regulation of the emerging markets loan market, The

Buckley, Ross P

ROSS P. BUCKLEY*

This Article examines the proper characterization and regulation of the secondary market in emerging markets loans. In 1983, in the aftermath of the debt crisis, the secondary market commenced. At the time, country debtors in the secondary market were known as less developed countries (LDCs).1 This market, centered in New York City, grew explosively to record a turnover of $1.3 trillion face value of debt in 19932 and $5.3 trillion in 1996.s

As the LDC loans were converted into Brady bonds4 in the successive Brady-style restructurings of the 1990s, the market moved from a little-regulated loans market into a well-regulated bond market subject to the full U.S. securities law regime.5 In separate sections, this Article investigates three aspects of the secondary market in emerging market loans: (I) the proper characterization of the market, (II) the history of abuse of the market, and (III) the regulation of the market.

I. THE CHARACTERIZATION OF THE MARKET The first section of the Article considers three questions relating to the characterization of the market: (A) is the secondary market for emerging markets loans subject to regulation as a securities market under US law?6; (B) is the market an exchange or an OTC market?; and (C) is the market one international securities market or a collection of regional markets?

A. Is Loan Trading Subject to the U.S. Securities Laws?

To answer the question whether the secondary market is subject to the U.S. securities laws requires a determination of whether a traded LDC loan is properly considered a security. The relevant parts of the lengthy definition of a security in section 2 (a) ( 1 ) of the Securities Act of 1933 ('33 Act) are as follows: The term "security" means any note ... bond, debenture, evidence of indebtedness, investment contract, . . . or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in . . . [or] receipt for . . . any of the foregoing.8

The complete definition is intentionally broad.9 For a loan or assignment thereof to be a security under the above definition it would have to fall within the meaning of the phrase "evidence of indebtedness." None of the other classifications listed in the above definition assist in determining whether the secondary market falls under the control of U.S. law.lo An illuminating summary of the conventional view of the relevant U.S. law comes from Lee Buchheit": Commercial bankers learn, seemingly with their mothers' milk, that bank loan assignments and participations are not subject to the federal securities laws in the United States.... One reaches the conclusion that the securities laws only have limited application in this area by extrapolating from judicial precedents that inevitably are based on specific factual circumstances .... [R] ead literally, the securities laws would appear to cover a commercial bank loan agreement . . . as an evidence of indebtedness . . . and the sale of interests therein .... [O]ver the years, however, most courts have tended to focus on the introductory words to the definition of a security in both the 1933 Act and the 1934 Act (". . . unless the context otherwise requires . . ."), as the basis for excluding bank loans, and loan assignments. . . from the definition of a security.... In effect, courts have been persuaded that banks do not require the protection of the securities laws when lending money to their customers, or when purchasing interests in existing loans originated by other banks.12

Buchheit continued to lay the groundwork for this inquiry, when he wrote:

It is important to note, however, that these precedents provide only a limited amount of comfort. The cases to date generally have involved sales of participations in commercial bank loans to other banks or financial institutions that were negotiated on a case-by-case basis. The market for loan sales has moved well beyond [this].13

There are few cases on the sale of LDC loans in the secondary market.l4 The voluminous case law is, as Buchheit has identified, limited principally to the sale of participations in U.S. commercial bank loans15 and there are sound policy reasons why these participations (and the underlying loan agreements) should not be securities.l6 The courts have been understandably loath to expand the reach of the complex securities law regime to banks in their conventional dealings with other banks. However, a trading floor for LDC loans does not look like the business of conventional commercial banking. Rather an LDC trading floor looks more like a securities trading room.

The leading case on the definition of "security" is Reves v. Ernst & Young.l7 The case dealt specifically with the term "note" in the definition of security but many of its findings are applicable to the "evidence of indebtedness" language.Is The Court in Reves stressed that the purpose of Congress "in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called."'9 In addition, the Court found that in interpreting the term "security," "form should be disregarded for substance and the emphasis should be on economic reality."20

The Court adopted a version of the Second Circuit's "family resemblance" test.21 Under this test, there is a rebuttable presumption that any "note" or "evidence of indebtedness" is a security because of the definition in the Securities Acts coupled to a list of categories of instruments that are not securities. The relevant criteria in deciding whether an instrument is a security, or should be added to the list of non-securities, were laid down by the court as follows:

(1) The motives that would prompt a reasonable seller and buyer to enter into the transaction: If the seller's purpose is to raise money for general business purposes and the buyer's is to profit from the returns the instrument is expected to generate, the instrument is likely a security;

(2) The intended distribution of the instrument: If it is one in which there will be "common trading for speculation or investment" it is likely a security;

(3) The reasonable expectations of the investing public: The more the public expects that an instrument will be a security and thus regulated by the securities laws, the more likely it is a security; and

(4) The existence of another regulatory regime: If there is no other regulatory regime that significantly reduces the risk of the instrument, thereby rendering securities regulation necessary, the more likely it is a security.22

To return to the "evidence of indebtedness" language in the statutory definition of a security, it should be noted that typical loan documentation does not evidence indebtedness. Sovereign loans are invariably documented as loan facilities that permit drawdowns after execution. The loan documentation itself will recite the maximum amount of funds which may be advanced, but will not actually evidence any indebtedness. Accordingly, the loan agreement is probably not a security. However, the assignment agreement by which the loans are transferred will recite the indebtedness being transferred, as will the notices to the agent bank. Therefore, the assignment agreement may properly be considered an "evidence of indebtedness."

B. Are Assignment Agreements Securities?

The answer to the question of whether assignment agreements are securities turns upon whether they are "evidences of indebtedness." Assignment agreements certainly evidence the indebtedness of the borrower to the new creditor. If the new creditor were to bring a suit on the debt shortly after receiving the debt by way of assignment, the assignment agreement might be the only evidence of the indebtedness of the borrower to it. However, the borrower never executed the assignment agreement. Rather, the assignment must be read with the original loan agreement to establish its effectiveness. This system should not bar an assignment agreement from being an evidence of indebtedness as a bond also must be read with the underlying trust deed for all of its terms to be appreciated, and a bond is nonetheless an evidence of indebtedness. The U.S. Tenth Circuit wrote the following concerning a bank commitment letter that had been traded:

It is true that the letter of commitment is not an indicium of debt in the same sense as is a promissory note, but as used in the Securities Acts no such restriction is appropriate. In last analysis, this letter of commitment was sold for a substantial consideration, and the buyer received what appeared to be an enforceable obligation that contemplated the flow of funds. It indicated a binding and legally enforceable right. Therefore we can find no fault with the ruling of the trial court insofar as it regarded the letter of commitment as plainly being a security.23

The other issue is whether the evidence of indebtedness itself has to be traded to be a security, similar to a bond. The answer appears negative because investment contracts are undoubtedly securities, yet are not traded themselves. In this case, the indebtedness is traded and the evidence of indebtedness, in the form of the assignment agreement, may comprise a security under the statutory definition. The agreement for a commercial bank loan to a customer for its current operations and a note evidencing such a loan are not considered securities under the U.S. securities laws.24 However, this is no bar to a so-called assignment of an interest in such a loan being a security. Numerous cases have held that a participation in a non-security can itself be a security by way of reasoning that applies equally to assignments of loans.25

So it appears that the assignment agreement for an interest in an LDC loan could well be a security for the purposes of the federal securities laws. However, the above analysis does not settle the issue because the "evidence of indebtedness" language is generally accepted as being too broad to permit a literal reading.26 There are no cases directly upon the interpretation to be given to the "evidence of indebtedness" language in this context. Accordingly, the four Reves factors will be applied to determine whether a court would be likely to hold assignment agreements to be securities.27

1. The Buyer's and Seller's Motives

The motivation of a buyer of LDC loans is to earn a return on its funds and the motivation of a seller is to diversify its risk. In the words of the majority in Banco Espanol de Credito v. Security Pacific National Bank, "the overall motivation of the parties was the promotion of commercial purposes rather than an investment in a business enterprise."28 An earlier case drew the following illuminating distinction between investment and commercial purposes in terms of access to information:

While banks are subjected to risks of misinformation, their ability to verify representations and take supervisory and corrective actions places them in a significantly different posture than the investors sought to be protected through the securities acts. In an investment situation, the issuer has superior access to and control of information material to the investment decision. Rather than relying solely on semi-anonymous and secondhand market information, as do most investors, the commercial bank deals "face-to-face" with the promisor.29

Most participants in the emerging markets loans market have roughly equal access to information and deal directly with the debtors. As a result, sellers of debt rarely enjoy superior access to information concerning the debt. Accordingly, this distinction supports rather strongly the view of this as a commercial rather than investment market.

However, there also are countervailing considerations. To apply a factor found significant in Banco Espanol de Credito: some of the buyers of LDC debt were indeed "non-financial entities not acting as commercial lenders but making an investment, and even [the]. . . banks that purchased the [debt] . . . generally did so not through their lending departments but through their investment and trading departments."30 On balance, therefore, this first factor concerning motives weighs against assignment agreements being securities.

2. The Intended Distribution of the Instrument

The secondary market for LDC loans is comprised almost entirely of banks and institutional investors. The offer of an interest in an LDC loan in the market could well be described as "a limited solicitation to sophisticated financial or commercial institutions and not to the general public"31 and hence not a security. Buyers are sophisticated entities, which does not exclude them from being a "broad segment of the public,"32 yet still meets the courts' standard of common trading required of a security.33 On balance, this second factor also tends against the assignment agreement being a security.

3. The Reasonable Expectations of the Investing Public

There is no evidence that the public have reasonable expectations that an assignment agreement would be a security and thus regulated by the securities laws. The large size of loan interests typically offered for sale and the relatively complex documentation of loan transfers distinguishes the secondary market from a regular securities market.34 This factor, once again, mitigates against assignment agreements being securities.

4. The Existence of Another Regulatory Regime

Before loan trading moved into registered broker-dealer subsidiaries, the instruments were not considered securities, and the market in these instruments was essentially beyond regulation. No other regulatory regime significantly reduced the risk of investment in loans assigned by assignment agreements. Accordingly, up to 1993 this final factor weighed in favor of the assignment agreement being a security. After 1993 most of the loans were converted into Brady bonds and the trading desks moved into the registered broker-dealer affiliates of the banks, so the regulatory regime for securities applied both to bonds and the relatively small amount of loans still being traded.

Overall, the four-factor test laid down by the U.S. Supreme Court in Reyes suggests that assignments of LDC loans are not securities.35 However, this issue is too complex to be adequately examined in this Article. Lee Buchheit offers some useful thoughts to conclude this Section: [B]anks are well advised to recognize that in future lawsuits the mere fact that the instrument in question evidenced a loan or a beneficial interest in a loan will not, by itself, be determinative for purposes of deciding whether the [loan is a security]. The defendant bank can expect to face a close scrutiny into both the methods by which the instrument was sold and the type of purchaser to which it was sold.36

C. Is Bond Trading Subject to the Securities Laws ?

On their face, Brady bonds appear to be securities and thus subject to U.S. regulation. However, this legal position was initially unclear. The Security and Exchange Commission (SEC) issued no-action letters,37 which recognized Brady bonds as bonds but permitted their distribution by private placements.38 These no-action letters anticipated the subsequent exemptions created by Regulation S and Rule 144A of the Securities Acts for private placements that meet certain criteria.39 For securities law purposes, Brady bonds were treated as exempt securities.

