Two Brazilian Brothers to Pay Nearly $5 Million in Insider Trading Case

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The bullish bet on H. J. Heinz flashed all the telltale signs of insider trading.

The bet came on Feb. 13, just a day before Berkshire Hathaway and the investment firm 3G Capital announced a $23 billion takeover of Heinz. The trade went through a Swiss Goldman Sachs brokerage account owned by an entity based in the Cayman Islands. And perhaps most telling, the traders' identities were a mystery.

On Thursday, the Securities and Exchange Commission unmasked those traders and said it had confirmed what it suspected for months: the bet amounted to insider trading.

The S.E.C., which acted quickly in February to freeze the assets in the Swiss account, has now amended its complaint to name two Brazilian brothers as the culprits. The brothers - Rodrigo and Michel Terpins - agreed to pay nearly $5 million to settle the charges.

Michel Terpins, 36, set the chain of events in motion, according to the S.E.C. After receiving a confidential tip that the Heinz deal was looming, the agency said, he alerted his brother.

Rodrigo Terpins, 40, then served as the trader. While vacationing at Walt Disney World in Orlando, Fla., the S.E.C. said, he bought nearly $90,000 in options contracts in Heinz. News of the takeover deal sent Heinz's shares, and the value of the options contracts, soaring. According to the S.E.C., the brothers' positions rose nearly 2,000 percent and they reaped over $1.8 million.

'Rodrigo and Michel Terpins obtained confidential information prior to any public awareness that a Heinz deal was in the works, and they exploited it to the disadvantage of all other traders in the marketplace,' Sanjay Wadhwa, a senior S.E.C. enforcement official, said in a statement. 'Those who use foreign accounts to commit insider trading in the U.S. markets should know that their activities can still be tracked and they will be held accountable by the S.E.C. for their actions.'

The case illustrated the far reach of the agency, which traced the trades through a web of foreign accounts. But it also showed the challenges that regulators face in navigating a dizzyingly complex global marketplace.

The Terpins brothers routed their trades through a Goldman Sachs account in Zurich, where laws largely shield the account holder's identity. Without a direct window into the account, the S.E.C. had to freeze the assets to prevent the then-anonymous traders from spending their gains or moving the money.

Then came a lengthy waiting game for the S.E.C. The agency relied on Finma - the Swiss regulator that is the gatekeeper for the American authorities - to help with the release of information.

Although the settlement on Thursday capped an eight-month hunt for the traders, the investigation has hardly concluded.

The S.E.C. has yet to charge, or even identify, the person who tipped Michel Terpins to the Heinz deal. Instead, the commission's amended complaint identified the person as 'a source who had access to the material nonpublic information and was under an obligation to not disclose the information,' suggesting that the agency was still weighing an action against the source.

The source, past S.E.C. actions suggest, probably came from a limited universe of insiders who knew about the deal. One set of potential insiders worked at 3G, a company with Brazilian roots.

No one at 3G has been accused of any wrongdoing.

Lawyers for the Terpins brothers did not respond to a request for comment. The brothers agreed to give up their $1.8 million in illicit profits and pay $3 million in penalties.

The S.E.C.'s amended complaint outlined the Terpinses' role in the Heinz case. After Rodrigo Terpins learned of the leak from his brother, he phoned a broker at Goldman Sachs on Feb. 13. At the time of the call, which Rodrigo Terpins made using a United States cellphone number, he was on vacation at Disney World.

The broker initially cautioned against the trade, noting that Goldman rated Heinz as a sell, meaning the bank suggested that investors steer clear of the stock. Undeterred, Rodrigo Terpins instructed the broker to place the trade anyway.

Ultimately, the brothers purchased 2,533 call options contracts. The trades allowed them to place a bullish bet on Heinz without the expense or obligation of actually buying the company's shares. The trades instead offered the brothers the flexibility to buy the shares at a given price - if they chose to do so - and allowed them up to four months to wait and see if the stock actually rose above that price.

The trades instantly set off alarm bells for the S.E.C. For one, before those trades, the account had not previously traded in Heinz, nor had it 'made any purchase of call options,' the complaint said.

Rodrigo Terpins, the S.E.C. said, also used a Swiss Goldman Sachs account to anonymously make the bet. Yet the account did not belong to Rodrigo Terpins, who 'did not have explicit authority to make trades' in the account. Instead, it was owned by Alpine Swift, which the S.E.C. identified as a 'corporate entity formed to hold assets.' The beneficial owner of Alpine Swift, the agency said, was 'a close relative' of the Terpinses.