US reviews meeting between Activision CEO and option buyer

Authorities are investigating the timely trading of Activision Blizzard inc

ATVI -0.31%

According to people familiar with the matter, Securities are investigating at least one meeting between the video game company’s CEO and one of the three dealers days before placing a large bet on Activision stock.

Activision CEO Bobby Kotick met with Alexander von Furstenberg the week before Mr. von Furstenberg and media moguls Barry Diller and David Geffen bought options to buy Activision stock at $40 each on Jan. 14, around 59 million dollars, was arranged days before Activision agreed to acquire Microsoft for $95 per share corp

The Wall Street Journal reported.

The Justice Department is investigating whether options trading violated insider trading laws, people familiar with the matter said. The Securities and Exchange Commission is separately conducting a civil investigation into insider trading, the people said.

Mr. Diller previously told the Journal in an interview that neither man had material non-public information about the deal between Microsoft and Activision. He confirmed that they had been contacted by regulators.

“We were unaware of this transaction and it defies credulity to think we would have proceeded then,” Mr. Diller wrote in an email to the Journal on Thursday. “It is also hard to believe that Mr. Kotick, a discerning professional, would have told you about the upcoming transaction over a convivial breakfast with Mr. von Fürstenberg and his wife.”

According to a person familiar with the matter, Mr von Furstenberg disclosed his breakfast meeting with Mr Kotick to law enforcement, who questioned him about the trade. Messrs von Furstenberg and Geffen did not respond to the Journal’s requests for comment.

Alex von Furstenberg disclosed his meeting with Mr Kotick to law enforcement, who questioned him about the trade, according to a person familiar with the matter.


Photo:

Drew Angerer/Getty Images

Mr. Kotick’s status in the investigation could not be ascertained. He was not questioned by law enforcement, some of the people said. The Justice Department declined to comment. The SEC declined comment.

“Mr. Kotick had a social brunch with his friends at a popular restaurant,” said an Activision spokesman. “He, of course, did not share with them any information about a possible transaction with Microsoft.”

The meeting between Messrs. von Furstenberg and Kotick adds to the growing regulatory pressure on Activision and Mr. Kotick personally. The SEC is separately investigating Mr. Kotick and other Activision executives over how they handled allegations of workplace misconduct, the Journal reported, citing documents and people familiar with the investigation. That investigation, along with an investigation led by the California Department of Fair Employment and Housing, has escalated since the Microsoft deal was announced. Activision has said it is cooperating with the SEC investigation and has called a recent move by the California state agency to subpoena police records “an extraordinary fishing expedition.”

Mr. Kotick and Activision have come under intense scrutiny from employees, investors and regulators since a California state agency lawsuit in July alleging a culture of sexual harassment and gender pay gaps. Shortly after the Journal reported in November that Mr. Kotick knew about some sexual harassment allegations and had not reported them to Activision’s board of directors, Microsoft came forward with a potential deal, the Journal reported. Mr Kotick has said he has been transparent with his board and Activision has called the Journal’s reporting “misleading”.

On Wednesday, a federal judge approved an $18 million settlement between Activision and the Equal Employment Opportunity Commission, which has been investigating Activision since 2018.

Experts say regulatory investigations are unlikely to derail the deal with Microsoft unless there’s a so-called material adverse change that would affect the value of the deal, which is expected to close sometime next year. Mr. Kotick is not expected to remain at Microsoft, people familiar with the matter said.

Microsoft will have to pay Activision a breakup fee of approximately $3 billion after April 18, 2023 if Microsoft backs out of the transaction, securities filings show. If Activision abandons the deal, it will have to pay about $2.3 billion.

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Barry Diller said none of the men had material non-public information about the Microsoft-Activision deal prior to the options trade.


Photo:

Nikki Richcher for The Wall Street

Mr. von Furstenberg arranged the options trading through JPMorgan Chase & Co. for himself and Messrs. Diller and Geffen, according to some people familiar with the matter. Mr. Geffen believed that Activision was undervalued and would be acquired or privatized and, according to Mr. Diller, first contacted Mr. Diller with the idea for the trade.

“It’s a simple situation and a simple coincidence that happened over 2 business days,” Mr. Diller wrote in the email. “Any information and records we are giving investigators will support this. I didn’t wait until I was 80 to engage in such an obvious scam.”

Mr. von Fürstenberg is Mr. Diller’s stepson, and Mr. Diller and Mr. Geffen are long-time friends. Mr. Kotick is a longtime friend of Messrs. Diller and von Furstenberg, according to people familiar with their relationship.

Activision stock was about $63 at the time of trading, meaning the options were already profitable or “in the money” to exercise. Option holders could reap more if Activision’s stock price rose.

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According to his LinkedIn profile and the Ranger website, Mr. von Furstenberg is the founder and chief investment officer of Ranger Global Advisors LLC, a company that manages his family’s wealth. The firm has more than $1 billion under management, the website says. A Ranger Global Advisors staffer declined to comment.

Call options give a trader the right to buy stock at a specific price by a specific date. The three men have yet to exercise the options, which do not expire until early next year, people said.

Traders using options often try to profit from a price movement. Because options typically cost less than stocks, they can amplify gains if traders bet correctly, especially if they bought options that were “out of the money” — the term for bets that weren’t profitable at the time the options were bought are. Options that are “in the money” when purchased are typically more expensive and less risky because they can be profitably exercised immediately.

The dealers appear to have spent around $108 million to acquire the right to purchase 4.12 million shares of Activision, the people said. If these options were exercised today, they would be worth approximately $167 million based on recent trading prices.

The value of the options would continue to rise if the deal closes at the stated price per share of $95, which Microsoft says is expected after mid-year, compared to Activision’s closing price of $80.36 on Wednesday . If the men hold the options pending a deal at that price, their profit will exceed $100 million, the people said.

write to Dave Michaels at dave.michaels@wsj.com and Kirsten Grind at kirsten.grind@wsj.com

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