Tuesday, October 26, 2021

Suspicious bets made prior to Goldman’s $ 2.2 billion acquisition of GreenSky

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Sam Edwards | fake images

The day before Goldman Sachs announced its $ 2.2 billion purchase of financial technology lender GreenSky, someone placed options trades that immediately soared in value – moves that market participants say indicate advanced knowledge of the deal.

On September 14, the trader bought 8,000 options that would only be worth it if GreenSky’s price rose above $ 10, according to market participants. The options were out of the money, meaning GreenSky was trading well below the strike price and costing just a penny a share.

After the news of the deal paste, the value of the contracts, each of which allowed the purchase of 100 shares of GreenSky, skyrocketed. The trader made a staggering 3,900% profit in a single day, market sources say. That means a $ 40,000 bet would have turned into roughly $ 1.6 million.

Acquisitions are complicated transactions that involve teams of bankers, lawyers and other specialists with access to information on the movement of the market. With so many pairs of eyes on a deal, information often leaks out. Up to a quarter of all agreements with public companies result in some type of insider trading, which often involves out-of-the-money calls in the options market, according to a 2014 study by professors at New York University’s Stern School of Business and McGill University.

Although there have been cases of insider trading high profile Perpetrators, instances in which people used material, non-public information in the markets, most of the time the activity goes unpunished, according to the 2014 study.

Goldman Sachs declined to comment for this story. A representative for GreenSky did not respond to voicemails.. The Securities and Exchange Commission and the Financial Industry Regulatory Authority did not immediately return calls seeking comment.

Goldman was his Financial Advisor and used Sullivan & Cromwell as legal counsel. JPMorgan Chase and FT partners advised GreenSky, which also used the law firms Cravath, Swaine & Moore, and Troutman Pepper Hamilton Sanders.

The GreenSky board also hired its own bankers and attorneys at Piper Sandler and Wilson Sonsini Goodrich & Rosati. Banks and law firms declined to comment or did not immediately respond to messages.

‘Nobody is that lucky’

The Sept. 14 trades weren’t the only unusually prescient bets made prior to the Goldman deal.

Options activity for GreenSky is generally muted, with fewer than 1,000 calls making up the average daily volume. Betting on soon-to-be profitable $ 10 call options arose however, over the past two weeks, indicating that multiple operators may have been aware of the deal.

Volumes jumped from 153 calls on Sept. 7 to 7,175 calls by Sept. 9, according to Jon Najarian, a veteran marketer and CNBC contributor. By September 13, two days before the announcement, the call volume reached 12,755. The contracts were mostly sold for profit on Sept. 15, he said.

“When we see unusual activity like that, we tend to think that someone had tomorrow’s newspaper today,” Najarian said. “Nobody is that lucky. Whoever bought those calls is likely to face regulators.”

The exchanges were so blatant, and some of the calls would expire in just a few days, that whoever made them must be inexperienced, according to a former Wall Street executive with more than four decades of knowledge of the markets. There are ways to structure the bets that would make them less obvious to regulators, he said.

“He looks like a 22-year-old boy who didn’t know what he was doing,” he said. “But it’s a no-brainer, they had inside information.”

The financial columnist Matt Levine, a former Goldman banker who has written extensively on insider trading, has some guidelines when it comes to prohibited activity. His first rule (“don’t do it”) is followed by a second:

“If you have the insider on an upcoming merger, don’t buy short-term out-of-the-money call options on the target,” Levine wrote in 2014. column. “The SEC will get him!”

With reporting contribution from CNBC’s Bob Pisani.

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