“Terrabusi”: leading ‘insider trading’ case

Facts

At the end of 1993 negotiations were initiated regarding the purchase of the majority stock of shares of Establecimiento Modelo Terrabusi S.A. (“Terrabusi”) to Nabisco. During the negotiations the parties subscribed a Memorandum of Understanding (“MOU”) on November 1993 by which the purchase price per share was agreed.  Terrabusi disclosed to the public the signing of the MOU but did not inform in such disclosure the price per share agreed with Nabisco. In later negotiations the sellers and Nabisco agreed to raise the original price per share, which was not disclosed to the public either. 

During the first months of 1994 certain managers and shareholders of the control group of Terrabusi carried out numerous purchases and sales of Terrabusi shares in the open market. These insiders presumably were aware of the purchase price per share agreed with Nabisco, which had not been disclosed to the public in general.

CNV Summary Proceedings

The Argentine Securities Exchange Commision (Comisión Nacional de Valores - “CNV”) initiated summary proceedings against certain managers and shareholders of Terrabusi and imposed a monetary penalty to them for transacting in the market knowing the price per share of Terrabusi agreed with Nabisco which was unknown to the public in general.  

On July 11, 1996, the CNV resolved that these managers and shareholders incurred in “insider trading” as provided under section 21 General Resolution No 277/1993 of the CNV regulations, that prohibited insiders the “use of privileged information… with the purpose of obtaining any advantage for themselves or for third parties, derived from the purchase or sale of securities or any other transaction related to the public offering regime”.    

The CNV determined that these persons purchased shares when the listed price was lower and sold shares when the listed price was higher than the price agreed with Nabisco. These insiders used information to which they had access due to their positions in the company and as negotiators of the sale of shares to Nabisco.

The CNV determined that even though the MOU subscription had been informed to the public, the price per share agreed with Nabisco had never been informed. This information had sufficient relevance to affect the placement or the negotiation of the shares in the market. By operating with knowledge of this information the insiders operated under unequal terms with respect to other investors. The CNV interpreted that the purpose of the regulation is to achieve a transparent market by guaranteeing access to sufficient and reliable information which is a key factor in order to foster trust of the investors.  

Applying the “abstain or disclose rule” of US securities regulations, the CNV considered that the insiders should have abstained from transacting in the open market if they had knowledge of privileged information, or alternatively they should have disclosed this information to the public before entering into any market transaction. The CNV also considered that evidence of intentional wrongdoing (dolo) was not necessary to be shown, as evidence of transacting in the market with knowledge of privileged and confidential information was sufficient.

In the analysis of the evidence the CNV specially considered: (a) the MOU, (b) the transactions entered into by these managers and shareholders during the period in which the sale to Nabisco was being negotiated, (c) the statements of the insiders and relationships among them (most of them were family related, were friends, participated in a business in common and had an agreement among them no to sell shares without consulting with the others first), and (d) the pattern of transactions that the insiders stated they followed, which allegedly consisted of buying when the price of the share decreased and selling when the price of the share increased, had varied according to transactions registered in which: (i) they purchased shares in two occasions when the share price was increasing (presumably because they knew that such price was still lower than the price offered by Nabisco), and (ii) because of the huge daily volume of transactions they entered into that reached 70 % of the total share sales of Terrabusi.

First Appeals

On December 5, 1997 Room A of the Commercial Court of Appeals confirmed the resolution of the CNV. Such ruling was appealed before the Supreme Court, which on September 27, 2001 ruled that the Room A judgment was arbitrary for having cross referenced the opinion of the Room Attorney without considering defenses made by the accused, and the ruling of Room A was annulled and the case was remitted once again to the Court of Appeals.   

Ruling Room D of the Commercial Court of Appeals

On August 27, 2002, Room D of the Commercial Court of Appeals reversed the decision of the CNV. Room D considered that the CNV interpreted erroneously the insider trading figure when it determined that under Section 21 of General Resolution No 277/1993 the insiders were required to abstain from trading. Room D considered that there was no direct evidence that the accused had acted “using their privileged information”, which was the requirement of such applicable regulation. Section 7 of Decree No 677/2001 provided the obligation to abstain from trading when in knowledge of privileged information, but Room D considered that this Decree was passed after the relevant transactions occurred.  Given its criminal nature they considered that the sanction could not be imposed based only on presumptions that contradict other legal presumptions, such as the presumptions of good faith and innocence. In that regard, the actions of the accused can only be interpreted as that of any other investor: buy when the price falls and sell when the price rises. According to Room D to determinate if the information about the price offered by Nabisco was “used” would be equivalent to “investigating the psychic process to form the will” of each of the accused insiders.

New Supreme Court Ruling

The Supreme Court integrated by new ministers ruled on April 24, 2007 to revoke the ruling of Room D and to uphold the resolution of the CNV.

The Supreme Court considered that the difficulty (if not, impossibility) to determine the internal will of insiders in each transaction would annul the figure of “insider trading” due to the impossibility of its application, as actions cannot be split from the actor’s knowledge. 

The Supreme Court also determined that the mass media articles informing the negotiation between the companies were not effective public disclosure because:

i)            the purchase price which is essential information was not published,

ii)            the senior staff of Terrabusi publicly denied the information published,

iii)            in any case the information obtained from the media did not provide the same certainty to the public as that of the accused, and therefore the outsider shareholders were in unequal conditions to transact the company shares at the market. The Supreme Court considered that in order to avoid the inequality between the public and the insiders, the relevant facts –including the agreed purchase price per share-  should have been communicated to the CNV and stock exchanges and markets where the shares were listed for them to be disclosed to the public prior to the transactions.

The Supreme Court considered appropriate the analysis of the facts made by the CNV and concluded that:

a)           the imposed sanction was administrative and not criminal in nature and was passed by the CNV in exercise of its supervisory powers;

b)           the CNV has regulatory powers provided by law with competence over all the participants of the public offering regime and therefore it was competent to impose sanctions when infringements to the CNV general resolutions are found;

c)           the accused knew the price offered by Nabisco which is reflected by their condition of insiders and the terms and evolution of the transactions they entered into;

d)           the invoked good faith is not consistent with the great volume negotiated by the accused during this period and the purchase of shares by them even when the price went up, which shows their intention of obtaining advantages.

For the above reasons, the Supreme Court confirmed the CNV Resolution imposing a monetary penalty on the accused.