The Securities and Exchange Commission is investigating trading of Schering-Plough Corp. shares ahead of the announcement of its merger with Merck & Co., people familiar with the matter said.
The investigation is focusing on whether people trading the pharmaceutical company's stock in late February or early March were using inside information about the merger talks, which concluded in a deal announced Monday, March 9.
Shares of Schering-Plough rose 8% on Friday, March 6. Early the following Monday morning, Merck announced its deal with Schering-Plough. It said it would pay shares and cash then valued at $23.61, a 34% premium to the Friday closing stock price.
Merck and Schering-Plough declined to comment.
Merck Chief Executive Richard Clark told analysts in February that he was open to doing a large deal, reversing a company tradition of shunning big mergers. Some analysts were predicting a deal would happen. Meanwhile, Schering-Plough was being discussed as a possible acquisition target for a larger drug company.
In fact, talks had already begun in December, executives from both companies later said. They said the talks moved rapidly, with meetings rotating between the companies' New Jersey headquarters. Merck affirmed on April 21 that the deal is on track to close in the fourth quarter.
The investigation is the latest by the SEC involving insider trading around takeover talks. Separately on Thursday, the agency and the Justice Department filed fraud charges against a former Citigroup Inc. investment banker who was accused of telling his brother about several health-care deals before they were announced.
The former Citigroup banker, Maher Kara, passed internal bank information to his brother, Michael, according to the SEC complaint filed in federal court in San Francisco. According to the SEC, Michael Kara made more than $1.5 million and tipped off others who made $4.5 million. The SEC is seeking disgorgement of those gains. The SEC also filed fraud charges against four others, two of whom agreed to settle the charges.
Maher Kara's lawyer said his client "is innocent and looks forward to his vindication at trial." Michael Kara's lawyer couldn't be reached. Citigroup said it "cooperated fully" with authorities.
Insider-trading cases can be difficult to prove because markets are full of rumors, especially regarding potential takeovers. A spate of deals often leads arbitragers to bet on which other companies are likely to pair up. That could make it difficult for the SEC to separate speculation from actual knowledge of talks.
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