Texas Tech University

"The Security and Exchange Commission: A Good Ambassador for the U.S." - Franco Parisi, Michael Ijeh and Myrna Yamel Lopez-Avila

Trevor Bell

February 17, 2015

Visiting International Scholar Franco Parisi and two Rawls students, Michael Ijeh and Myrna Yamel Lopez-Avila, recently discussed the Security and Exchange Commission and its involvement with the Chilean capital market. As Visiting International Scholar, Parisi, who is from Chile, works with students in the Rawls Business Leadership Program and his Finance course to discuss current international issues.

Michael Ijeh is a senior Finance major with a minor in Economics. He is heavily involved in the various Finance organizations and projects within the Rawls College, which includes the Student Managed Investment Fund (SMIF), Financial Management Association, Valuation Club, Financial Analysts and Advisors Society of Texas Tech (FAAST), Rawls Business Leadership Program, and currently starting a consulting group for Texas Tech. Michael also conducts economic research within the Undergraduate Research Scholars (URS) program for the Honors College.

Myrna Yamel Lopez-Avila is a senior International Business major who will graduate in May 2015. During her time at the Rawls College, she studied abroad in Seville, Spain, last summer through the Center for Global Engagement.

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The Security and Exchange Commission: A Good Ambassador for the U.S.

Around the globe, the U.S. is either admired or detested. However, it is undeniable that different institutions are helping protest other nations from corruption whenever possible. The latest example involves the Security and Exchange Commission, better known as the SEC, to help protect the Chilean capital market.

During the past couple of weeks, the SEC filed suit against Juan Bilbao and his partner, Tomas Hurtado, in the United States District Court Southern District of New York. The reason involves concerns over insider trading of American Depositary Shares (ADS) of CFR Pharmaceuticals, S.A. (CFR) on the basis of material nonpublic information related to a tender offer for CFR by Abbott Laboratories (Abbott). On March 9, 2014, "Abbott" made a confidential proposal to CFR to acquire all of the outstanding shares of the company. The next day, CFR's board of directors met to consider Abbott's offer and agreed to proceed with the offer. According to the SEC, "at that meeting, CFR's board discussed the highly confident; nature of the information related to Abbott's offer." At that time, Mr. Bilbao was a participant member of that board's meeting via telephone. Just two days after the board meeting, from March 12 to May 7, 2014, Mr. Bilbao used a U.S. brokerage account in which he was the beneficiary to purchase 707,222 ADSs of CFR for $14.3 million, of course using an offshore entity, Somerton Resources Limited. Based on SEC reports, using the same account, Bilbao used Hurtado to purchase CFR ADSs, and Hurtado used his own brokerage account to buy 35,000 ADSs of CFR for $707,710 in April 29 and May 6, 2014.

Of course, none of those transactions were known in Chile, neither by the rest of the member of the board of directors at CFR or by the Chilean Capital Market Regulatory Agency (Superintendencia de Valores y Seguros, SVS). On May 2014, Abbott announced a definitive agreement to acquire CFR through U.S. and Chilean public cash tender offers of all the remaining outstanding shares. Three months later, Abbott was the owner up to 99.6% of CFR. After the transaction, Bilbao's profits were approximately $10,110,975.61 and Hurtado's about $495,039.50. From the SEC's eyes, Bilbao and Hurtado abused the nonpublic information to generate those profits. The demands against Bilbao and Hurtado were issued on December 22, 2014, then on January 14, 2015 the Chilean regulatory authority opened an investigation about those transactions.

But the question is: are these types of transactions frequent in emerging markets? Our intuition says yes, but these types of transactions are difficult to see if the SEC does not bring them into the public eye. Remember, in the emerging markets, wealth, legal, and political powers, are highly concentrated in a few people, so it is difficult to "blow the whistle" for executives who are witnesses of those transactions. Moreover, in emerging markets there isn't a lot of trust, or maybe low trust, that an operation like Bilbao and Hurtado would even be reported by an anonymous witness. For large corporations, people feel, in one way or another, that somebody will tell on the whistle blower, and that person will pay big, and the one doing the white collar crime will pay nothing or nothing in relative terms.

We strongly believe that capital markets are highly sensitive to this kind of conduct similar to Bilbao and Hurtado, and the information given by the SEC is valuable and relevant for emerging markets. Of course, there are problems in the U.S., but the significant contributions of the SEC in these types of cases are highly valued not only by stockholders, but also by the countries involved. Since not all foreign governments know how to regulate companies that have ADSs or ADRs, or trading its bonds in a U.S. capital market, making a complaint using the SEC's web enforces regulations. It is another contribution from the U.S. to emerging markets. We do not know yet if the allegations against Bilbao and Hurtado by the SEC are true or false, but there is some good explanation to be given by those Chilean residences to clarify the transactions. Either way, it is a good lesson for the Chilean capital market and some agents that participate in these emerging markets.

This supports the efforts outlined in the Rawls College of Business Strategic Plan. Learn more about the LEADER 2020 Strategic Plan and follow our progress on Twitter at #RawlsLeads.