CHICAGO — The Chicago Board Options Exchange said Tuesday that it is investigating trading of Zayre Corp. options in what one member called "probably the most blatant insider trading scandal I've seen."
The alleged irregular trading activity occurred in mid-September, just before a newspaper reported that Zayre, one of the nation's largest discount-store chains, may be the target of a takeover bid.
Robert Kingsley, one of the CBOE market makers who triggered the investigation with a written complaint to the exchange, said Tuesday that hundreds of thousands of dollars in profit could have been made.
He said he is still sorting out his own transactions during that time but guessed that he lost about $20,000.
The allegations cover these events:
In the final minutes of trading on Friday, Sept. 11, a broker came to the trading area with six to eight orders to buy Zayre call options, with each order consisting of 100 to 400 contracts.
The options gave the owners the right to buy Zayre stock at $30 a share by a given date. The stock closed a short time earlier on the New York Stock Exchange at $28.125.
It was too late for the market makers in Chicago to hedge their sale of options by buying the stock on the New York Stock Exchange, and only a few minutes of trading was left on the Pacific Stock Exchange. As a result, Kingsley said, he was only able to buy 500 shares of stock to offset about 10,000 shares represented by the options he sold.
The next trading day, Monday, Sept. 14, an article in USA Today reported that Edward J. DeBartolo Jr., owner of the San Francisco 49ers professional football team, had acquired a major stake in Zayre and may seek control of the company.
Zayre stock surged $3.375 to close at $31.50 a share for a gain of more than 9% on the day.
"I've been at this for 12 years," Kingsley said, "and this is probably the most blatant insider trading scandal I've seen. The broker comes in between 3 and 3:10 (p.m.) on Friday and then Monday morning the newspaper article appears, and the profits are in hand."
He said the broker who bought the call options was merely executing orders for another broker. He said he did not know the identity of the other broker or of the ultimate customers.
The exchange would say only that it is investigating the complaint.
Kingsley said the Security and Exchange Commission had been informed. SEC spokesman Charles Larson would neither confirm nor deny that the agency was conducting its own investigation.
Last week, Zayre said it had received a letter from DeBartolo declaring that he may seek to acquire a majority share in the company.