For bank regulatory purposes, Brady bonds initially were treated as loans. A Brady bond looks like a bond and is one sheet of paper, rather than the one hundred or so typical of a sovereign loan agreement. A Brady bond is designed to be transferable by delivery, and its terms are generally similar to those of other sovereign bonds.40 However, in August 1990, the Brady bonds issued by Mexico, Costa Rica and Venezuela were still treated by the market as bank loans for regulatory purposes.41 Statements in the no-action letters issued by the SEC on the Brady bond issues42 and statements from a SEC spokesman also supported the view that Brady bonds were still considered bank loans.43 Likewise, the general market view, in the words of Kathy Galbraith, was that "these are conversion bonds and aren't really bonds."44

In 1990, a senior banker ventured the view that "if a Brady bond is held on a bank's books as a long-term asset, then it is a loan. But if a bank hands these bonds over to its trading desk, [and marks] them down to market, then it is a bond."45 An instrument's status as a security seems unlikely to depend upon whether it is held in a bank's investment or trading portfolio. The only reasonable explanation of the double-think regarding Brady bonds in 1990 and 1991 is that the regulators were keen to promote the Brady process and prepared to bend the laws to ensure that there were no legal impediments to the popularity of Brady bonds.46

Interestingly, at some unheralded stage, Brady bonds came to be generally accepted as securities under both the securities and bank regulatory regimes. The mysterious, presumably alchemical, process by which this happened is unknown. However, Brady bonds are currently the securities that their name, form and function always suggested they were,47 and their presence means this market is now a securities market. If trading desks had segregated the trading of Brady bonds from the trading of loans, it is possible the latter would not have been subject to the securities laws. As this was impractical, banks moved their LDC debt trading units into their registered broker-dealer subsidiaries and accepted that the activities of the entire trading unit were subject to the securities laws and NASD and SEC oversight.48

D. Classification of the Market

As the secondary market has matured into a securities market, the issue arises as to the type of security market it is. In general terms, security markets are classified as either exchanges or over-the-counter (OTC) markets.

An exchange is based on auction trading accomplished by the centralization of trading activity.49 All buy and sell orders for a security are transmitted to the floor of the exchange where they are executed, usually at the post of the specialist on the floor.5 Specialists also buy for their own account to facilitate the smooth operation of the market but their primary role is to match buyers with sellers.51 The New York and London Stock Exchanges, for example, work on the principle that lies at the heart of the statutory definition of an exchange in section 3(a) (1) of the Securities Exchange Act of 193452 ('34 Act). The '34 Act states that "any organization . . . [that] constitutes, maintains or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange. . . " is an "exchange."53

An OTC market, on the other hand, does not depend on bringing together all buy and sell orders in the one place.54 Rather, an OTC market functions by having a number of dealers who make a market in each stock by trading in it as principals for their own account.55 These market makers publish, buy, and sell prices on the securities in which they make a market and, indeed, are required by law to do so "on a regular and continuous basis."56 In an OTC market, a broker may act as a principal and fill a customer's buy order out of inventory or act as a broker and acquire the security from a market maker for their customer.57 The largest OTC stock market in the world is the National Association of Securities Dealers Automatic Quotation System (NASDAQ), which is located in the United States.58

Until 1993, the secondary market in discounted sovereign loans did not satisfy the definition of an exchange in the Securities Acts as there was no market place. In addition, buyers and sellers were not brought together as the primary method of effecting trades in securities.59 Accordingly, the secondary market was not an exchange for the purposes of the '33 and '34 Acts and did not need to be registered as such with the SEC.6 Instead of being an exchange, the secondary loan market was an OTC market until 1993 for two main reasons: ( 1 ) it was conducted over the telephone and not in any one location, and (2) large inventories were held by traders to meet customer's orders and traders often acted as principals in their dealings with customers. In 1993, another major change occurred in the market's practices and live screens, which quoted firm prices, became the norm for the major assets. Live screens proved highly efficient at disseminating Brady bond and loan prices and revolutionized trading.sl Market practice moved towards screen based trading through brokers and away from traders dealing directly with each other.62 At the end of 1995, Jorge Jasson of Chase Manhattan described the secondary market as "not as much dealer-to-dealer trading now . . . direct dealing is done mostly with clients.... Our commitment to market-making and liquidity. . . is to our clients and not to the Street. With more activity through brokers, professionals now are not required to make markets to each other."63

This description indicates a major change in the market's operation as the market of the late 1980s and early 1990s relied upon the tacit agreement of traders to make markets for each other.6 Prior to 1993, the secondary market functioned as an OTC market, in which liquidity was provided by market makers buying and selling for their own account. After 1993, this market began to function less like an OTC market and more like an electronic exchange, in which liquidity arose from brokers matching buyers and sellers electronically. Although the market still treats itself as an OTC market,65 the issue of whether it is or not is not as clear as it was prior to 1993. Currently brokers, through their trading screens, provide "facilities for bringing together purchasers and sellers of securities"66 in the terms of section 3 (a) (1) of the '34 Act.

The proceeding analysis under U.S. legal principles applies equally to the secondary market in other countries. The international market is likewise an OTC market. The issue for the international secondary market for LDC loans is whether it is one market or many. E. One Market or Many ? In 1991, David E. Van Zandt wrote, "U.S. Treasury bonds and the government securities of other [Organization for Economic Cooperation and Development (OECD)] countries are traded internationally and for the most part they trade all over the world at the same price. . . the market for .... Treasury securities represents a truly international market."67 However, with respect to private sector stocks and bonds, Van Zandt concluded that "a truly international market for securities remains a long way off. Substantial barriers to such a market still exist. Moreover, we have no clear conception of what an international securities market would look like even if it existed."68 This study of the secondary market for non-OECD government securities, including sovereign loans and Brady bonds, reveals a true international securities market by Van Zandt's criteria.

Van Zandt noted that a true international market may be "either a central market or a set of competing decentralized markets."69 He also identified five essential characteristics of a central market:70 (1) investors and issuers have no incentive to restrict their activities to their own jurisdiction7l; (2) an absence of institutional or regulatory barriers to access to the market72; (3) the rule of one price-if the market is decentralized, the same security must trade at the same price (after exchange rate adjustment) in each market73; (4) a set of common confirmation and settlement procedures74; and (5) regulatory cooperation to prevent regulatory barriers to access or different regulatory costs of transacting business.75 Each of these criteria will now be applied to the secondary market in discounted sovereign debt.

First, investors in the emerging markets secondary market have no incentive to restrict their activities to their jurisdiction. For reasons of convenience and to save the cost of a call to New York, an investor in Argentine Brady bonds who lives in Buenos Aires may prefer to purchase his bonds through a local trading house, but there will usually be no difference in price or other reason to do so. Second, there are typically no institutional or regulatory barriers to access to this market. New trading houses may be set up at will. There are no seats to buy on an exchange or other formal barriers to entry by traders, and new investors may enter the market freely.

Third, the test of one price is satisfied as the price is usually the same regardless of where the instrument is purchased. New York is the primary market for most Latin American instruments, while London is the primary market for many of the Eastern European instruments. The debt of different African nations is shared between the two centers. However, all emerging markets debt can be purchased and sold in either New York or London and in most of the other places where traders operate, including Sao Paulo, Tokyo, Frankfurt and Manila. The price in each market will be essentially identical. If it is not, sophisticated traders will rapidly arbitrage away the difference. Furthermore, as trading prices are a percentage of face value and the face value is usually in U.S. dollars, rarely are there any exchange rate issues. Fourth, the work of the Emerging Markets Traders Association76 (EMTA) led to the use of standard form confirmations and standard settlement procedures in virtually all trading centers. Because most trades by a trader in a smaller center will be international and not with other traders in that center, the use of the same confirmation forms and settlement procedures globally is important.

Fifth, there has been little regulatory cooperation as there has been little regulation. International regulators have adopted a hands-off approach, similar to U.S. agencies. Most international regulators have ignored the market except when the market has been used to break national exchange control or tax laws. Accordingly, there have been very few regulatory impediments to access and very little regulatory effect on transaction costs. Exchange control limitations of broad application on the movement or conversion of funds have been the only impediments to investment in the market. Moreover, these impediments were often avoidable by local investors in Latin American countries because investors were using flight capital, which was already abroad and beyond the reach of local laws.

According to the five criteria laid down by Van Zandt, the secondary market in LDC debt, like the market in OECD government securities, is a true international securities market. However, the potential for abuse and manipulation has been greater in this market than in the market in OECD government securities. The reasons for this difference form the basis of Part II of this Article.

II. THE HISTORY OF MARKET ABUSE

The subject of market abuse will be dealt with in four parts: (A) insider trading, (B) front running, (C) offences by employees against employers, and (D) market manipulation.77

A. Insider Trading Insider trading is the name commonly given to trading securities on the basis of material, non-public information. Most trading units in the United States were moved into the registered broker-dealer subsidiaries of their parent banks from late-1992 to 1994 in recognition of the growing prominence of Brady bonds in the market and their inherent nature as securities. Since 1994, the market has been a securities market subject to regulation. The analysis in this Part will begin by considering insider trading in the period before the U.S. securities laws applied.

In 1987, the first suggestions of insider trading in the secondary market appeared in print. An article in The American Banker, on the day after Citicorp's announcement of its $3 billion addition to loan loss reserves on account of its LDC debt exposure, stated that "Wall Street brokers wondered aloud if Citicorp's foreign debt traders were tipped off in advance to Mr. Reed's market-moving announcement. If so, they likely took a short position in Brazilian debt to take advantage of what is expected to be decline in the value of those credits."7

The crucial aspect of this quotation is not the speculation about the possibility of insider trading. This speculation about insider trading was simply the truth beginning to surface. The crucial aspect is the acknowledgment that if there had been a tip off, Citicorp's traders likely took a short position.79 Outside Citicorp, no one knew what its traders had done. The absence of any central exchange or registry meant the information was simply not available.so The absence of a central exchange also meant that searching for patterns in trading would have been extremely difficult. In Peter Truell's words: "There's no exchange, no official leadership, no written rules, no reporting system [,]"sl "the global bazaar [is] almost wholly invisible to regulators."82

The first established case of insider trading in the secondary market occurred between January and August 1988 when the Visa Group, a major consumer-products group that produces some of Mexico's most famous beers, engaged in the renegotiation of its $1.6 billion of debt.83 During this period the price of its bonds moved from twelve cents on the dollar to around fifty cents on the dollar. It became clear to a number of bankers that some LDC debt traders were receiving precise details of the restructuring and trading on that information. Concern among some bankers84 ran so high that Michael Chamberlin, then a lawyer with Shearman & Sterling of New York,85 visited the bank negotiating committee in Mexico City to remind them of their obligations to preserve the confidentiality of the restructuring information.86 With a four-fold increase in the price of $1.6 billion face value of debt in just seven months, the potential profits from trading on such information would have been massive.

In 1990 and 1991, allegations of insider trading in the secondary market became common. Two principal types of insider trading were alleged: (1) trading by the major commercial banks on the basis of knowledge from their restructuring committees, and (2) trading by Latin American investors and certain traders on inside knowledge of the debtor's impending actions.ss The focus in this Article will be on the former.

