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Lee Schafer: Trading case tied to former Life Time Fitness exec hits investing neophytes

Lee Schafer, Star Tribune (Minneapolis) on

Published in Home and Consumer News

Here's a snippet of this phone call included in the SEC's document: "If you are trading, and I've heard of ... companies that are trading and eventually they sometimes are bought and they go private and the company will buy out all of the existing stock that is outstanding, you know. So how does that work? Like, say for example if I had, if I had just bought options on a stock ... "

Few of us sound like speech tournament champions in phone recordings, but the gist of what the SEC described was Beshey wondering whether a call option would be worth much when the company got bought. And yes, it would be.

This was too good of a scheme to keep quiet, and one of the people Beshey allegedly tipped, a real estate agent in suburban Chicago, allegedly tipped a mortgage broker and three others -- all described as his friends.

A call option is the right, but not the obligation, to buy shares at a specific price. If Life Time stock is trading at $57 per share, these options can be bought pretty cheaply, because who would want to own the right to buy at $65?

News of Life Time's deal did finally leak, as the Wall Street Journal in early March 2015 reported that two private equity firms were near a deal. The stock price soared, reaching more than $69 per share. The trades described in the indictment, generally for options that granted the right to buy at $60 or $65 per share, suddenly looked awfully shrewd. It wasn't long before the formal announcement finally came: a deal at $72.10 per share.

Altogether, as alleged in the SEC suit, the defendants cleared about $867,000.

Then, the prosecutors say, it came time to send some profits up the chain to pay for the tip. One of those debts, as alleged in a federal document, got settled with delivery of "at least 10 pounds of marijuana." At the top of the chain was Shane Fleming, who was paid "approximately $10,000 in cash for sharing the inside information about Life Time," as alleged in the SEC complaint. That was it, just $10,000 for a midcareer executive in sales.

The allegations in the Life Time case are a reminder for anyone of the risks in trading on insider tips. Even if you work miles from the world of securities trading, one of the many people you encounter walking through life may call up with a seemingly can't-lose tip. They know someone who knows someone, they may say, and have heard that a company is about to make an announcement that is certain to move the stock.

Don't let them get even halfway through the pitch before you hang up.

About The Writer

Lee Schafer came to the Star Tribune after 15 years as a corporate officer, consultant and investment banker in the Twin Cities. He has been a columnist for Twin Cities Business magazine and was senior editor for Corporate Report Minnesota. Readers may write him at lee.schafer@startribune.com.

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