The Securities and Exchange Commission is investigating possible insider trading in Lockheed Corp. stock options just before the Aug. 29 announcement that Lockheed would merge with Martin Marietta Corp., government and industry sources said Friday.
Lockheed shares jumped $10.75 when the merger was announced, enabling investors who bought options in advance of the announcement to make almost a 500 percent profit in a single day.Officials of Lockheed and the Pacific Stock Exchange, where Lockheed options are traded, said they have supplied information to SEC investigators who are looking into an unusual surge in options trading prior to the announcement.
As is usual in such cases, SEC officials refused to confirm or deny whether an investigation is under way.
Also looking into trading in Lockheed options is the oversight and investigations subcommittee of the House Energy and Commerce Committee, headed by Rep. John Dingell, D-Mich.
Options are contracts that give investors the right to buy or sell 100 shares of stock at a fixed price within a stated period of time. Instead of buying 100 shares and paying the full price, an investor can buy a 100-share option for a few dollars or less a share.
Just before the two giant defense contractors revealed they were going to merge, Lockheed shares were trading for about $63 and options to buy Lockheed stock at $65 a share were selling for less than $2 a share. After the announcement, Lockheed stock jumped to $76.75 a share, turning a $2-per-share investment in the options into almost $12 overnight.
There was unusually heavy trading in the options just before the announcement, Pacific Stock Exchange officials confirmed, but no sign of increased activity in the stock itself or in shares of Martin Marietta, both of which trade on the New York Stock Exchange.
Buying and selling securities based on inside information about an upcoming merger is illegal, and Marietta and Lockheed officials went to unusual lengths to keep secret the negotiations that led to the $23 billion merger agreement, company officials said.
Until the week before the announcement only about 10 people knew about the potential merger, the biggest ever in the defense industry, Lockheed officials said.