Earlier this month the SEC settled an insider trading case which was based on little more than a suspicious trading pattern. In SEC v. Di Nardo (here) the Commission obtained a settlement were the complaint was based on trading in significant option positions in two take over stocks shortly before the announcements. Mr. Di Nardo and his trading vehicle settled by consenting to an injunction and agreeing to pay disgorgement and a penalty equal to about half of the trading profits. The source of the inside information on each deal was not determined.
If Di Nardo, which was based on trading in advance of two deals, was suspicious the trading of Juan Jose Fernandez Garcia in options prior to one deal might be viewed as less suspicious. Nevertheless, it yielded the same result – almost. SEC v. Garcia, Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010).
Mr. Garcia is one of two defendants in the case. The other is Martin Carlo Sanchez. The complaint alleges insider trading in advance of the announcement of the bid by Potash Corporation for BHP Billton Plc. Both men took large positions in the options market shortly prior to the deal announcement. Both traded through Interative Brokers. Both profited following the deal announcement.
The Garcia complaint calls the trading “suspicious.” As in Di Nardo, little more is known about the Garcia defendants than the actual trades placed and profits almost collected. While it is known that Mr. Garcia is the Head of European Equity Derivatives at Banco Santander, S.A. which advised Potash on the bid, there it is no evidence that Mr. Garcia accessed any inside information at the bank. While it is known that both defendants live in Madrid, there is no evidence that Mr. Garcia tipped Mr. Sanchez or even if the men knew each other. Indeed, the complaint admits that its key trader trading claim is based on “information and belief.”
Nevertheless, the Commission settled with Mr. Garcia. He consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). He also agreed to disgorge his trading profits of $576,033. Unlike Mr. Di Nardo however, Mr. Garcia only agreed to pay a civil penalty of $50,000, which is less than 10% of the trading profits. Apparently suspicious trading in take over stocks may result in an enforcement action as in Di Nardo and Garcia. At the same time less suspicious trading clearly yields a lesser penalty.