Smithfield’s $4.7 billion acquisition by Chinese food company Shuanghui.

This follows a pattern of SEC insider trading investigations and asset freezes in the wake of merger announcements. The SEC got a similar court order to prevent an investor who purchased $90,000 worth of Heinz options the day before Warren Buffett’s Berkshire Hathaway and the private equity firm 3G Capital announced their purchase of the ketchup company. “The nature of these claims are freeze assets first, pursue the substance of the claims later,” said Jacob Frankel, a former SEC enforcement lawyer.

The SEC had to move quickly on Badin Rungruangnavarat, the Thai man who allegedly made the trades, because he tried to recover his money on June 3, less than a week after the Smithfield-Shuanghui deal was announced.

“Absent an asset freeze, the proceeds of his highly suspicious trades almost certainly will be transferred outside the United States, potentially beyond the jurisdiction and reach of this Court,” the SEC said in the complaint.

According to the complaint, Rungruangnavarat purchased call options — contracts that allow the buyer to buy a stock on a certain date at an agreed upon price — future contracts, and 100 shares of Smithfield’s stock between May 21-May 28. Of the 3,000 options he purchased, 1,700 were “out-of-the-money,” meaning the price that he could buy the stock at in the future was above the price of the stock itself. Out-of-the-money call options are a cheap way to speculate on the price of a stock rising because they are less expensive than the stock itself and the buyer gets all the upside if the price goes to or above the call price of the option.

The SEC’s complaint says that “Rungruangnavarat essentially cornered the market in Smithfield call options and futures contracts” and that he controlled 580,000 shares, or just below 29 percent, of Smithfield’s average daily trade volume in May. His trading gains by the end of the trading day on May 29, the day the Smithfield acquisition was announced, were $3.2 million, a 3,400 percent gain. The stock opened 25 percent higher than where it closed the previous day after the merger announcement on May 29.

While the complaint details the suspicious trades — the only trades Rungruangnavarat made were on Smithfield contracts and stocks — it is much spottier on what, if any, nonpublic information he used to make those trades. To get an insider trading conviction, prosecutors can’t just show someone made large trades timed to certain events. They need to prove that the trades were enacted based on nonpublic information.

The SEC says that in May, before Rungruangnavarat opened his account and made the trades, an investment bank advising Charoen, a Thai food conglomerate also contemplating an acquisition of Smithfield, had access to an “electronic data room” where companies interested in Smithfield could evaluate the company’s data and do due diligence.

The complaint alleges that “Rungruangnavarat has a Facebook friend who is a former employee of the company where Rungruangnavarat works, and who is an associate director at the Thai investment bank that advised Charoen on its contemplated Smithfield bid.”

Frankel said it was typical of the SEC to spot suspicious trades, seek to freeze the assets, and then pursue a substantive investigation.

“There’s no downside to the SEC to bring such a case,” he said. “Once the SEC identifies and gets jurisdiction over the individual, it gets the substantive investigation started.”

It’s possible that Rungruangnavarat won’t show up in the U.S. to try to claim his trading profits. However, a Spanish investor facing a similar case in 2011 who had his assets frozen following suspicious trades before a merger, did show up, spoke to investigators and gave a deposition. A judge ended up dismissing the SEC’s complaint because it was not able to show what nonpublic information the investor had or who gave him any such information.

Although the SEC was able to freeze Rungruangnavarat’s assets with a court order, the closest thing they have so far to a link to the case disclosed pubicly is the aforementioned Facebook friend. So tip for the aspiring insider traders out there: social media may not be your friend.

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