Suspicious trading before HP's $2.7 billion 3Com bid; SEC closed for holiday

Somebody get the SEC on the phone, stat! Oh wait, they were closed Wednesday for Veterans Day.

Suspicious activity in the options market for 3Com (COMS) raised concerns late Wednesday that news of computer and printer maker Hewlett-Packard's (HPQ) $2.7 billion purchase of the networking company was leaked before the deal was officially announced, according to multiple reports. If this were the case, the activity could be a possible violation of securities law against insider trading.

There was an abnormally massive spike in activity for November and December call options, which would give the holder the right to buy 3Com shares at $5. The stock was up 35% in after-hours trading to $7.65, meaning that someone who exercised the option could have realized a huge paper gain in a matter of hours.

3Com is among the companies that has come up in the probe of hedge fund Galleon Group, whose formerly high-flying founder Raj Rajaratnam was just indicted for orchestrating an insider-trading ring. News of the pending announcement would be the very definition of "material non-public information."

"Since I do not believe in coincidences on Wall Street, I would bet that these unusual call option trades will spark an investigation," OptionMonster co-founder Jon Najarian told Reuters.

Before the deal was announced Wednesday, 3Com options activity jumped to 17 times the normal level. The largest transaction was apparently an order of 1,900 November call options that took place around noon EST on the Chicago Board Options Exchange, the wire reported, according to Trade Alert.

"It could be that something leaked about this deal because someone buying those options for 60 cents, which could now be worth $2.60, could make four times their money, just like that," Najarian told Dow Jones. A screen grab of the suspicious activity can be found here.

Late Wednesday, HP announced the deal to buy 3Com in a combination that would make HP the second-largest networking company in the world after Cisco Systems (CSCO).

Options traders told Reuters that "the hallmarks of suspicious trading were there: shares of 3Com jumped 28 cents, or 5.18%, to $5.69 during the day, rising from the opening bell and closing a penny off the high of the day."

3Com's options are rarely traded, Dow Jones pointed out, with just a few hundred contracts changing hands on a daily basis.

"The unusual volume in the November and December $5 calls indicated a red flag and would be a sign that this news was leaked ahead of the announcement," Jeff Shaw, head options trader at Timber Hill, a division of Interactive Brokers Group, told Reuters.

3Com surfaced in the Galleon case, after it was divulged that traders from Incremental Capital allegedly were given inside information on a previous attempt by 3Com to sell itself from a lawyer working on the transaction.

The SEC wasn't commenting late Wednesday. Are they watching?


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