In the late 1980s and early 1990s, many market participants claimed that the integrity of the secondary loan market was intact.89 Others held equally strong views to the contrary.90 In an "extensive" survey conducted in August 1990 for LatinFinance "respondents from investment banks and independent boutique traders generally reported that in their view abuses of the [Chinese walls] are common. Most respondents from commercial banks disagreed."91 Interestingly, while market participants differ on insider trading abuses by some banks, there was general agreement that certain banks had effective internal controls. Citicorp and Bank of America head the list of banks cited often as having had effective internal regulation.92

1. Other Insider Trading Opportunities

Sitting on steering committees, or advisory committees as they are also known, for debt restructurings and debt-equity schemes, allowed banks access to potentially valuable information. On June 19, 1989, Yugoslavia informed the London branch of Manufacturers Hanover that it wished to postpone by six months the date when a particular credit would be eligible for conversion into loans to other Yugoslav borrowers.93 Manufacturers Hanover did not notify the other banks until two days later. Traders allege that in those two days Manufacturers Hanover sold $3 million of that particular loan, demand for which evaporated upon the announcement of Yugoslavia's request.94 A spokesman for Manufacturers Hanover said at the time that this was pure coincidence and that " [i] t would be completely erroneous and irresponsible to suggest that a trade was transacted on inside information."95 In May 1993, a trader at Citicorp was accused of using inside information from the debt restructuring negotiations for Panama to sell his holdings of Panamanian debt before a major fall in its price.96 Citicorp chaired the creditors' committee in the negotiations. An internal investigation found no evidence of impropriety, and this appears to have been a case of trading based on clever deductions from public, not inside information.97 Indeed, the publicity given to these allegations against Citicorp suggests the competitiveness of the market may lead to disclosure of many instances of insider trading and thus may support arguments for self-regulation of the market.98

2. Incidence of Insider Trading

That there is no way to know with precision how much insider trading has occurred in the secondary market is not surprising. Even in conventional securities markets, "it is not known how much insider dealing actually takes place and hence how much damage it causes. . . reliable data is neither available nor likely to become available."99 Insider trading appears significantly more prevalent in the secondary market than in most securities markets.loo Two factors, which will be explained more fully, support this conclusion: (1) human nature, and

(2) the culture of the secondary market.

Human nature suggests that where self-interest is involved the number of people prepared to bend and break rules is inversely proportional to the clarity of the rules and to the effectiveness of the enforcement procedures. In other words, the less clear the rules or the less likelihood of being caught, the more likely the rules are to be broken.lol Individual traders trading for their own account on inside information could have used a foreign trading desk as a front to hold the loans as owner of record with a participation in favor of the trader. The risks associated with such trades were almost non-existent as there was no central database of trades from which to trace the trade to the foreign trading desk, and no one outside the foreign trading desk would know the identity of the beneficial owner of the loans.

The culture of the market was principally influenced by two factors: (1) the backgrounds of the traders, and (2) the inter-bank nature of most transactions. Individuals and banks that joined the secondary market in the 1980s and early 1990s usually came from a commercial banking, rather than a securities background. Michael Chamberlin, Executive Director of the Emerging Markets Traders Association, noted that "[1]oan traders didn't have the 'securities' awareness of rules that any bond trader would have had."02 Likewise, because most transactions were between banks, infringements were generally seen to be technical violations of the rules without a moral dimension. In a sense, parties were expected to look after themselves.los A senior trader, summarizing the situation, stated that " [t] he culture of the market is to ignore the accountants, ignore the lawyers, ignore the rules."l04 In 1991, Martin Quintin-Archard of Intercapital Brokers expressed the following common market view towards insider trading:

There are no insider trading rules in this market. If you're sitting around a negotiating table, you see stuff start to slip. If you're the first man in the game to sell, nobody can touch you. It may be immoral, but it's not illegal. The market is still a bit of a Wild West, and Devil take the hindmost.05 Martin Schubert, Chairman, European InterAmerican Finance Corporation, echoed this view, when he stated that "[t]he market has become much more of a gambling arena than in earlier days and all of us who deal try to get the competitive edge referred to in regulated markets as `insider information,' and in our market as being a sharp trader."10616

These attitudes are further borne out by the porosity or absence of Chinese walls17 in most major banks until well into the 1990s.los Outrageous institutional arrangements, such as the same person heading both LDC debt trading and restructuring departments,l09 and disdain for the usual rules against market manipulation" also contributed to the notion of the secondary market as a gambling arena.

Each of the preceding factors strongly suggests that insider trading was a relatively prominent feature of the market in the first decade of its development. At the time Quintin-Archard and Schubert made their frank admissions, the secondary market was not subject to securities regulation as it was a market in loans, not bonds. If not subject to securities regulation, then two questions emerge: (1) how was insider trading regulated, and (2) were there penalties for insider trading at common law?

3. Formal Regulation of Insider Trading

The staff of the Board of Governors of the U.S. Federal Reserve System reportedly conducted extensive and rigorous investigations into insider trading abuses in the secondary market between 199011 and early 1992.112 Inquiries to the Federal Reserve about these investigations were met with the response that "the Federal Reserve does not comment upon the existence of investigations."lls It is widely rumored that Citicorp, in particular, was subject to a rigorous investigation in the early 1990s that led to a major internal review and improved the implementation of Chinese walls and other procedures.114

4. Penalties for Insider Trading at Common Law

At common law, insider trading of corporate stocks was a matter of state law within the United States, and each state had a different approach. The "majority rule," as expressed in Percival v. Wright,115 was followed in most states at the turn of the century. According to Percival, directors were held not to owe fiduciary duties to shareholders individually but merely to the corporate entity and to the shareholders in their dealings with or on behalf of the corporation.lls Because a transaction between a director and shareholder, in which the director profits by inside information, results in no financial loss to the company, that transaction gives rise to no cause of action. The only remedies offered by the common law to the shareholder under this approach were in tort for fraud or misrepresentation. A director who made no representations and simply failed to disclose his inside information could therefore trade in his company's shares with impunity.

The "majority rule," however, was soon displaced in some jurisdictions by the so-called "special circumstances" doctrine upheld by the U.S. Supreme Court in Strong v. Repide.117 The special circumstances likely to result in directors owing fiduciary duties directly to the shareholders include "the fact that the corporation is closely held . . the familial relationship of the parties ... the forthcoming sale of corporate assets . . . the fact that the director initiates the sale . . . and the relative ages and experiences in financial affairs of the director and the shareholders."lIs In most states the "special circumstances" doctrine is the law today.ll9 In a substantial minority of states, a wider view is followed. Under the "minority rule," directors owe fiduciary duties directly to shareholders individually.l20 This fiduciary duty requires a director to make full disclosure of all material facts in dealings with shareholders.?21

In the early 1930s, various states were in agreement that the cause of action for breach of fiduciary duty only arose when there was privity between the plaintiff and defendant.l22 No cause of action lay for transactions in "impersonal" stock markets.l23 As common law became codified at the federal level with the promulgation of Rule lOb-5 in 1942,124 the development of state common law on this subject ended. A further sixty years of judicial development would not likely have retained the doctrine of privity as a requirement for a cause of action. As modern precedents allow for the liability of directors and officers for trades in an organized impersonal stock market,125 a contemporary U.S. court would be hesitant to exclude transactions on a stock exchange from the imposition of such fiduciary duties. If a corporate officer is in possession of non-public information that indicates the value of the shares will rise shortly, no good policy reason exists to distinguish between the purchase of shares in a negotiated personal transaction and the purchase of shares in an impersonal transaction on a stock exchange. In each transaction the corporate insider profits while the shareholder suffers. To draw such a distinction between personal and impersonal transactions would mean reviving the old doctrine of privity over commercial reality.

How does the common law on insider trading in shares by directors of companies apply to insider trading in LDC loans? A principal type of insider trading in the secondary market grew out of trading desks using information acquired by a bank as a result of sitting on a steering committee for a debt restructuring or restructuring, or in negotiations with a debtor for a debt-equity swap program or debt buy-back.l26

When a bank's trading desk buys or sells based on material, non-public information gained from its restructuring department, its liability for breach of fiduciary duty will depend upon whether the bank owes a fiduciary duty to the debtor from whom the information is misappropriated. U.S. courts have held that "at the heart of the fiduciary relationship [lies] reliance and de facto control and dominance"127 and "a fiduciary relationship involves discretionary authority and dependency: [o]ne person depends on another-the fiduciary-to serve his interests."128

Banks on a steering committee are appointed by the debtor to facilitate communication between the debtor and its hundreds of creditors.l29 However, steering committees are usually careful to describe their function as a mere communications link between the debtor and its universe of lenders. As a steering committee serves its own interests, rather than those of the other syndicate banks or the debtor, the extension of fiduciary duties to a steering committee under these circumstances is possible, but unlikely.

Accordingly, trading desks of steering committee banks that buy and sell on information gained as a result of membership on the committee are unlikely to have committed insider trading based on a fiduciary duty theory. The result is the same where the trading desk has acquired its non-public information from another bank's restructuring department or from another confidential source, for example, connections within the Central Bank of the debtor nation. The dispositive factor for determining insider trading liability based on fiduciary duties is not how the information is acquired but rather whether the acquiree, the trading bank, owes a fiduciary duty to the source of the information. Accordingly, common law does not prohibit insider trading on the basis of non-public information from bank steering committees.

5. Penalties for Insider Trading Under the Securities Laws

As banks moved their trading units into their registered brokerdealer subsidiaries in 1992 and 1993, the trading units came under the regulation of U.S. securities laws. Rule lOb-5, promulgated in 1942 under the '34 Act, proscribes "any act, practice, or course of business [that] operates. . . as a fraud or deceit upon any person, in connection with the purchase or sale of any security."130 As interpreted and applied by the courts,l3' Rule l Ob-5 clearly prohibits insider trading when: (1) a shareholder is defrauded because an insider breaches a fiduciary duty owed to the shareholder by trading on the basis of material, non-public information; or (2) the source of the inside information is defrauded because an insider breaches a fiduciary duty owed to the source by trading on the basis of the inside information.132 Where fiduciary duties are not owed, U.S. law remains unsettled. Rule lOb-5 may apply in other circumstances but the courts are still defining its scope. The other principal basis for liability is the "misappropriation theory," which proscribes the misappropriation of private information in breach of a duty of trust and confidence.l33 However, the Supreme Court in United States v O'Hagan required "a fiduciary relationship between the defendant and the party from whom the information is misappropriated" 134 for liability under this theory. Accordingly, without a breach of a fiduciary duty, liability will rarely be imposed for insider trading. Based on this reasoning above, an LDC debt trader will rarely owe a fiduciary duty to the debtor. Therefore, a trader buying or selling based on material non-public information is rarely liable for insider trading.

