The SEC Tries to Make an International Case on Insider Trading

red flags

The BHP – Potash merger in 2010 was a bit leaky. The SEC has an ongoing investigation into suspicious trading ahead of the the August 17, 210 public announcement of BHP Billiton’s acquisition of Potash Corporation. The latest SEC points the SEC’s accusatory finger at two Spanish citizens.

At first I though the SEC had merely re-published an old story. In August of 2010, the SEC brought a case against two citizens. The SEC alleged that Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez had material, non-public information and purchased hundreds of “out-of-the-money” call option contracts for stock in Potash in the days leading up to the public announcement. Mr. Garcia, a former employee of the an adviser to the merger gave up and disgorged his illicit windfall. Mr. Sanchez fought and the SEC failed to find the smoking gun that turned the suspicious trade into insider trading.

The latest case pits the SEC against Cedric Cañas Maillard, who served as an executive advisor to Banco Santander’s CEO, and his close personal friend Julio Marín Ugedo.

The SEC alleges that Cañas purchased 30,000 Potash Contracts-for-Difference, a highly leveraged derivative, from August 9 to August 13 based on material, non-public information he learned about BHP’s offer to acquire Potash. Cañas liquidated his entire CFD position in Potash following the August 17 public announcement for an illicit profit of $917,239.44. Cañas also communicated frequently with Marín that month, and Marín has admitted that he and Cañas discussed investing in Potash prior to his purchase of 1,393 shares of Potash common stock through two Spain-based brokerage accounts. By trading Potash stock based on material, non-public information, Marín generated net trading profits of $43,566 (a 28.47 percent return) in just one week.

Clearly, these are suspicious trades. .

What caught my eye was a jurisdictional question. This is an area I’m a bit fuzzy on.

Neither Cañas and Marín are citizens of the United States. Neither lives in the United States. According to the SEC complaint, both travel frequently to the United States and Cañas lived periodically in the United States prior to 2008.

Cañas made his bet using Contracts-for-Difference, a highly leveraged derivative, equivalent to 30,000 shares of Potash. The Contracts-for-Difference are not traded in the United States and Cañas used a Luxemborg based trading account at Internaxx.

I’m missing the nexus to the United States that would give the SEC jurisdiction.

The SEC complaint crafts an argument that Internaxx needed to purchase shares of Potash on a US exchange to hedge its risk against the Contracts-for-Difference. That seems very shaky to me from a jurisdictional perspective.

The SEC has an easy case on the inside information aspect because Banco Santander already conducted an internal investigation, found trading in violation of its policy, and fired Cañas.

The Marín case is easier to make. He opened a foreign account, but purchased Potash stock directly. That puts his trades on the NYSE and within the grasp of the SEC.

The SEC still needs to prove the use of inside information by Marín. That will be a tough battle.

According to the SEC complaint, the trades have lots of red flags and stink of insider trading. The Cañas case caught my eye because I don’t see how a US regulator can jump overseas and bring an enforcement action when there does not seem to be a substantial US nexus.

Maybe a reader knows more about the international jurisdiction of the SEC and can pipe in with some thoughts on what the SEC can do over the border.



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2 Responses to The SEC Tries to Make an International Case on Insider Trading

  1. Response March 21, 2014 at 11:45 pm #

    Upon receiving each order, lnternaxx purchased an equivalent number of NYSE­
    listed Potash shares at a price at or better than Canas ‘s specified limit price to establish the price of Canas’s CFD positions, as well as to hedge its risk and remain neutral in the transaction. Internaxx purchased all 30,000 shares of Potash stock through U.S. exchanges.

    • Doug Cornelius March 22, 2014 at 12:35 pm #

      Thanks for the additional information.

      I checked into the docket and the SEC is troubling serving the defendants. The SEC sent letters, but the defendants refused to accept delivery. The SEC is now trying to go through procedures under the Hague Convention.