Many will remember that in last week's second round of arrests in the ongoing insider trading crackdown, the traders that were targeted were all cited for their buying stock in 3Com (COMS) back in 2007 just weeks before Bain Capital and Huawei Technologies announced plans to acquire the company. While the deal later fell through on national security concerns, the traders cited made over $10 million in illicit profits on their trades.
Fast forward to yesterday, and COMS now finds itself in the crosshairs of another potential insider trading scandal. Following last night's announcement that Hewlett-Packard (HPQ) would buy COMS for $7.90 per share in cash, many bloggers have been quick to point out the surge in yesterday's option volume. Zero Hedge notes that yesterday's volume in COMS call options was three times the existing open interest, and that $1.5 million was made in profits as a result.
Since merger news often has a way of 'leaking' to some before it is released to the general public, it is not uncommon to see a spike in option volume ahead of an official announcement. Usually these cases go unnoticed and receive little attention (or prosecution), although an individual was charged back in September for loading up on calls in Perot Systems (PER) ahead of the DELL takeover announcement. However, with the ink barely dry on last week's SEC complaint regarding insider trading in COMS, even if you knew about the deal ahead of time, who on earth would be so brazen (or stupid) as to act on that information when it involves the same stock?