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New York State Attorney General Andrew Cuomo regularly scores points with the public by taking on bad guys in the business world. But his investigations may be giving some other bad guys an opportunity to reap illegal profits.
For the second time in four months, traders this week apparently made potentially big profits by placing suspiciously large bets against a stock that was about to get hammered by a Cuomo press conference. Like last time, they placed their bets less than an hour before the meeting with journalists got under way.
This time around the stock was UnitedHealth Group (UNH, news, msgs). Cuomo said Wednesday that he plans to sue the insurer because he thinks subsidiaries of the company help UnitedHealth and other insurers bilk customers by lowballing reimbursements.
UnitedHealth denies those charges, but its stock temporarily fell 5% as the Cuomo news conference got rolling. Traders placing suspiciously large option bets ahead of the news conference could have made nearly $1 million, calculates Jon Najarian, an options market expert at OptionMonster Holdings.
"Large options transactions in advance of a public announcement always make regulators raise their eyebrows, and rightly so," commented former Securities and Exchange Commission Chairman Harvey Pitt, now with Kalorama Partners. "It would clearly be something that would be looked at." An SEC spokesman declined comment on whether it is investigating the options trading ahead of the Cuomo press conference.
A leak unlikely
No one has accused the attorney general's office of leaking information to traders ahead of time, and such leaks are unlikely. "It's pretty rare for any leak to be traced back to anyone in a prosecutor's office," says David Marder, who regularly prepared insider-trading cases at the SEC before moving into private practice at the law firm Robins, Kaplan, Miller & Ciresi in Boston.Rumors of the attorney general's suit could have started as journalists and UnitedHealth itself got wind of the investigation. Employees at the company might have known about the content of the news conference because Cuomo's office was in discussions with UnitedHealth about the matter beforehand. A spokesman for UnitedHealth Group acknowledged this but declined to comment on the suspicious trading.
What's unusual about this week's trading, however, is that it marks the second time in four months that it has happened ahead of a Cuomo news conference revealing allegations against a company.
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Back on Nov. 2, someone also bought large blocks of Washington Mutual (WM, news, msgs) puts just minutes before a scheduled news conference by Cuomo announcing a lawsuit that would take down Washington Mutual stock. In a suit against the home-appraisal unit of First American, Cuomo alleged Washington Mutual was involved in a scheme to cherry-pick appraisers who would inflate the estimated value of homes. Washington Mutual responded that it has "absolutely no incentive to have appraisers inflate home values."
Anyone inside an attorney general's office leaking market-sensitive information could be open to prosecution for insider trading because this would violate confidentiality agreements. The New York attorney general's office declined to comment on the suspicious bets placed ahead of its news conference.
The unusual trading in UnitedHealth began about 45 minutes before the noon start of Cuomo's news conference Wednesday. At 11:14 a.m., someone purchased 4,000 put-option contracts for 40 cents per option. The put options gave them the right to sell UnitedHealth stock at $45 a share before Feb. 16. So they would become more valuable if UnitedHealth stock fell.
"They swept all the exchanges," says Najarian. "I'd say it's extremely unusual." After that first round of put buying, traders purchased an additional 2,700 similar put-option contracts. The unusual size of the purchases suggests buyers were in the know, says Najarian.
When UnitedHealth stock then tanked around noon, those options tripled in value to $1.55 apiece. Najarian estimates the buyer could have easily have locked in profits of $800,000 or more through a combination of selling the options or hedging against their decline by purchasing the stock during the momentary dip. The options are currently out of the money, and UnitedHealth shares now trade at $46.88.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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