SEC Probing Insider Trading in HP-3Com Deal: Report

A jump in options call trading for 3Com in the hours leading up to HP's announcement of a $2.7 billion bid for networking company 3Com is prompting SEC regulators to investigate whether there was insider trading, according to Bloomberg. In addition, 3Com faces two shareholder lawsuits from investors who say HP's offer is too low. HP is hoping to adding 3Com to its networking business to better compete with Cisco.

Federal regulators reportedly are investigating whether there was illegal inside trading connected to Hewlett-Packard's $2.7 billion bid for networking company 3Com.

According to a report by Bloomberg, options call trading for 3Com jumped in the hours before HP announced the offer, at one point growing to 17 times its average over the previous four weeks, and marking a 26-month high in trading activity.

Quoting an anonymous source, Bloomberg reported that the Securities and Exchange Commission is investigating whether someone profited illegally from inside knowledge of the deal before it was announced.

Click here to see what HP would gain by buying 3Com.

The report said that the SEC regularly monitors options call trading as an indicator of potential insider trading. Call options can mean that someone has the right to acquire stock at a given price by a particular date, and reportedly lead to high returns for traders speculating about possible acquisitions.

HP on Nov. 11 announced its intention of buying 3Com, which analysts said would help HP fill some holes in its ProCurve networking offerings. In particular, HP would gain 3Com's core data center switching products, which would help HP in its growing competition against networking giant Cisco Systems. HP also would gain 3Com's TippingPoint network security subsidiary, and would get greater traction in the rapidly growing Chinese market, where 3Com is headquartered.

Apparently not everyone is happy with the deal. 3Com reportedly faces separate shareholder lawsuits filed in Delaware and Massachusetts by investors who argue that HP's proposed $2.7 billion bid is not high enough.

3Com has 5,800 employees worldwide, and generated $7.5 million in profit on $290.5 million in revenues in the third quarter.