6. Chinese Walls

The protective device often used to guard against the misappropriation of inside information is known as the Chinese wall.l35 In a major commercial bank, the Chinese wall should comprise, at a minimum: (1) internal policies prohibiting the communication of non-public information by employees working on restructuring negotiations and other matters, and (2) restrictions designed to prevent access between floors by the bank's debt trader and the employees involved in the restructuring negotiations.136 In addition, a 1990 SEC report on this topic for broker-dealers recommended several policies including continuing education programs for new and existing employees, introducing document control and coding procedures, periodic security checks of telephone lines, monitoring of in-house trading activity, implementing a `restricted list' that lists those securities the firm and its employees may not trade, and periodic compliance audits.'37 Each of these steps could be implemented in the secondary market with the exception of a restricted list. A restricted list would not be feasible because the secondary market is dominated by the debts of a few nations thus it would not be practical to stop trading the debt of a significant debtor.138 The price of secondary debt has been sensitive to the progress of negotiations for restructurings and debt-equity schemes.139 Coincidentally, major banks were usually involved in the restructurings and debt-equity schemes as members of steering committees.140 Chinese walls were rarely an issue for other organizations in this market as other departments of investment banks and brokerages almost never had material non-public information of relevance to their LDC debt trading units.

By the end of 1993, Chinese walls were in place in most major banks. However, whether these walls were adequate is not clear, and much evidence suggests these walls were not adequate, at least in the early 1990s."141 Some of the larger banks were slow to tighten their internal procedures. The fundamental basis of a Chinese wall is the physical separation of staff from departments between which non-public information should not flow.l42 Yet, in March 1993, The Economist reported that, "[u]ntil recently, some of America's top banks-including the unimpeachable J.P. Morgan, probably the biggest trader-have run their restructuring and trading operations side by side."143 Even more egregiously, the same person headed both the restructuring and trading teams at Swiss Bancorp until well into the 1990s.144 In most cases, it was not until the trading desks were moved into the banks' brokerdealer affiliates that effective Chinese walls were in place. However, this rectitude was the product of the securities law requirements for registered broker-dealers, not a choice to upgrade protections within the secondary markets trading divisions.145

B. Front-Running

Front-running is the practice of trading ahead of clients. A trader in receipt of a client's buy or sell order large enough to move the market may be tempted, before implementing the client's order, to buy or sell first for the bank's own account, the trader's own account, or both. Front-running is potentially more problematic when a trader, before receiving the order, learns that its client will probably be buying or selling a large position.l6 In this case, if the client intends to make a large purchase, the trader may be tempted to stock up on the required paper in anticipation of selling the required paper to the client. If the trader's purchase is large enough to move the market, the trader will then on-sell the paper to the client at increased prices.l47 If the market has been moved by the trader's purchase, the net effect of such front-running is to transfer to the trader money that would have been the client's. Front-running by trading houses for their own accounts was relatively common in the secondary market with respect to loans.148 The Swiss and German banks, in particular, were heavily criticized by other traders for front-running. One German trader, in particular, was fond of referring to front-running as "arbitraging the information curve. "149

If a trader's transaction moves the market, the trader can be prosecuted with the theft of a client's opportunity to purchase at a lower price or to sell at a higher price.l50 If a trader's transaction is not large enough to move the market, the trader's client will not suffer any loss. However, a trader's conduct may still be in breach of fiduciary duties resulting from the agency relationship involved in the sale or purchase of debt.

Even though front-running was a potential problem for the secondary market, there had been no effective regulation of a banks' frontrunning for its own account. Although front-running in LDC loans sales could be prosecuted as theft of corporate opportunity and breach of fiduciary duty, clients had no effective way to become informed of any occurrence of front-running. The only practical restraint against a bank front running appeared to be the bank's own policies. However, today, because loans have been converted into Brady bonds and are now treated as securities, the practice of front-running is a clear breach of U.S. securities laws and subject to SEC regulation.

The evidence demonstrates that trading desks in even the larger of banks front-run for their own account, in particular, in light of upcoming developments in restructurings. The Economist reported that "Is] ome outside the banks suggest that commercial banks' restructuring arms have been colluding with their traders. They point to price movements that can come only from `front-running' by banks involved in steering-group talks with debtor countries."151 Such front running easily equates to insider trading.

Detection of a trader front-running for his personal account is more difficult in the secondary market than in the primary exchange markets. Traders engaging in such front-running can use a trading unit in another country as a front to purchase or sell securities in that fronting unit's name, but on the traders' behalf. Any trader in New York or London would have no difficulty in finding offshore trading houses willing, for a fee, to act for them in complete confidence. By the use of participation agreements, the foreign trading unit could remain the owner of record of the debt. Unless the foreign trading unit broke the confidence, detection would be practically impossible. Furthermore, some traders, even at the most reputable trading houses, believe that trading ahead of a client before that client placed the order does not constitute front running.l52 For example, some traders believe that a trader is free to buy or sell ahead of orders that the trader knows the client is likely, but not certain, to place. This is a highly problematic view as such conduct is clearly a breach of the fiduciary duties owed by a trader to its clients.

Finally, the profits from illicit trades carried out through an offshore trading desk, whether the result of front running, inside trading or other abuses, will hardly be declared income. Thus, illicit trading also results in inevitable fraud against governmental revenue.l53

Offences by Employees Against Employers

Some commentators believe that the major victims of abuses in the secondary market have been banks, at the hands of their own traders.154 Although it is unlikely for an individual trader's trades to move the market, if an individual trader's transaction moves the market, the bank loses the benefit of a move in prices. There was very little possibility of detection if traders traded for their own personal accounts in front of major transactions by the traders' bank for the bank's account.155 The more common way in which banks suffered at the hands of their own traders was by undervalued sales to a company owned by the trader and/or accomplices. The two prosecutions next considered in this Article illustrate this type of transactional offense.

1. The Angotti Case

The Angotti case illustrates the need for a central database of transactions to establish trading patterns and market prices. Antonio Angotti, hired by Security Pacific in early 1988, headed a trading desk for LDC debt. The primary role156 of the trading desk was to liquidate Security Pacific's own portfolio of some $1.9 billion of LDC loans.l57 Over the next fifteen months some $1.3 billion of debt was sold.

Three other traders were hired with Angotti.l58 In early 1989, the three traders prepared an eighty-page report detailing fifteen questionable trades by Angotti and delivered it directly to the Chairman of Security Pacific. After an internal review two weeks later, Security Pacific suddenly closed the debt trading unit. Security Pacific indicated that the unit had done its job even though Security Pacific still held $500 million of LDC debt.l59 Although the bank sought to keep the matter private, the story emerged, and Angotti was subsequently charged before a federal grandjury.160

The questionable trades included an unusually large sale of $120.47 million of debt at fifty-three cents on the dollar by Angotti to Fintech, Inc., a small, specialized broker. Fintech resold most of the loans shortly afterwards to Libra Bank for 53.75 cents.l61 Libra's traders were incredulous that Security Pacific had brought in a third party broker rather than make the sale directly to Libra.l62 In November 1988, Angotti sold $16 million of Venezuelan debt to Fintech at thirty-eight cents on the dollar when other traders knew such debt was selling for at least 39.25 cents.l6s Fintech, owned and managed by Jaime Montealegre and David Martinez, people whom Angotti had been close friends with when the three worked together at Citicorp in the mid-1980s, did not regularly engage in transactions of this magnitude.l64 Later the same month, Angotti sold $59 million of Argentine debt to Swiss Bank and NMB for 17 and 17.75 cents on the dollar "at a time when Merrill Lynch had offered in writing to buy much of the same debt for 18.5 cents.'65 Swiss Bank and NMB were later discovered to have often acted as a brokers, or "fronting agents," for Fintech.

In a number of other sales Angotti requested special payment arrangements for the debt. In one case, when Uruguayan debt was sold for 60.25 cents on the dollar, Angotti had the purchaser pay 58 cents on the dollar directly to his employer and the balance of 2.25 cents on the dollar ($73,000 in this case) into an account in the Cayman Islands.lss

The report of the three traders identified a misappropriation of up to $25 million.l67 Nevertheless, the grand jury found insufficient evidence to indict Angotti.l68 The lack of a central exchange with records of trades and prices enormously complicated the task of analyzing these transactions in the secondary market. It is difficult to imagine what the grand jury members made of this little understood secondary market. For most people the concept of "selling a loan" is quite difficult to grasp, not to mention the sale of loans with a face value of $1.3 billion. The regulatory lesson from this episode appears to be that it is difficult to regulate and prosecute transactions completed years earlier without a central database of transactions to establish trading patterns and market prices.

The closure of the trading unit by Security Pacific cost the three traders who had exposed these transactions their jobs.l69 By comparison, Angotti left to take up a prestigious White House Fellowship in the Treasury's international debt policy office. He was said to have "designed some fairly novel techniques for handling Third World debt."170 A task, no doubt, in which he had considerable experience.

2. The Young Case

The first major public171 investigation into the secondary market was conducted by the Federal Reserve in conjunction with the Manhattan District Attorney's office and focused on the conduct of Daniel Young. Mr. Young, a trader with Manufacturers Hanover, acquired certain Colombian Deutsche Mark loans for the bank at 61.75% of face value in August 1990.172

The indictment alleged that in October 1990, after Young had met with potential investors and urged Manufacturers Hanover to sell the loans, that the head of the LDC debt trading desk told Young that the bank did not wish to sell the asset as it had been acquired "with a view toward longer term appreciation." However, three days later Young prevailed upon a junior LDC trader to "auction" the assets and give Tritech the right to match the highest bid received. According to the indictment, Tritech, a small partnership owned and controlled by Young and three former Manufacturers Hanover bankers,173 purchased the loans at 67.5% of face value. Manufacturers Hanover was unaware of the ownership of Tritech. In December 1990, when the extent of the transaction was realized, Young resigned at the bank's request. The indictment contends that Tritech sold the loans for 93% of face value in November 1991 for a profit in excess of $500,000.174

Young and another alleged owner of Tritech, George Liberatore, were indicted for conspiracy to misappropriate bank assets, misappropriating bank assets and giving and receiving a bribe.l75 The Federal Reserve commenced separate proceedings against Young for violations of U.S. banking laws and, among other sanctions, sought to have him barred for life from the banking industry.l76 These actions were resolved by a plea bargain in which Young pleaded guilty to a felony and was required to perform community service. The charges against Liberatore were dropped shortly afterwards.

