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The Imperial SEC? - Foreign Policy and the Internationalization of the Securities Markets, 1934-1990

International Enforcement Issues

Insider Trading in the International Context

While part of the SEC was focused on easing requirements for foreign issuers, the Commission's enforcement arm worked to expand SEC jurisdiction over securities law violations involving U.S. securities which occurred abroad, while also negotiating agreements with foreign countries for greater cooperation with the SEC.

The U.S. markets were booming in the 1980s and a wave of corporate takeovers began. With these takeovers came a series of insider trading scandals in which people privy to material non-public information bought the securities of a company about to be acquired. Trading on such information was a violation of Rule 10b-5 of the 1934 Act. As the SEC began investigating these cases, it hit road blocks when it could not obtain crucial material from foreign institutions, such as overseas banks, due to bank secrecy laws. Transactions initiated in Switzerland were especially difficult to investigate due to that country's stringent secrecy laws.

In 1981, two SEC insider trading cases were running in tandem with one another. St. Joe involved the take-over by Seagrams of St. Joe Mineral; the SEC suspected that individuals had engaged in insider trading. These traders had purchased options through a Swiss bank that had acted as an agent. Likewise, the Santa Fe case involved allegations of insider trading through foreign banks before the announcement of Santa Fe's merger with Kuwait Petroleum.

In St. Joe, the SEC moved to freeze assets of those who had allegedly traded on inside information. Some of those assets were in foreign banks. The SEC also asked a federal court in New York to compel the discovery of the identity of certain customers of a small Swiss bank suspected of using the accounts to trade on inside information. The bank argued that, because of Swiss bank secrecy laws, it could not provide the information. Judge Milton Pollack granted the SEC's request and fined the bank $50,000 for each day that it did not produce such information.(77) Pollack's order "sent a tremor through the Swiss banking establishment." (78)

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