Market Overview

Insider Trading Allegations Rock Global Education & Technology Group

The Global Education & Technology Group (NASDAQ: GEDU) is reeling this week following reports that both the Chairwoman and the CEO participated in an insider trading syndicate. If you would like to be alerted to GEDU updates as they come out in real-time, signup for a free trial of Benzinga Pro's premium news service.

According to a report published by Absaroka Capital Management, the syndicate committed “10b(5) violations by transacting in advance of the public announcement of the acquisition agreement between GEDU and Pearson PLC on 11/21/11 for $11.006/ADS.”

Back in June, the initial insider trading allegations were made. Today, the case was amended to include both the CEO and the Chairwoman.

Bloomberg wrote last week that, “The Securities and Exchange Commission announced that it has frozen the assets of four Chinese citizens and a Chinese-based entity charged with insider trading in advance of a merger announcement by educational companies based in London and Beijing. The SEC moved quickly to obtain an emergency court order to freeze assets just two weeks after the suspicious trading by Sha Chen, Song Li, Lili Wang, and Zhi Yao, who have U.S.-based brokerage accounts. Some of them already attempted to liquidate or transfer their illicit profits.”

We at Benzinga wrote last week that, “On November 21, 2011 Pearson agreed to acquire GEDU for $294 million, or $11.006 per share. This amounted to a 105% premium over the previous day's price and a whopping 214% premium over the 30-day average price of GEDU shares prior to the acquisition announcement. In the days and weeks leading up to the announcement of the deal, suspicious trading activities were taking place in GEDU shares in brokerage accounts linked to the company's management.”

Further, “The report is sure to continue to ruffle feathers for a few days to come. "Moreover," the report states, "because the brokerage orders for All Know Holdings Ltd. Ms. Chen Sha and Mr. Yao Zhi all originated from the same computer, it appears highly likely these accounts are held in "straw-man" names for a yet-to-be publicly determined benefactor."”

The amendment issued by Absaroka on Thursday stated that the court administrative hearing that morning for the SEC requested asset freeze, Judge Kororas scheduled the preliminary hearing for 01/03/12.

“In summary,” says the report, “with GEDU equity trading approximately 5.3 percent below the proposal acquisition price, Absaroka believes a net short position in GEDU ADSs presents a highly compelling risk-reward proposition at this time.”


ACTION ITEMS:

Bullish:
Traders who believe that GEDU will survive the proceedings might want to consider the following trades:
  • With GEDU equity trading approximately 5.3 percent below the proposal acquisition price, Absaroka believes a net short position in GEDU ADSs presents a highly compelling risk-reward proposition at this time. Despite the controversy, it remains worthy of a look.
  • There is a significant possibility of GEDU reverting to a low single digit per ADS trading range if Pearson renegotiates or walks away from the existing acquisition agreement. Not great for GEDU, but it would present interesting opportunities.
Bearish:
Traders who believe that GEDU won't survive may consider alternative positions:
  • TAL Education Group (NYSE: XRS) is trading at a similar price and a comparable market cap to GEDU, though it's recent trend leaves a lot to be desired. Approach with caution.
  • Xueda Education Group (NYSE: XUE) might represent a better bet. The company has seen a steady year and looks relatively safe.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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