M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, August 26, 2010

Potash and Idiot Insider Traders

I haven't touched on BHP's hostile bid on Potash to date and hadn't planned to.  But, now I feel like I have to.  The SEC just charged two Spaniards (Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez) with insider trading in advance of BHP's bid for Potash.  Garcia and Sanchez fall into the growing category of idiot insider traders.  Forget the insider trading charges, these guys should be charged with "idiot insider trading."  Why?  Well, two words:  call options. I've blogged about the idiocy of using call options for insider trading before (here and here).

According to the complaint Garcia and Sanchez bought 331 out-of-the-money call options for Potash in the two weeks prior to the transaction being announced.   Prior to these purchases, neither Garcia nor Sanchez had ever dipped into the call option market.  And, what?  The very first time they decide to buy options they load up on one company's options just prior to the announcement of a hostile acquisition and make $1.1 million in profits?!  [Anyway, props to them for going big.]

The second reason that these guys are idiot inside traders is that bought all these options through their personal brokerage accounts.  What?  No old aunt in Croatia to run the trades through?!

The final reason why these guys are idiot insider traders is that Garcia was head of equity derivative research at Banco Santander, which had been advising BHP on its bid.  Let's see BHP approaches its bankers at Banco Santander and says, we'd like to acquire Potash and the first thing that enters Garcia's mind is that he should trade on the info?!  Garcia should have known better than to betray client confidences.

Anyway, is it any surprise that the SEC filed its complaint on August 25, just eight days after BHP announced its offer for Potash?  Wait a minute -- the original complaint was filed last Friday (August 20) but only unsealed yesterday.  That's three days between announcement of the deal to filing of the sealed complaint.  Man, these guys are idiots.




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