D. Market Manipulation

Some individual trading houses made a practice of attempting to manipulate the market. In the 1980s, the lack of depth in the market often allowed such conduct to be successful. As the market grew dramatically in the 1990s, manipulating the market became more difficult, especially when the object was the debt of a major debtor. However, even toward the end of 1993, a major trading house acting alone, with the courage to commit substantial sums and take the associated risks, was able to manipulate the market for the debt of a major debtor. In 1993, one senior trader stated that "[r]ight now, $100 million of debt will bring any price down in this market, except perhaps Mexico's."177 Manipulation was facilitated by extraordinary external conditions, and some trading houses were assisted by the willingness of some of the large hedge funds to join in attempts to push prices around.l78 Since 1993 the growth of the secondary market has made manipulation of the debt of the major debtors increasingly difficult. Massive capital is now a precondition of even trying to manipulate the debt of an Argentina, Brazil or Mexico. However, price manipulation in the thinly traded "exotics"-countries whose debt turnover is small such as Cuba, Lebanon, Mauritius, and Vietnam179-still remains open to virtually all traders. The thinness and extreme volatility of the markets in these credits means such tactics have always enjoyed reasonable success.Iso The principal type of manipulation in the exotics market was ramping.181

Ramping is "a practice that can be used in any market to create an impression of generalized market activity that forces prices higher, so that advantage can be taken of the higher prices to sell out at a quick profit."l82 To illustrate the forms that ramping took in the secondary market, two examples will be considered. The first example comes from one of the largest traders that would, from time to time, attempt what it termed an "exercise." The "exercise" would involve each of its traders, perhaps fifteen, working the telephones to make buy or sell inquiries and entering into minor transactions of a certain asset. The goal was to drive the market up or down, as the case may be.lss For instance, if the trading house had gone short on a particular credit for approximately $150 million, it would strive through both a concerted barrage of sell offers, and perhaps ten or twelve sales of $1 million or $2 million pieces of debt, to drive down the asset's price. All of this was done in anticipation of acquiring the asset to close out its short position. This procedure did work at times, even on major assets, in 1992 and 1993.l84 Certainly the procedure worked often enough to be worthwhile as the particular trading house was renowned for its "exercises." "Exercises" were justified as "simply testing the market."l85 This trader was not alone. During the October collapse of 1991, there was a lot of ramping.las The settlement periods allowed traders to go short a few days regularly, which was "a long time in these markets" especially in the dismal days of October 1991.187

The second example comes from a seasoned trader relaying his personal experience with the Ecuadorian debt market during a 1993 interview.188 One morning this trader wanted to sell some Ecuadorians loans, confident that few others would be interested in selling Ecuadorian debt that day. He and his staff spent some time placing bogus buy orders at slowly increasing prices on the trading screens, orders which he had no intention of honoring, to drive the price up.189 If anyone had responded, the trader would have said he had just bought the debt. This type of deception works when prices are merely indicative and not firm. With the posting of the increasing buy prices on the screen, the trader's plan called for another unknowing trader, presumably suspecting some type of rally in Ecuadorian debt, to place a buy order. The first trader then took that order and sold his parcel of debt at a considerable profit over the price at which trading had commenced for the day. The trader related this story quite openly and was evidently pleased with his success. He stated that "I got the sucker ... [t]his is not really manipulation, it is simply finding a price at which debt gets sold . . . It is suckering people but not manipulation, that is a legal term, it is not that."190 The strength of his denial gives his game away, and this example provides a classic case of ramping.

In 1992, a number of traders reportedly depressed the price of Ecuadorian debt by selling their holdings in successful anticipation of a large sale of the debt by a Japanese bank. The traders then profited upon the subsequent repurchase of the debt at much lower prices.'91 Such trading would only be improper if made on the basis of nonpublic information obtained from within the Japanese bank. If the decision was based on information in the public arena, even if only known to few people in the United States, it was perfectly legitimate. The manipulation results from the placing of bogus buy or sell orders, which the trader never intends to complete.

1. Reasons to Control Market Manipulation

The regulatory regime proscribing market manipulation in the United States was introduced by the '34 Act.l92 The '34 Act recited that securities are susceptible to manipulation that, in turn, causes, intensifies and prolongs national crises like the Great Depression of the early 1930s.193 In 1991, Fischel and Ross challenged this position arguing that attempts to control manipulation were misguided because trading is so costly and trades so rarely move prices. As a result, individuals will rarely try to manipulate prices.l94 Fischel and Ross further argue that prohibiting manipulation involves social costs as some appropriate trading will inevitably be deterred, and regulation is expensive to administer. Because these social costs outweigh the minimal benefits of the proscription of manipulation, regulation should be abandoned.195

Although highly persuasive arguments have been made against the position of Fischel and Ross, whether their analysis is correct for mature securities markets is beyond the scope of this Article.l96 This Article, however, shows that the reasoning of Fischel and Ross does not apply to the secondary market. While prices of emerging markets loans do move in response to trading, the information is imperfect. In addition, the markets in the debts of some nations is so thin that, at times, prices move in response to the mere offering of debt for sale or purchase or in response to rumors of future demand for debt. Furthermore, manipulation in this market can be affected at times without great cost as trades may not be required. Thel and others, in disputing the thesis of Fischel and Ross, have concluded that manipulation is theoretically possible and probably occurs fairly often in mature securities markets.l97 In the secondary market, manipulation is not only possible but has occurred frequently throughout the market's history, in particular, during its first decade.

2. Sanctions for Market Manipulation

The primary determinant of the relevant sanctions against market manipulation is whether or not U.S. securities laws apply. The manipulation of markets in loans was formerly subject to the common law, but today the manipulation of markets in Brady bonds is subject to the sanctions of the U.S. securities laws.

a. Sanctions under the Common Law

The common law of market manipulation commenced with the English case of Rex v. de Berenger,198 which concerned market manipulation through false rumors at the end of the Napoleonic war. The defendants were convicted of a conspiracy to raise the price of government securities and to injure the public who might buy those securities.l99 As a result, the concept of a free and open market became part of British law with criminal sanctions for interference. As Loss puts it, " [t] he essence of the matter is that the public has a right that a natural market should not be tampered with."200

The U.S. common law on market manipulation broadly followed the British.201 Criminal sanctions for manipulation in the United States were found in the federal mail fraud statute,202 in special state legislation in New York,23 and in the inherent nature of manipulative trading as a fraudulent device. Judge Woolsey provides the following description of markets:

When an outsider, a member of the public, reads the price quotations of a stock listed on an exchange, he is justified in supposing that the quoted price is an appraisal of the value of that stock due to a series of actual sales between various persons dealing at arm's length in a free and open market on the exchange, and so represents a true chancering of the market value of that stock thereon under the process of attrition due to supply operating against demand.4

Upon this analysis, whether the manipulative trading consists of loans in the secondary market or stocks on the New York Stock Exchange should make absolutely no difference. Such manipulation is a fraud that is enjoined under the common law.

b. Sanctions Under the U.S. Securities Laws

The U.S. regulatory scheme for securities has no general prohibition on trading for the purpose of influencing prices and only prohibits the employment of manipulative devices in certain circumstances.205 The SEC has promulgated a series of rules to proscribe specific practices that are irrespective of the trader's intention.6 In addition, the general fraud provisions207 prohibit many forms of market manipulation.8 The Supreme Court has held that the intention of Congress in enacting the '34 Act provisions was "to prohibit the full range of ingenious devices that might be used to manipulate securities prices."209 In practice, however, these provisions are less than effective as one of their elements is an intention to deceive, which is often a difficult matter to prove.210 Nonetheless, any attempt to manipulate a securities market by artificially stimulating demand or reducing supply violates rule lOb-5.211 Furthermore, section 9 of the '34 Act applies to all securities, including options and other derivatives, that are registered on a national securities exchange. Section 9 prohibits the creation of a false or misleading appearance of active trading and any actions that raise or depress the price of a security for the purpose of inducing its purchase or sale by others.2l2 Knowing and wilful violations of these or any other securities laws are criminal offences under section 32(a) of the '34 Act with severe penalties, including jail terms of up to ten years for individuals.2 As the sanctions are severe, attempts to manipulate Brady bonds are theoretically as perilous as the manipulation of any security in the United States. In practice the manipulation of Brady bonds is subject to two factors that counterbalance each other: (1) the likelihood of detection is less with Brady bonds than other securities-there is no central database of trades so investigations have to be conducted through the records of brokers and/or individual banks, without the ready ability to scan for patterns of trading; and (2) the size and depth of the markets in Brady bonds makes manipulation very difficult. In summary, the secondary emerging markets loan market was wide open to abuse and manipulation prior to its evolution into a securities market beginning in 1993. The limited regulation of the market in that period is the subject of the next and final Part of this Article.

III. THE REGULATION OF THE SECONDARY MARKET

The earliest recorded official attitude to the secondary market was positive when the Vice-Chairman of the Federal Reserve Bank, Preston Martin, addressed the International Management and Development Institute in Washington, D.C. on January 10, 1984.214 Under the headline, "Fed Likes Secondary Market for LDC Debt," the American Banker reported that "[t]he Federal Reserve is becoming one of the stronger advocates of nurturing the secondary market for buying, selling and trading the extensive foreign loans of U.S. commercial banks."215 The reported comments of Mr. Martin suggest that he was more interested in the development of a secondary market in LDC equities than in debt, as this would have opened a new route for foreign capital into these economies. Nonetheless, his comments reflect an openness on the part of the Federal Reserve in 1984 to new developments such as the secondary market in debt.2l6

For the next few years, the relevant U.S. regulatory environment remained unchanged. Because the Federal Reserve Board and the Comptroller of the Currency regularly conduct all of their investigations into bank activity in the strictest confidence,2l7 it is unknown whether either of these agencies was overseeing or investigating the market. There is, however, no record of any official investigation into the market and no apparent modification of market practices, which might have occurred in response to an investigation.218 In 1990, a new regulatory concern emerged as the market was accused, accurately, of aiding the infringement of local tax and currency regulations in Mexico and Chile.219

A. Infringement of Local Regulations

Complaints were made by the Mexican and Chilean governments to the U.S. government that secondary market traders were aiding and abetting the infringement by local companies of the foreign exchange and tax laws by enabling their participation in round-tripping transactions.220 In a round-tripping transaction an investor, having brought foreign funds into a country under some advantageous investment promotion scheme, proceeds to take them back offshore. The investor then recycles the foreign funds a second time through the investment promotion scheme thus securing, two or more times, inducements intended to be available only once.

Mexico alleged that companies and individuals were failing to report profits earned on secondary market buybacks of their own debt as income or were repaying obligations under the Ficorca program (a scheme to permit peso repayment of foreign denominated loans) by improper means. While there were various abuses of the local currency and Ficorca regulations, the Mexican authorities found prosecutions for tax evasion the simplest and most effective means of enforcement.221

The Chilean authorities, by contrast, chose to ignore these schemes for some time, believing that they served Chile's goals. The Chilean allegations were not of routine round-tripping transactions, but rather a series of particularly nefarious transactions in which round-tripping was used to defraud the debt-equity conversion scheme. Foreign investors, fronting for a Chilean national, would acquire debt and submit it for conversion into equity. Under the debt-equity conversion guidelines, the converted funds could only be used for investment into the nominated, government-approved project. However, the funds never reached the project and the entire proposed investment was often fictitious. Instead, the proceeds of the debt-equity conversion were converted into foreign currency and removed from Chile. These round-tripping transactions had an enormous potential for profit, because they were limited only by the amount of foreign exchange that could be assembled and the number of times the foreign exchange could be brought into the country and repatriated abroad again. These transactions amounted to direct theft from the Chilean government, and a major U.S. money center bank was involved in many of these round-tripping transactions. Although the resulting scandal was suppressed, the Chilean government was furious nonetheless when it learned of these schemes.222 As punishment, the Chilean government almost banned the bank from doing business in Chile. Instead, the bank agreed to fire its three most senior officers in Chile and pay a fine in the order of $20 million.223

B. U.S. Regulatory Efforts

By 1991, U.S. regulators were beginning to look at the secondary market. In December 1991, E. Gerald Corrigan, President of the Federal Reserve Bank of New York, issued a stern warning making it clear that should the market's attempt at self-regulation fail, regulators would step in.224 Corrigan also vowed to bring about more detailed audits of loan transactions."225

The intensive audits had commenced some two months earlier than Corrigan's statement.226 The initial audits focused on money center banks in New York and some foreign banks, such as NMB and Bank of Tokyo. The audits, conducted jointly by the Federal Reserve Board and some regional Federal Reserve Banks, were described by the Federal Reserve Bank of New York as "rigorous" and designed to ensure "the tightest possible controls."227 The industry agreed that they were strict. A senior banking lawyer described the audits in early 1992 as "truly horrendous."228 These "target surveys" and focused audits of early 1992 were not unique events. Rather the New York Federal Reserve and the Office of the Comptroller of the Currency (OCC) thereafter examined the emerging markets trading desks under their respective supervision as part of their annual examinations.229 This ongoing regulatory supervision, although not as thorough as the focused audits of early 1992, did much to stimulate changes in the trading culture.230 As one senior market source put it in 1994, "[t]he snooping of the Fed has caused them to find religion."231

The audits apparently were prompted by complaints made by debtor nation's governments and debt traders. These complaints alleged that traders were engaged in unfair market practices. In particular, some Latin American governments alleged that "banks involved in restructuring their countries' foreign debts have profited from inside knowledge by buying securities then reselling them to investors at a higher price."232 The Brazilian collapse in October 1991 had also troubled regulators and induced them to conduct audits.

