The Reach of Section 10(b) After Morrison and Dodd-Frank

In Morrison v. National Australia Bank, Ltd., 130 S.Ct. 2869 (2010) the Supreme Court delimited the reach of Exchange Act Section 10(b) to the shores of the United States. The Court held that the question regarding the reach of the Section is not one of jurisdiction but rather, the proper construction of the Section. Construing Section 10(b) in view of a presumption against extraterritorial reach, the Court concluded that it is limited to securities transactions where the purchase took place in the U.S. or on an exchange here.

The month after the Court announced its decision, Congress passed the Dodd-Frank Act which contained a legislative fix for Morrison applicable to the SEC and the Department of Justice. The Act provide that the jurisdiction of the antifraud provisions of the securities laws in suits brought by the SEC or the government reaches any conduct in the U.S. that constitutes “significant steps in furtherance of the violation” even if it is outside the United States. Dodd-Frank thus extends the jurisdiction of the provision despite the fact that the Morrison Court held that question regarding the reach of Section 10(b) was not a jurisdictional one. Rather, the Exchange Act afforded sufficient jurisdictional power for the courts to hear appropriate cases. Stated differently, on its face Dodd-Frank fixes a problem that was not broken. Thus whether the Dodd-Frank fix actually constitutes a legislative fix for Morrison is unclear. Now the Commission has filed an action which may furnish the answer, SEC v. Canas, Civil Action No. 13 CIV 52299 (S.D.N.Y. Filed July 30, 2013).

The Canas case

Canas is an insider trading action brought against two citizens and residents of Spain, Cedric Canas Maillard and Julio Martin Ugedo. Mr. Canas served from May 1, 2008 through January 2011 as the Technical Cabinet Adviser to the CEO of Banco Santander, S.A. Mr. Martin is a long time friend.

The action centers on the failed takeover bid by BHP Billiton for Potash Corp. of Saskatchewan Inc. BHP, headquartered in Melbourne, Australia, is the world’s largest mining company by revenue. Potash, headquartered in Saskatoon, Saskatchewan, Canada, is the world’s largest producer of potash by capacity.

On August 17, 2010 Potash publicly announced that its board had received and rejected an unsolicited offer to purchase its common stock for $38.6 billion or $130 per share in cash from BHP. The price represented a 16% premium to the most recent closing price. Following the announcement the share price increased by almost 28%. BHP commenced a hostile bid for all the shares of Potash. That bid collapsed following the filing of a suit to enjoin it and in the wake of opposition to the transaction from the Canadian government.

Shortly prior to announcement by Potash about the bid, the CEO of BHP contacted the president and CEO of Potash, requesting a meeting. It was scheduled for August 12, 2010 in Chicago, Illinois. Days before the scheduled meeting BHP approached Santander, inquiring if the bank could support a $10.5 billion portion of the underwriting in connection with the proposed bid. Later the same day, August 4, 2010, the bank and BHP executed an agreement. Santander assembled a team to begin due diligence.

The next day the Global Head of Corporate Investment Banking forwarded an e-mail attaching a memo regarding the proposed transaction to the CEO of the bank. A copy was also sent to the Head of European Loans who in turn forwarded it to Mr. Canas. Later that evening Mr. Canas discussed the proposed transaction with the Head of European Loans. On August 9, 2010 Santandar approved the proposed underwriting for the deal.

Between August 9 and 13, 2010 Mr. Canas purchased highly-leveraged securities know as Contracts-for Difference or CFDs through the Luxenbourg affiliate of TD Ameritrade. CFDs are not available in the U.S. The securities mirror the movement and pricing of the underlying stock on a dollar-for-dollar basis. The purchase and sales prices are identical to those quoted for shares on the listing exchange. In executing the transactions the brokerage firm purchased the equivalent number of Potash shares through U.S. exchanges to set the price and as a hedge. While the purchase price for the CFDs was minimal, once the proposed transaction became public Mr. Canas was able to liquidate his holdings for a profit of $917,239.44.

Prior to the announcement of the proposed deal Mr. Canas also tipped his long time friend Mr. Martin, according to the complaint. Between August 10 and 11, 2010 Mr. Martin purchased 1,238 shares of Potash stock on the New York Stock Exchange, although he had little investment experience. Mr. Martin did have telephone calls with Mr. Canas at the time. The two men also exchanged text messages. At some point Mr. Martin admitted he discussed investing in Potash with Mr. Canas, according to the complaint. Following the announcement of the proposed deal Mr. Martin had trading profits of $37,153.27.

The bank conducted an internal investigation following the public announcement of the proposal. During that inquiry Mr. Canas admitted he had been informed about the proposed deal.

The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.

Issues for resolution

The trading of Mr. Canas presents at least three key issues in view of Morrison. The initial question is whether purchasing CFDs under the circumstances here is sufficient to bring it within the Morrison constricted reach of Section 10(b). A second will focus on the construction of the Dodd-Frank provision, that is, whether by extending the jurisdiction of the antifraud provisions the Act in fact legislatively overruled the Supreme Court’s decision. A third question concerns the construction of the Dodd-Frank provision and whether the conduct in the U.S. represents “significant steps” in furtherance of a violation within the meaning of the Act.

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