updated 10/5/2006 8:09:04 PM ET 2006-10-06T00:09:04

Unusual swings in the trading of options and derivative debt instruments in Harrah’s Entertainment Inc. ahead of a buyout bid announcement Monday has raised suspicions among insider trading experts, but regulators were mum on whether an official probe had begun.

The volume of call option trading surged in the week before the announcement that Apollo Management and Texas Pacific Group offered to purchase Harrah’s for $15.05 billion, or $81 a share, a 22 percent premium to Friday’s closing price.

That volume jump is a sign of possible insider trading, according to James Cox, a law professor at Duke University who testified before the Senate Judiciary Committee last month.

“What you look for is abnormal trading interest. Normally you find call options being executed all the time at the same level and spreads,” he said. “Suddenly if you find there’s this huge shift in demand for call options, then that’s what raises your eyebrow.”

According to data provided by Options Clearing Corp., call option contracts in Harrah’s shares were exchanged four to six times the average daily volume of August on Tuesday, Wednesday and Thursday before the bid was announced.

On Tuesday, there were 14,992 call option contracts exchanged, followed by 20,006 on Wednesday and 23,597 on Thursday. The average daily volume in August was 3,784.

A call option gives the buyer the right to buy the underlying stock at a future time for a fixed price. It was not immediately clear at what average price the call options were bought.

The price of a derivative of Harrah’s bonds also leapt in the days before the announcement, according to data provided by Markit Group.

The cost of a five-year credit-default swap in $10 million of Harrah’s bonds rose 14 percent from $99,807 to $113,475 in a single day. It also surged 12 percent from $88,319 to $99,216 on Wednesday.

The swap, which protects buyers against a default, more than doubled to $265,000 the day of the announcement.

The buyout bid announced Monday was widely expected to be financed using debt leverage, which some analysts expected would roughly double the existing $10.8 billion in debt on Harrah’s books, increasing the risk of default on existing bonds.

Credit rating companies Standard & Poor’s and Fitch Ratings Inc. reacted Monday by cutting Harrah’s credit rating to junk status while Moody’s Investors Service changed its outlook to negative.

Some industry experts said the increase in the price of credit-default swaps was reflected by all dealers in the market, raising doubt that insider trading occurred.

Morgan Stanley analyst Celeste Brown said in an analyst note on Monday that rumors about the deal were circulating in the market last week.

But Cox said that didn’t rule out insider trading.

“There is a kind of a follow-the-leader phenomenon,” he said. “You have what are called informed traders and then people detecting that there are informed traders. Then the uninformed traders start following them. There’s a lag there and it isn’t in lock step. But that could be what’s going on.”

Authorities declined to say whether an investigation had begun into the pre-announcement swings.

“The Chicago Board Options Exchange and the other options exchanges monitor for unusual trading activity in our marketplaces, and ... CBOE coordinates much of the industry’s efforts in this regard,” said exchange spokeswoman Lynne Howard in a statement. “However, we do not comment on specific investigations.”

Securities and Exchange Commission spokesman John Nester in Washington declined to comment and would neither confirm nor deny the existence of an investigation.

Harrah’s spokesman Alberto Lopez also would not comment on any possible investigation but said the company would cooperate fully with any probe.

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