Investigating insider trading is difficult. Proving it is even more difficult. Frequently, the trading is “suspicious” because of its timing, magnitude, or for a variety of other reasons. Market watchers such as FINRA use this term to classify trading that merits additional investigation. It is a starting point, not a conclusion and clearly not proof of insider trading. More is needed.

Sometimes suspicious trading becomes the predicate for an enforcement action. This is the case in the Commission’s most recent insider trading case, SEC v. Garcia, Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010). The case was filed just three days after the takeover announcement on which it centers. The defendants are Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez, both of Madrid, Spain. As in many such cases, the SEC sought and obtained emergency relief, freezing the brokerage accounts of the two defendants and securing an order for expedited discovery.

The case centers on the unsolicited bid for Potash Corporation of Saskatchewan, Inc. by BHP Billiton Plc, announced on August 17, 2010. In the bid, BHP offered a 16% premium to market or $130 per share for the stock of Potash. Potash, the world’s largest fertilizer company, was advised on the bid by Banco Santander, S.A. It shares are traded on the New York and Toronto Stock Exchanges and its options are listed on the Chicago Board Options Exchange. BHP is a global natural resources company based in Australia. The day after the bid, the share price of Potash rose over 27%. The bid was ultimately rejected.

On August 12, 13, and 16 Mr. Garcia purchased 282 Potash call options for approximately $13,669 through Interactive Brokers. Virtually all of the contracts were in the “front month” August series and were due to expire on August 21, 2010. Most were out of the money when purchased by Mr. Garcia. On August 17, 2010, after the take over announcement, Mr. Garcia sold his holdings for a profit of $576,033.

From January 1 through August 12, 2010, Mr. Garcia did not trade in any Potash securities at Interactive Brokers and he engaged in what the complaint calls “minimal” options trading. At the time of the purchases, Mr. Garcia was the Head of European Equity Derivatives at Banco Santander, S.A. Mr. Sanchez purchased 331 call options in Potash on August 12 and 13, 2010, at a cost of $47,499. All of the options were due to expire on September 18, 2010, and were out of the money. They were purchased through Interactive Brokers. From January 1 through August 12, 2010, Mr. Sanchez did not own or trade any Potash shares at Interactive. The day after the take over bid was announced Mr. Sanchez sold his position in Potash for a profit of $496,953.33. He has been unsuccessful in attempts to withdraw the funds.

The complaint claims that the trading of Messrs. Garcia and Sanchez is “suspicious.” That allegation leads to the statement that “on information and belief” Messrs. Garcia and Sanchez traded on inside information. Perhaps so.

The complaint may, however, be more noteworthy for what it does not state. It does not claim that Mr. Garcia accessed or learned material non-public information through his work. It does not claim that Mr. Garcia tipped Mr. Sanchez, although it alleges that the trading patterns in Potash options are similar. It does not claim that Mr. Garcia knows or ever communicated with Mr. Sanchez. It does not allege that trading options is atypical for either defendant, other than to note that Mr. Garcia’s trading in this regard earlier in the year was minimal. It does not analyze the historical trading of either defendant beyond what occurred over the last few months in one account.

In some cases where the Commission has quickly filed insider trading charges it has been successful such as SEC v. Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y.) (here). In other instances, the defendants are demanding that the Commission prove its case such as SEC v. Condroyer, Case No. 1:09-cv-3600 (N.D. Ga.) (here). In still others the Commission has been unable to prove the claim at trial such as SEC v. Rorech, Civil Action No. 09 Civ. 4329 (S.D.N.Y.) (here).

Regardless of the results here, it is clear the proving insider trading based primarily on a set of trades in advance of a corporate event is not only difficult, but perhaps as much luck as anything else. Aggressive and efficient enforcement is important and can facilitate the program. Enforcement based on luck does not. The need for speed – even if one or both of the defendants are attempting to withdraw their trading profits – should not eclipse getting it right. It clearly is not a reason to rely on luck rather than sound investigation and evidence.