In early 1992 Corrigan thumped his fists on the table in a private meeting with emerging markets traders as he emphasized the need for proper standards in trading.233 Traders present at the time have reported that Corrigan's speech "scared. . a lot of people."234 At the time, some members of the press called for formal regulation of the market by the Federal Reserve.235 Corrigan's withering blast stimulated some serious rethinking about market practices in at least some of the major trading units.2" In general, the secondary market appeared to take his warnings seriously, with many trading units reportedly commencing staff education programs.237

In January 1992, the Emerging Markets Traders Association (EMTA) began work on its code of conduct at Corrigan's suggestion.238 Notwithstanding the audits and exhortations, the voluntary code of conduct was formulated by the EMTA at a leisurely pace. A draft code of conduct was released in June 1992(239) and the final form was approved in June 1993.24o

In November 1992, a small investment house wrote to the Federal Reserve Bank of New York requesting an investigation of the secondary market. The chairman of that investment house alleged that in November there was a concerted effort by the major traders to drive down debt prices.241 The Federal Reserve, however, was not eager to undertake further formal supervision of the market. Rather the Federal Reserve responded that the EMTA's voluntary code of conduct was a "constructive approach," and the Federal Reserve would continue to supervise banks participating in LDC debt, but only on an individual basis.242

C. The Absence of External Regulation

The history of external regulation of the secondary market was well-described by a partner at a leading Wall Street law firm in 1993 who stated that "[t]o the extent securities are involved, SEC Rule [s] ... apply; but if securities are not involved there's nothing. To date, caveat emptor has been the standard."243 Until the end of 1991, external regulators largely ignored the secondary market and provided little effective regulation until the market evolved into a securities market.

There were a number of reasons for this inaction of external regulators.244 The primary reason involved overwork. The SEC, the Federal Reserve Bank system and the OCC, like most regulatory bodies, have relatively modest resources to stretch over many functions. In the early 1990s, in addition to their demanding routine functions, the regulatory agencies had to respond to the massive Savings & Loans crisis, the relaxation of the Glass-Steagall regime,245 the lifting of some restrictions on inter-state banking, and the regulatory revisions to accommodate Brady bonds. All of these occurrences amounted to an extraordinary workload, and the regulators did not appear eager to add to their workload the difficult task of regulating the secondary market. A second reason for the regulatory lethargy resulted from banking regulators being in the business of protecting the deposits of the public and maintaining the stability of the system. Accordingly, trading practices are not traditionally high on their agenda unless such practices threaten a bank's soundness,246 which was not the case in emerging markets loan trading.247 Although the SEC maintains fair and efficient securities markets and trading practices are on their agenda, the SEC's jurisdiction runs only to the regulation of securities, and LDC loans were never considered securities.248 Accordingly, before the securitization of the loans into Brady bonds, loan trading fell through a gap in the U.S. regulatory regime.249

A third reason the regulators largely ignored the secondary market is because the market is essentially a private market for sophisticated participants, thus it did not call for regulation as strongly as a public market.250 The strength of this argument declined during the early 1990s as greater numbers of banks promoted emerging markets debt to wealthy individuals as an attractive high-yield investment.251 The fourth reason for regulatory inaction was the expectation that the workings of the Brady Plan would solve, in time, the regulatory dilemma. As the loans became bonds, and thus securities, the debt trading needed to be registered as broker-dealers252 with the SEC under section 15(a) of '34 Act.253 As efficiency required that the trading of Brady bonds and unsecuritised loans be carried out in the same units, the development of the Brady process carried within it a regulatory requirement for the entire market. In the early 1990s, securities regulators may have been content to wait, anticipating that both time and the Brady process would bring the secondary market under their regulatory umbrella.254

The fifth and final reason for this regulatory inaction was the divided regulatory regime. Debt trading units in commercial banks and investment banks perform identical functions, yet the former answer primarily to the Federal Reserve System and the latter to the SEC. This division of responsibility certainly complicated regulatory initiatives and contributed to the inaction of regulators. The impact of the divided regulatory regime will be considered further in Part II.D of this Article. D. The Divided Regulatory Regime

There are three principal regulatory agencies: the Federal Reserve System, the SEC and the OCC. In 1933, the Glass-Steagall Act255 separated the banking and underwriting functions and restricted commercial banks to the former and investment banks to the latter.256 The Federal Reserve System has primary oversight of commercial banks while the SEC has primary oversight of investment banks and securities dealers.

1. Commercial Bank Regulation

The Board of Governors of the Federal Reserve and the regional Federal Reserve Banks257 administer a large collection of banking legislation. The OCC, an agency within the U.S. Treasury Department, serves as a second bank regulator. The Federal Reserve and the OCC are primarily concerned with the safety and soundness of the banking system as a whole and the consequent protection of public deposits.258 Regulation is further complicated by the existence of nationalchartered and state-chartered commercial banks. The Federal Reserve and the OCC supervise national-chartered banks. The Federal Reserve and the relevant state agency supervise those state-chartered banks that are members of the Federal Reserve System. Non-member state chartered banks are supervised by the relevant state agency and, if they have obtained federal deposit insurance, by the Federal Deposit Insurance Corporation (FDIC).259 Finally, federally licensed branches of foreign banks in the United States and branches and affiliates of U.S. national banks abroad are supervised by the OCC.260

2. Securities Regulation

The SEC is responsible for administering both the '33 Act and the '34 Act, which govern the issuance, distribution and trading of securities.261 The regulatory scheme is further complicated by the role of the National Association of Securities Dealers (NASD) and the stock exchanges. The SEC has authority to regulate broker-dealers directly but in practice delegates the great bulk of day-to-day regulation to NASD, which is the largest self-regulatory organization subject to SEC oversight.262 Likewise, the SEC exercises most of its control of stock exchange activity indirectly through supervision of the self-regulatory rules and conduct of the various stock exchange bodies.263 This complex web of regulators and regulation is not suited to the control of a rapidly growing and changing new market. If one includes the self-regulatory organizations such as NASD, the stock exchanges, and the EMTA, six bodies have varying degrees of potential regulatory oversight of the secondary market. The U.S. securities regulatory regime continues to be subject to strident criticism and calls for a complete restructuring.264 Certainly the high number of potential regulators of the emerging markets loan market serve to make the market's external regulation more difficult. Part II.E. of this Article considers the alternative to external regulation.

E. Self-Regulation

By 1990, the secondary market had grown in size and sophistication to the point where centralized regulation would promote efficiency. At that time, the market had not yet evolved into a securities market and had little effective external regulation. The lack of external regulation created the need for a self-regulatory organization. The EMTA was born into, and partly because of, this regulatory vacuum. The EMTA is considered here because its initial activities were principally directed towards the self-regulation of the market, in the sense of rationalizing and standardizing market practices, improving the conduct of traders, and generally promoting the efficiency and transparency of the market.

The EMTA is a not-for-profit service organization, headquartered in New York City with a mission statement that recites it is "dedicated to promoting the orderly development of a fair, efficient and transparent trading market for Emerging Markets instruments and to supporting the globalization and integration of the emerging capital markets."265 In late 1990, the development of the EMTA began when eleven major trading houses266 decided to form the LDC Debt Traders Association, with the declared purpose of concentrating on the standardization of procedures and documentation.267 In mid-1992, the association changed its name to the Emerging Markets Traders Association.268 By the end of 1993, the EMTA had grown to 118 members269 and by March 1997, to approximately 168 members, 65 of which were full members actively engaged in trading emerging markets instruments.270 With an office on Wall Street, the EMTA had thirteen full-time professional staff in 1993, and fifteen in 1996.271

The founding Chairman, Nicolas Rohatyn, was at pains to stress in an early interview in 1991 that "[t]his is in no way, shape or form a self-regulatory organization."272 Indeed, so vehement were the denials by Rohatyn and others273 of any self-regulatory aspect to the EMTA, the text of the interview brings to mind Shakespeare's immortal aphorism, "[he] protests too much, methinks."274

In 1990, with the advent of Brady bonds and the explosion in the size of the secondary market, there were good reasons to form an association that would seek to standardize market practices and thereby render the market more efficient. Likewise, an association would play a self-regulatory role and serve as a unified industry voice, and thus resist outside regulation of this market. The EMTA, it seems, was formed in part as the industry's response to fears of external regulation.275 In any event, whether or not the Association was founded with a selfregulatory intent, the EMTA was engaged in preparing a code of conduct for the industry by the beginning of 1992.276

1. EMTA's Self-Regulatory Efforts

The EMTA provided a forum for secondary market-participants to discuss and explore issues of common interest through specialized committees and working groups. These committees and working groups generally met monthly. The Market Practices Committee, which was the center of the EMTA's work, met monthly to develop and recognize market practices. At the request of one or more members, the committee would consider an existing or proposed market practice, either in the monthly open forum meeting or a closed session. Recommended market practices would be proposed at the monthly open-forum meeting and adopted at the next open-forum meeting, unless significant comments or objections were received. Upon adoption, each market practice, any associated recommended legal documentation, and a recommendation from the EMTA as to the use of the practice and documentation would be distributed to all members.277

The EMTA's first project was to prepare much-needed standard confirmations. In early 1991, the association drafted a set of twelve confirmations to cover each category of trade of Mexico's Brady bonds, a standard confirmation for trading loans, and three standard interest payment reconciliation clauses for inclusion in assignment agreements.278 The EMTA also promulgated eight Market Practices covering matters such as bond settlement practices, the timing of confirmations, and the standard settlement period for generic loan assets.279 In mid-1992, the association proposed recommended trading practices for the Argentine Brady-style restructuring, including treatment of accrued, but unpaid interest,280 and treatment of the when-issued trades of Brady bonds.21 Amended and updated versions of these practices were promulgated throughout the balance of 1992 and into 1993 as the Argentine restructuring lumbered towards completion.2 Similar issues were also addressed by the EMTA for the Brazilian Brady-style restructuring.283 In 1993, the EMTA promulgated a general trading practice regarding the treatment of interest and principal payments made between the trade date and the settlement date284 and suggested market practices for options transactions.285 By the end of 1993, the EMTA had also drafted standard confirmations for each category of Brady bonds as issued by each new issuer, standard terms for options, a bilateral netting agreement and trading forms for when-issued trading of Brady bonds.26

