UPDATE 1-Judge OKs SEC asset freeze on TXU option traders

(Adds background, details, SEC, TXU comment)

By Peter Kaplan and Michael Erman

WASHINGTON/NEW YORK, March 2 (Reuters) - A federal judge on Friday granted an emergency order sought by U.S. regulators to freeze as much as $5.4 million in investor assets for apparent illegal insider trading ahead of TXU Corp.'s TXU.N buyout announcement.

A group of unknown investors "were in possession of material, nonpublic information" ahead of the Texas utility's Feb. 26 announcement of a $31.8 billion buyout by private equity groups, the Securities and Exchange Commission said in a complaint filed with the U.S. District Court in Chicago.

The SEC alleged that the unknown buyers bought at least 8,020 call option contracts for TXU common stock in advance of the announcement, and are in a position to receive more than $5.3 million in trading profits.

"At present, the purchasers of the call options through foreign accounts are unknown," the SEC court document said.

A temporary restraining order issued by the court on Friday called upon the investors to identify themselves and their financial accounts, and barred them from destroying any of their financial records.

News of a TXU deal surfaced after the close of trading on Feb. 23. But the company's options and shares surged prior to those reports.

A total of about 18,000 calls and 8,300 puts traded in TXU on Feb. 23, far outnumbering its average daily volume of 6,696 contracts and normal daily call turnover of 3,200 contracts, according to options-research firm McMillan Analysis Corp.

The company's shares surged $3.95, or 6.6 percent, on Feb. 22 and Feb. 23 to $60.02. The buyout firms, led by Kohlberg Kravis Roberts & Co [KKR.UL] and Texas Pacific Group [TPG.UL], are offering $69.25 per TXU share.

After the Feb. 26 announcement, TXU's shares closed more than 13 percent higher than the previous trading day.

The SEC said the unknown purchasers of TXU call options bought them through foreign brokerage firms Credit Suisse (CSGN.VX), Fimat Banque Frankfurt Zweigniederlassung and UBS AG (UBSN.VX).

"Those brokerage firms, in turn, cleared the trades through several domestic brokerage firms, which in turn executed the purchase orders through the facilities of the Chicago Board Options Exchange," the court filing said.

TXU declined to comment on the SEC allegations or court action.

The SEC said in a statement it received help with the case from Britain's Financial Services Authority, the Swiss Federal Banking Commission and the Chicago Board Options Exchange.

Earlier this week, well-known options trader Jon Najarian said the options activity ahead of the media reports looked like "textbook insider trading."

Some investors focused on the calls granting them the right to buy what is a $66.50 stock, as of Friday's close, for $57.50 and $60, according to Najarian's computer model, which tracks unusual movement in options and shares. (Additional reporting by Lisa Lee in New York and Doris Frankel in Chicago)