Thread: TX - Insider trading alleged by SEC - Gov. Rick Perry

Posted on Sat, Mar. 03, 2007
Insider trading alleged by SEC
By DAVID WETHE

STAR-TELEGRAM STAFF WRITER
FORT WORTH - The Securities and Exchange Commission is alleging insider trading in the purchase of call options on TXU stock last week, shortly before a $45 billion bid for the power company was unveiled by Kolhberg Kravis Roberts & Co. and Texas Pacific Group.

On Friday, a federal court in Chicago granted a temporary restraining order to freeze about $5.4 million in profits earned by unnamed purchasers who the SEC said used foreign brokers to make their buys.

The stock purchases were based on knowledge, not public at the time, that KKR and Fort Worth-based Texas Pacific Group planned to buy TXU. The sales talks became public after the markets had closed Feb. 23, and the stock jumped $9 in after-hours trading.

The buyout bid was formally announced Monday morning, after TXU's board gave its approval Sunday night. But the investment firms had briefed environmental groups and key lawmakers, including Gov. Rick Perry, in the days before the announcement, company officials, lawmakers and the environmental groups said.

TXU's stock price (ticker: TXU) rose 13 percent Monday after the buyout was announced at $69.25 a share. It closed Friday at $66.50.

The SEC said someone or multiple people bought 8,020 "call options contracts," each for 100 shares with strike prices ranging from $60 to $62.50. The shares were bought through overseas brokers who then worked with three U.S. brokers to make the trades.

"A call option gives the purchaser the right to 'call in' or buy stock, and profit is made on a call option when the underlying stock increases in price," according to the seven-page SEC complaint.

The SEC said that the trading of TXU call options could have made the purchaser or purchasers $5.4 million.

The lawsuit was filed in Chicago because the options contracts are traded on the Chicago Board Options Exchange. The SEC is working with officials in Chicago, the United Kingdom, Switzerland and Germany to identify who bought the options and how that party is related to TXU, KKR and Texas Pacific, said Kit Addleman, associate director of enforcement for the SEC in Fort Worth. The Fort Worth office, which oversees an 11-state region, is handling the investigation.

"We have reason to believe based on the suspicious nature of the transaction that they're associated or got the information from the purchasers or TXU," Addleman said. "But those exact connections will have to be figured out in litigation."

Texas Pacific Group and KKR declined to comment on the SEC's action.

The power company is working with the SEC in its investigation, Lisa Singleton, a TXU spokeswoman, said via e-mail.

"TXU voluntarily provided the SEC with background information regarding the transaction in response to a request from the SEC for information," she said. "We do not expect that anyone affiliated with TXU will be named as a party. TXU took a number of steps to prevent the premature disclosure of information regarding the transaction with TPG and KKR. We do not have any reason to believe those measures were not effective in preventing any 'leaks' from TXU."

Call-option contracts are legal, but they're often used in insider-trading cases, Addleman said. That's because the fee to buy a contract is a small percentage -- sometimes about 10 percent -- compared with what it would cost to buy the stock outright.

"If you know that the stock is going to go up because you have an inside source, you can use these contracts to make an extraordinary amount of money," she said. "Whereas purchasing the stock [outright], in some respects, limits you to what your pocketbook has."

Mike Davis, professor of economics and finance at Southern Methodist University's Cox School of Business, said the disadvantage of using call-options contracts is that the market for those instruments is thin compared with the stock market.

"A big transaction in here would be noticeable," he said. "I can see why you would want to do it because your upfront costs are much lower. ... But you're likely to get caught."

TXU disclosed Friday that KKR and Texas Pacific have lined up $24.6 billion in debt financing to complete the deal, which would be the largest private equity buyout ever. It would bring TXU's debt to $37 billion. Investors led by KKR and Texas Pacific have agreed to buy TXU for about $32 billion and assume $12 billion in TXU debt. The TXU filing indicates that the buyers would contribute less than $8 billion to the deal. TXU said a "substantial majority" of the new debt would be added to TXU's retail energy division.

None would be added to the power-transmission business, the only regulated part of TXU. Critics had feared that new debt would force regulated rates higher.

Fitch Ratings said that because of the disclosure, it expected to downgrade the credit of TXU and its subsidiaries again, from double-B-plus to single-B, further into junk-bond territory.

That means TXU bonds are a speculative investment, but Fitch doesn't expect default, analyst Denise Furey said.

In other news, physicist and nuclear-power expert E. Gail de Planque has resigned from the TXU board, citing potential conflicts of interest. TXU said in a news release that de Planque had recused herself from all discussions related to the deal announced Monday and that ongoing discussions meant that potential conflicts would remain.

She serves as a director for BHP Billiton Plc, BHP Billiton Ltd., Northeast Utilities and Landauer Inc. and has served as a consultant.

The Associated Press contributed to this report.


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David Wethe, 817-685-3803 dwethe@star-telegram.com

I guess we need to start calling him Slick Rick.

Get this, last year TXU earned record profits, depite lower usage! They get a rate increase every year! They didn't give any of that outrageous profit back to the customers either! Oh no and I'm sure they have already asked for another rate increase. They fired a lot of long time employees and paid their new CEO C John Wilder "iIn his first year at TXU (ten months, actually), Wilder earned more than $55 million. That’s right. $55 million".

Oh, and we experienced rolling blackouts last summer.

Ahhhhh, it gets better, they bought out the gas company so in my opinion, they are monopolistic. We are freaking beholding to them.

Can TX survive the Bush-Perry Legacy?

Dixie