Throughout the succeeding years, the EMTA continued to recommend market practices on a host of matters.7 Among the more significant recommendations were: (1) the reduction of the settlement period for Brady bonds from trade date plus seven calendar days (T+ 7) to trade date plus three business days (T+3) after June 1, 1995 (to conform to the new standard for international securities)288; and (2) the reduction of the settlement period for loans from trade date plus twenty-one calendar days (T+21) to trade date plus ten business days (T+10) from January 1,1996.289

By the end of the extraordinary bull market of 1993, the backlogs in the processing of loan trades by the back offices of trading units and the agent banks for the loans had become so large that it threatened to paralyze loan trading.290 Many trades from 1993 remained unprocessed in mid-1994. The loans were never designed to be traded, and the turnover of 1993 and 1994 overtaxed the resources of both the trading houses and the agents.291 The EMTA responded to these problems in two ways. First, and most significantly, the EMTA began to develop a multilateral netting facility to speed processing of trades by the back offices of the trading houses and to ensure that only the net change in the trading position had to be reported to the agent banks. The first netting was of Russian loans in July 1994.292 By April 1995, 1,400 trades of Russian and Peruvian loans with a face value in excess of $3 billion had been netted and settled.293 Secondly, to ensure future backlogs did not accumulate, the EMTA prepared a set of standard terms for loan sales that came into use in late 1994.294 The standard terms were designed to be incorporated by reference into trade confirmations, for which standard forms were also provided,295 and served to standardize and simplify the processing of loan trades. Over time further sets of standard terms, tailored to the loans of particular countries, such as Peru, Russia and Yugoslavia were produced.296 In 1995, the EMTA took the operational efficiency of the market to a new level with the introduction of Match-EM, an automated trade confirmation and matching system. Match-EM permitted nearly instantaneous electronic confirmation and matching of trades of loans and Brady bonds, thereby eliminating the risk of errors and other problems between the execution and settlement of trades. Within four months of the introduction of Match-EM, one-half of the secondary market was wired into the system.297 By year-end, there was a daily average of 1,200 trade inputs being entered into the system with an average matching rate of 92%.2 The implementation of Match-EM allowed the EMTA to begin to collect and disseminate more accurate volume and price information on a close to real-time basis.299

a. Emerging Markets Clearing Corporation

In early 1995, the EMTA began developing proposals for a clearing corporation that would "accept matched trades of emerging markets debt ... net aggregate trade positions and issue net delivery and payment instructions to Euroclear and Cedel."ooo The Emerging Markets Clearing Corporation (EMCC) was established in conjunction with, and is operated by the International Securities Clearing Corporation (ISCC). The EMCC, owned by the emerging markets trading industry and the ISSC and originally scheduled for an April 1997 launch, commenced operation in April 1998 after three postponements that were principally the result of delays in receiving SEC approval.30

The EMCC was established to promote the efficiency and orderly development of the secondary market. In addition, the EMCC was to end the over-concentration of counterparty risk in two sets of institutions: (1) the commercial clearers of emerging markets debt, dominated by Daiwa Securities America; and (2) the brokers. Rapid rises in market turnover led to increases in the number of Daiwa's counterparties, exposing the firm to ever higher levels of counterparty risk. Likewise, higher turnover exposes brokers, unintentionally, to a greater risk of having to maintain positions overnight or longer. As all trades between members are guaranteed, and the EMCC is fully collateralised by all members, counterparty risk is massively reduced302 upon some estimates by up to seventy-five percent.03

Upon its inception in April 1998, the EMCC initially provided clearing services for U.S. dollar denominated Brady bonds, with the intention of expanding its services to global bonds issued in exchange for Brady bonds, emerging markets eurobonds, and eventually local market instruments and loans.34 In summary, Match-EM and the EMCC effect substantial reductions in settlement risk, enable participants to manage their inventories more effectively and greatly enhance the efficiency and transparency of the secondary market.305 Other activities of the EMTA include providing price and volume information and legal information about the secondary market. In 1992, the EMTA instituted an annual trading volume survey to provide basic information about the market, such as its overall size, most heavily traded types of debt, and major participants.306 In time, this practice was supplemented by month-end closing price information and the provision of daily market volume and price data on screens through Match-EM.37 The EMTA also commissioned a number of surveys of legal requirements in local emerging markets jurisdictions by preparing questionnaires for local counsel on matters such as securities, derivatives and foreign exchange regulations.sos Most of these initiatives would have been beyond the capacity or means of a singular trading house309 and were significant steps in the maturation of the secondary market.

Throughout its existence the EMTA's primary focus has been on improving the risk management, efficiency and transparency of the market. Risk management was enhanced by the survey of local legal requirements and developments such as standardized confirmations, multilateral netting, Match-EM, and the EMCC, which promoted the early settlement of transactions. Efficiency was enhanced by such developments as well as by the issuance of innumerable market practices and the promulgation of standard terms for loan sales. Finally, transparency was promoted through production of annual volume surveys and provision of daily price and volume information.

b. EMTA's Code of Conduct310

The additional focus of the EMTA has been on improving the conduct of market participants. The Code of Conduct of the EMTA serves an important self-regulatory role even though the Code is not legally binding on members and the sanctions for non-compliance are only the disapproval of other members and potential exclusion from the EMTA.311 The Code, however, is often given more force within institutions through express incorporation into in-house trading guidelines or implicit incorporation as the basis of those guidelines. Widely observed throughout the secondary market,3l2 the Code has been well received by market participants and their primary regulators and supervisors.313 In addition, compliance with the Code is driven by the long-term self-interest of market participants. As the Executive Director of the EMTA wrote in mid-1994:

The long-term success of the code will in large part depend upon whether it is widely perceived by market participants (and their regulators) to respond to the LDC debt market's need for greater efficiency and professionalism. If the Code is not perceived as successful, the various banking and securities regulators can be expected to act as they deem necessary to ensure that the trading market for Emerging Markets Instruments is both orderly and fair.TM The Code is broad-ranging and applies to the trading of all Emerging Markets instruments, which can be defined widely as loans, bonds and equities issued or guaranteed by public or private sector entities located in non-OECD countries.315 The Code expressly does not apply to trading in local markets in these countries because local markets are properly the subject of local regulation and market practices.316 Emerging markets trading houses come from many different countries and are subject to the diverse legal and regulatory regimes of their home jurisdiction and the various jurisdictions in which they conduct business.317 To accommodate this diversity, many provisions of the Code are general in nature and, in some areas, the Code merely encourages each EMTA member to develop, implement, and enforce its own internal policies and procedures.38 In addition, the Code is designed to supplement other regulatory regimes to which the trading house may be subject.319

The Code includes general policy provisions on matters such as financial responsibility, inside information, conflicts of interest, backoffice support, record-keeping, and control mechanisms. Moreover, the Code specifies detailed procedures on matters such as the firmness of price quotations, the binding nature of oral trades, trade confirmations, settlement instructions and preparation of legal documentation.32 In particular, the Code addresses the following issues:

Clarity of Role. "Each member should ensure that its identity and the capacity in which it is acting. . . are clear to its counterparties."321

(ii) Trading Policies. The Code calls for (A) adequate supervision and training of traders; (B) disclosure of information so that misrepresentations, either silent or communicated, are avoided; (C) preservation of customer confidentiality; (D) appropriate policies and controls to ensure that each member's trading activities do not knowingly conceal or facilitate fraud or other improper activity, such as money laundering, in any jurisdiction; (E) appropriate internal policies and procedures regarding the trading of emerging markets instruments after business hours or off business premises and by traders for their personal account; and (F) the avoidance of "any trading practices that are intended to manipulate prices."322

(iii) Inside Information. The Code calls for appropriate internal policies and procedures, which may include restrictions on trading of certain instruments or the implementation of Chinese walls, to prevent the misuse of inside information and any appearance of such misuse.323

(iv) Back Office Support. Because of the back office breakdowns and bottlenecks that accompanied the dramatic growth in the secondary market, the Code provides that "each member is strongly encouraged to ensure that its trading activities are supported by adequate back office personnel."324

(v) Control Mechanisms & Risk Management: Members are expected to maintain accurate books and records, establish and enforce adequate internal control mechanisms to ensure that its internal policies and procedures are observed, such as the segregation of duties and internal audits and implement policies to ensure appropriate risk management.

(vi) Trading Principles and Procedures for Loans and Brady Bonds. The Code states that the following principles and procedures will apply to the trading of loans and Brady bonds. First, members are to specify whether quotes are firm or merely indicative. If prices are firm, members are to specify how long prices will be firm. If no such specification of duration is made, the quote is only firm for the duration of that conversation. Second, trades are concluded when price, quantity and other material terms are agreed to in writing or orally, where subsequent written confirmation confirms the oral agreement. Third, confirmations should be sent by the seller within one working day after the trade and, whenever possible, before the close of business on the trade date. Fourth, confirmations should substantially conform to the standard forms developed by the EMTA and be sent by fax. Fifth, confirmations do not require countersignature by the buyer unless either party requests it. However, if a party requests a countersignature, the party is entitled to it. 325

The EMTA's Code of Conduct serves three principal functions. First, trading units rely on its as for developing their own policies and procedures for emerging markets trading.326 Second, the Code can be incorporated into and used as part of a firm's ongoing compliance efforts. Third, it may provide guidelines in settling disputes between traders as to certain trades.327

The use of the Code in developing internal policies and controls and in ongoing compliance is given indirect impetus by the provisions of the U.S. Sentencing Guidelines for Organizations,38 which govern the sentencing of individuals and corporations for violations of most federal laws, including securities laws. The Guidelines require long prison terms and large fines for individuals and restitution and massive fines for firms and corporations.329 The most effective way a firm can reduce its fines under the Guidelines is to put in place an "effective program to prevent and detect violations of law"330 and various requirements for an effective program are laid down by the Guidelines. A firm that has implemented rigorous internal policies and compliance procedures that comply, at a minimum, with the industry standards, is "in a far better position to argue to the prosecutor that criminal prosecution is unwarranted; and if that fails, such procedures will mitigate its exposure under the [Guidelines] to the fullest extent possible."331 Under the Guidelines, "industry standards. . . play a significant role in determining whether a company's compliance measures are 'effective.' "332 Accordingly, while the Code of Conduct is strictly voluntary, firms will expose themselves to greater sanctions for the misbehavior of their traders if they fail to implement internal policies and procedures based on, or drawn from, the Code. Therefore, the prospect of mitigation under the Sentencing Guidelines virtually requires firms to implement the Code.

