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SEC v. Banca Della SvizzeraItaliana

    Brief Fact Summary. An action was filed againstBanca Della SvizzeraItaliana (BSI) (Defendant) and its foreign principals by the Securities Exchange Commission (SEC) (Plaintiff) for insider trading in call options on national stock exchanges and since BSI denied identification of its principals the SEC moved to compel disclosure of that information.

    Synopsis of Rule of Law. Sales transacted on U.S. securities exchanges in violation of insider trading laws by a foreign party may be obligated to disclose principles for the stock buyer, even though acts of disclosure like that could allow the party to be held criminally liable in its home country.

    Facts. An action was filed by the SEC against BSI and its foreign principals for insider trading in call options. On the Philadelphia Stock Exchange the options were traded for the stock of the New York Stock Exchange traded, St. Joe Minerals Corp. (St. Joe). Immediately preceding a tender offer by a subsidiary of Joseph E. Seagram & Sons, Inc., the purchases of all common stock of St. Joe for $45 (vs. $30 a share pre-announcement) a share were made. BSI’s transactions in their options brought profits nearing $2 million overnight and because of this undue activity, caught the eye of the SEC, an investigation ensued and due to its findings, brought suit. The SEC procured a temporary restraining order requiring that “insofar as permitted by law,” BSI needs to disclose the identity of its principles; the SEC tried to attain the identities in various ways but no disclosure was provided and BSI adhered to its avowal of the banking secrecy law. In conclusion, harsh contempt sanctions were threatened by the court if the SEC interrogatories remained unanswered and in response, BSI procured a waiver of Swiss confidentiality laws and answered some of the interrogatories.

    Issue. Are sales transacted on U.S. securities exchanges in violation of insider trading laws by a foreign party may be obligated to disclose principles for the stock buyer, even though acts of disclosure like that could allow the party to be held criminally liable in its home country?

    Held. (Pollack, J.) Yes. Sales transacted on U.S. securities exchanges in violation of insider trading laws by a foreign party may be obligated to disclose principles for the stock buyer, even though acts of disclosure like that could allow the party to be held criminally liable in its home country.The central Supreme Court case is SocieteInternationale Pour Participations Industrielles et Commerciales, S.A. v. Rogers, 357 U.S. 197 (1958), which held that a party that fights discovery’s good faith is an essential factor in whether to impose sanctions when foreign law prohibits the required disclosure. Applied here, BSI purports that it could be subject to criminal liability under Swiss penal and banking law for disclosure of required information, however, by obviously using Swiss nondisclosure law to evade, in a business sale for profit to it, the strictures of U.S. securities law against insider trading, no matter if it was acting as a principle or agent. Thus, Swiss nondisclosure law cannot be relied upon to hide its activity and this result is backed by § 40 of the Restatement of Foreign Relations. The United States interest in implementing its securities laws to make certain the integrity of its markets is quite strong and the market must be shielded from evisceration. The Swiss government showed no opposition and never suggested to stop discovery. It is important to note that secrecy privilege exists for bank customers, not to protect the Swiss government or a public interest. Then the Restatement mentions difficulty put upon BSI from following unpredictable laws, in this case, BSI may face disclosure penalties but due to its bad faith, this difficulty fails to excuse BSI’s use of foreign law to protect it from the reach of our laws. Seeing as BSI’s attorneys will answer interrogatories in the U.S., that is where performance will occur and while BSI is a Swiss citizen, it is transitional in nature and has multiple foreign associates so there is a reduced reason for not ordering BSI to adapt to U.S. laws. Finally, a formal order instructing the requested disclosure will be the base for further actions necessary in the form of sanctions, to the extent that compliance is incomplete. “It would be a travesty of justice to permit a foreign company to invade American markets, violate American laws . . . withdraw profits and resist accountability for itself and its principals for the illegality by claiming their anonymity under foreign law.” Order granted.

    Discussion. Recently, Memoranda of Understanding (MOU) has been relied upon by the SEC for enforcement of securities violations involving foreign companies. MOUs vary from country to country, with some phrased as binding agreements (technically not enforceable under international law) where there is a commitment to investigate and prosecute fraud, manipulation, and other securities violations and others focus on the SEC’s technical assistance. Now there are also a limited number of treaties for mutual assistance in criminal issues utilized with some success in the enforcement of securities violations, with enforcement occurring the most in the United States.



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