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SEC Has Inside-Traders’ Scent in Fortress-Softbank Merger

A group of foreign traders exploited inside information on the buyout of Fortress Investment Group to make millions, the Securities and Exchange Commission claims in a federal complaint.

NEWARK, N.J. (CN) – In the lead-up a Japanese buyer’s $3.3 billion acquisition of Fortress Investment Group, various foreign traders used insider information to make millions on the buyout, the Securities and Exchange Commission claims in a federal complaint.

The acquisition of Fortress by SoftBank Group Corp, a Japanese telecommunications technology company, had been in the works since December 2016, but it did not become official until the second week of February.

SoftBank announced on Feb. 14 it would purchase Fortress for roughly $3.3 billion in cash. As a result of the acquisition, Fortress shareholders would receive $8.08 per share, a 30 percent premium over that day’s closing price of $6.21.

Though Fortress’ board of directors was involved in the acquisition, it was not notified of the merger until late in the afternoon on Feb. 13. Draft resolutions approving the transaction were sent the following morning at 11:02.

The SEC says unknown traders began heavily buying up shares of Fortress within a half-hour of the draft resolutions, ultimately acquiring a fifth of investment-management firm’s stock.

“As a result of the announcement, Fortress’ share price increased substantially, from a close of $6.21 on February 14th to a close of $7.99 on February 15th,” the SEC said in its complaint. “This placed the defendants in a position to gain substantial profits.”

A federal complaint the SEC filed on Feb. 24 in Newark says the identities of the traders are still unknown, but they are believed to be foreign-based.

The SEC believes several customers of the United Kingdom affiliate of brokerage firm R.J. O’Brien & Associates played the biggest role in the scheme. These customers allegedly bought more than 1 million shares of Fortress in the days leading up to the merger for a profit of nearly $2 million.

Also allegedly involved were customers of Maybank Kim Eng Securities, a Hong Kong-based broker-dealer that purchased 950,000 shares of Fortress just before news of the acquisition. Maybank customers bought Fortress shares as low as $5.92, netting a profit the next day of more than $1.6 million.

In the 14 months leading up to the announcement, Maybank customers had purchased only 10,000 shares of Fortress. On the day of the merger, however, the Hong Kong brokerage took on one of its larger positions of any security in a single day.

Maybank and R.J. O’Brien’s customers allegedly used brokerage accounts with UBS and Merrill Lynch, respectively, to make the trades.

None of the firms themselves are named as defendants.

A spokeswoman with R.J. O'Brien said the firm does not comment on ongoing regulatory or litigation matters.

Maybank has not returned an email seeking comment.

The merger of Fortress and Softbank has been closely watched, as the acquisition turns the once-public equity firm Fortress private.

SoftBank has said it will rely on Fortress’ extensive infrastructure and transaction sourcing expertise to help its new $100 billion technology investment fund. That fund will run alongside Fortress, SoftBank’s CEO has said.

The acquisition is expected to be approved by shareholders and regulators by the second half of 2017.

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