Tag: Potash

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.

References:

 

When Red Flags Are Not Enough

Purchase out of the money call options set to expire in two weeks, do not have any activity on that stock before, exclusively use options when you have rarely traded options in the account before, purchase those options just before the announcement of the company’s acquisition, and then quickly try to move the money off-shore.

Those red flags were enough for the Director of Compliance Operations at Interactive Brokers to put a hold on the account of Luis Martin Caro Sanchez. After reviewing the trades, the information was forwarded to the Securities and Exchange Commission for investigation. It reeked of insider trading, so the SEC obtained an immediate freeze on the account and charged Sanchez with insider trading.

Sanchez had bought several hundred of the risky Potash call options on August 12 and 13, 2010. A week later, the acquisition was announced causing a dramatic rise in the price of Potash stock. Sanchez managed to reap nearly $500,000 in profits at a handsome 1046% return. The actions seemed to be so blatant that I labeled it the perfect way to get caught insider trading. Of course one of the key elements of insider trading is having access to inside information.

Suspicious trades alone are not enough. In order for the SEC to win an insider trading case against a company outsider, the SEC must prove that an outsider made his trades based on material nonpublic information given to him by an insider. The SEC failed to find a connection.

Sanchez claimed he made became interested in Potash based on a technical signal “when he observed a crossover signal in the exponential moving average for the price of Potash stock.” He made the buy after

“there was a consolidation of the impulse of the cross of mediums, average, and that consolidation is known as pull-back, and consists of a slight drop in the price after a push for a higher price. And there was a hole that was filled – a gap that was produced during the increase – the previous increase.”

In fairness to Sanchez, he is from Spain and the interview was conducted without a certified, neutral translator. But to me, his explanation is just a bunch of mumbo-jumbo spewing out to make the SEC think he is a trading expert.

As much as the SEC tried, they could not link Sanchez to an insider. They could not even link him to his co-defendant, Juan Jose Fernandez Garcia. Both Garcia and Sanchez lived in Madrid and both made suspicious trades on Potash stock using accounts at Interactive Brokers. That was the only connection.

Garcia also happened to work at Banco Santander, who was an adviser to BHP in connection with its purchase of Potash. Garcia quickly settled with the SEC and forfeited his $576,032.00 in trading profits.

Sanchez was willing to fight for his windfall and challenged the SEC to prove he had inside knowledge. The SEC failed and Sanchez gets to keep his cash.

Sources:

Red Flags is Rutger van Waveren