2. The EMTA as a Self-Regulatory Organization

Between 1990 and 1993, the EMTA worked with difficulty to establish itself as a self-regulatory organization on the British model. New York City is not London, and most LDC debt traders had not learned their patterns of behavior on the playing fields of English public schools. Naturally, the culture of the secondary market always contained plenty of the Wild West sentiment, and traders prospered by being quick on the draw. The "mythical cowboy" traders did not take kindly to authority figures; often choosing to ride off into the sunset rather than stay in town and settle down. Perhaps partly for this reason, the EMTA was disliked by many in the secondary market during its early years. Apparently dominated by the big commercial banks,333 the EMTA appeared unresponsive to the different interests of investment banks and other trading houses that were not creditors of the debtors.4 The EMTA grew, nonetheless, and appeared to be somewhat responsive to these criticisms. In 1994, Michael Chamberlin, a former partner at Shearman & Sterling, became Executive Director. As Chamberlin came from a position of greater autonomy than the former Executive Director, his quiet, firm manner brought the appearance of greater authority to the role of Executive Director. In 1995, Alex Rodzianko of Chemical Bank was joined by Peter Geraghty of ING as Co-Chair so for the first time the Chairperson was not from a major creditor bank to LDCs. The EMTA was growing and responding to more of its constituency. The EMTA, as a self-regulatory organization (SRO) and alternative to government regulation, offered an advantage to both its members and government. For its members, the EMTA was more responsive to changes within the market,335 and its work in issuing market practices, such as the "when-issued" trading of Brady bonds illustrates this. For government, the EMTA burdened the traders with its cost of $1.5 million in 1993, which climbed to $4.5 million in 1996.336 The EMTA, however, cannot be considered a true self-regulatory organization as it has no enforcement powers. The association's edicts are not enforceable, and its rules able to be broken without legal sanction. Although the EMTA performed many useful functions and made many direct contributions to the maturation of the secondary market, the association was not destined to grow into a true SRO. By the end of 1993, the need for the EMTA to become a true SRO was also waning. As loans became bonds under the Brady process, trading units became registered broker-dealers and thus subject to the direct oversight of NASD and U.S. securities laws. In 1994, virtually all banks transferred their trading operations into their registered broker-dealer divisions if they had not already done so. By the end of 1994, the secondary market, which had been effectively unregulated at the end of 1992, was subject to the stringent, combined regulation of NASD, the SEC and U.S. securities laws.337

F. Securities Regulation

As debtors began to return as issuers to the voluntary Eurobond markets338 and loans were converted into bonds in the succession of Brady-style restructurings, traders of Eurobonds and Brady bonds were subject to the U.S. securities regulation regime and had to be registered as broker-dealers. Because it was inefficient to have some traders restricted to only trading loans, and broker-dealer affiliates of banks were the proper place for securities to be traded in a bank under the Glass-Steagall Act, trading units had to become registered brokerdealers.339 However, the trading practices of securities brokers were different in many respects from the practices that had prevailed in the formerly unregulated market. Although change occurred, it took time and required more than sitting examinations and moving into the broker-dealer affiliate of the banks.34

By mid-1993,J.P. Morgan and Chemical Bank moved their emerging markets trading groups into their broker-dealer affiliates in the United States, and in the balance of 1993 and early 1994, most other banks in the secondary market followed suit.341 These moves exposed the now-registered broker-dealers to the full panoply of SEC and NASD regulation.

IV. CONCLUSION

This research has established that the secondary market in emerging markets loans is a rare example of a single, international, OTC financial market. The secondary market was functioning as a single international market very early in its development, long before it began to mature in terms of operational efficiency. Such early international reach poses a challenge to regulatory authorities, as it means that today relatively unsophisticated markets, which are open to manipulation and may operate on relatively poor and unreliable information, can operate between nations and serve to spread investor contagion between national markets in difficult economic times.

Initially, the market was subject to no effective external regulation and little self-regulation. Until 1993, the market was wide open to abuse and manipulation and the common types of abuse and manipulation have been considered here. Although the actual incidence of these practices is impossible to assess, the available evidence suggests these practices were not dramatically more common in this market than others. In 1993, Michael Pettis stated that " [g]iven there was no supervisor, perhaps what is remarkable is not that the market is so dirty, but that it is so clean."342 Since 1993, the conversion of loans into bonds has brought the market under the regulation of the U.S. securities laws which, over time, has brought a marked improvement in market conduct.

The Emerging Markets Traders Association (EMTA), after a slow start in its early years, became progressively more active over time. The Association produced innumerable market practices, a set of standard terms for loan sales and a code of conduct and implemented multilateral netting, Match-EM, and the EMCC. Indeed, EMTA's efforts in this regard have effected a quiet revolution in the operational efficiency of the market. While EMTA's performance in its first three years of existence highlighted one of the risks of self-regulatory organizations-a certain comfortable somnolence-EMTA's performance from 1995 onwards in improving the risk management, efficiency and transparency of the market has been impressive and highlights the great potential in these matters of self-regulatory organizations.

1. In approximately 1984, the term "emerging market" was coined by the International Finance Corporation (IFC), a commercial arm of the World Bank Group, while seeking a title for an LDC investment fund. The IFC had previously promoted the Third World Investment Trust (TWIT), but its acronym was considered unhelpful. The Emerging Markets Growth Fund, on the other hand, was a marketable name. See Alain Soulard, The Role of Multilateral Financial Institutions in Bringing Developing Companies to US. Markets, 17 FoRDHAM INT'L LU. S145, S147 (1994). The terms LDC and emerging markets are used interchangeably in this Article. 2. The market existed in nascent form before the debt crisis of 1982 but really started to grow after 1982. In 1983, market volume was, in the absence of accurate figures, perhaps $500-700 million face value of debt, rising to perhaps $2-2.5 billion in 1984. See Smith Barney Research, In the Spotlight (an interview with Martin Schubert), BANKNOTES, (undated), at 8 (on file with author); Wallenstein, Debt-Equity Country Funds: Problems and Prospects, in THIRD WORID DEBT: MNNAGING THE CoNsEQuENcEs 32 (Stephany Griffith-Jones ed., 1989) (confirming an estimate of $2 billion). During 1990, turnover had reached $100 billion. See Brian O'Reilly, Cooling Down the World Debt Bomb, FORTUNE, May 20, 1991, at 123, 124; Richard Voorhees, Doses of Reality, LATINFIN., Sept. 1992, at 19, 26. Cf. NMB Postbank-leading the field, IFR REvIEw OF THE YEAR 78 (Supp. 1990) (providing an estimate of $75 billion). The EMTA's annual volume survey estimated that $1.978 trillion of loans and bonds were traded in 1993. See 1993 Debt Trading Volume Near U.S.$2 Trillion, EMTA But.i.., No. 4, 1994, at 1, (on file with author); Emerging Markets Traders Association, 1993 DEBT TRADING VOL. SURV., May 1, 1994. This figure is higher than other estimates that ranged from $1 trillion to $1.5 trillion. The annual LatinFinance survey showed a total self-reported volume of the traders surveyed of $1.365 trillion and concluded that "the consensus was that $1 trillion of emerging market debt changed hands." Richard Voorhees, Shooting the Bull, LATINFIN., Mar. 1994,

at 30, 30. A range of $1 trillion to $1.5 trillion was given by Tracy Corrigan in Picking Up the Pieces of an Emerging Market, FIN. TIMEs, Apr. 5, 1994, at 17. The best estimate after eliminating double counting is that perhaps $1.3 trillion of debt in fact changed hands in 1993. 3. Emerging Markets Traders Association, 1996 DEBT TRADING VOL. SURV., Mar. 17, 1997. 4. In the early to mid 1990s, each major debtor nation implemented a restructuring of its debt along the lines laid down in the Brady Plan, named for its initial proponent, then Secretary of the U.S. Treasury, Nicholas Brady. In these restructurings a nation's loans were converted into partly collateralized bonds, which typically had a tenure of 30 years and included a rolling guarantee of 12 or 18 months of interest payments and a guarantee of principal effected by the deposit in escrow of a suitable amount of zero-coupon U.S. Treasury bonds. These distinctive debt instruments were known as Brady bonds. See also infra Part I.C. 5. The first year in which Brady bonds accounted for over one-half of market turnover was 1993. According to EMTA's survey, trading volume in Brady bonds in 1993 was $1.02 trillion, some 52 percent of total market volume. See Emerging Markets Traders Association, 1993 TRADING VOLUME SURVEY, Aug. 8, 1994, at 11; see also Norman Peagram, How Safe Are Those Bradys?, EUROMONEY, Sept. 1994, at 50, 50. As the majority of the debt was converted into bonds, banks began to move their trading arms from their commercial banks and into the their registered broker-dealer subsidiaries, thus out from under the nominal regulation of the banking regulators and into the active regulation of the securities regulators.

6. This question has been explored only for the United States as New York is the principal LDC debt market, the focus of this study.

7. Most of the judicial definition of a security has centered on the interpretation of the phrase "investment contract," which is one of the items listed as a security. See THoMAS L. HAZEN, THE LAW OF SECURTIES REGULATION 24 (2d ed. 1990). The classic definition of an investment contract was laid down by the U.S. Supreme Court in SEC v. WJ. Howey Co., 328 U.S. 293, 298-99 (1946), as a contract or scheme in which a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. This jurisprudence does not assist us because a loan is not an investment contract.

8. Securities Act of 1933 2 2(1), 15 U.S.C. 77b(1) (1994). The term "security" is defined in virtually identical terms in section 3(a) (10) of the Securities Exchange Act of 1934; however, the '34 Act omits the "evidence of indebtedness" language. Securities Exchange Act of 1934 3 3(a) (10), 15 U.S.C. 78c(a) (10) (1994). The Court has stated that the term should be given the same meaning under each Act. See Landreth Timber Co. v. Landreth, 471 U.S. 681, 685-686 (1985); Marine Bank v. Weaver, 455 U.S. 551, 555 n.3 (1982). For a consideration of the differences between the definitions in the two statutes, see Arnold S. Jacobs, The Meaning of "Security"underRule lOb-5, 29 N.YL. SCH. L. REv. 211, 225-228 (1984). 9. In Justice Thurgood Marshall's words, "[i]n defining the scope of the market that it wished to regulate, Congress painted with a broad brush." Reves v. Ernst & Young, 494 U.S. 56, 62 (1990).

10. The term "note" may include promissory notes issued in conjunction with loans, but notes were issued with very few LDC sovereign loans. 11. Partner, Cleary, Gottlieb, Steen & Hamilton, NewYork, IS.Y.

12. Lee C. Buchheit, Legal Aspects of Assignments of Interests in Commercial Bank Loans, in HANDBOOK OF COMMeRciAL B LOAN SALES 453-54 (Lederman & Feinne eds. 1991 ) [hereinafter HANDBOOK] .

13. Id. at 454.

14. See, e.g., C.I.B.C. Bank and Trust Co. (Cayman) Ltd. v. Banco Cent. do Brasil, 886 F Supp. 1105 (S.D.N.Y. 1995) (holding that minority holder of foreign debt alleged breach of debt restructure agreement against Central Bank of Brazil); Pravin Banker Assocs. Ltd. v. Banco Popular del Peru, 165 B.R. 379 (S.D.N.Y. 1994) (upholding a motion to stay on Pravin's suit seeking payment of principal and unpaid interest following Peruvian bank's default).

15. See Lehigh Valley Trust Co. v. Central Nat'l Bank of Jacksonville, .409 F.2d 989, 992 (5th Cir. 1969) (applying a literal interpretation of the statutory definition to find that a loan participation was a security). The Fifth Circuit subsequently reversed itself on this point. See Bellah v. First Nat'l Bank of Hereford, 495 F2d 1109, 1111-1112 (5th Cir. 1974). The U.S. Supreme Court has since conclusively eschewed the literal approach. See Landreth Timber Co. v. Landreth, 471 U.S. 681, 693 (looking not only to the plain language of the statute, but also to a "security's" characteristics); Reves v. Ernst & Young, 494 U.S. 56, 56 (applying the "family resemblance" test).

16. Numerous authorities claim that bank loans are not securities. See infra note 25. The principal policy reason for not treating bank loans as securities is that the securities laws are designed to protect investors in corporate stocks and bonds, and banks do not require such protection in making loans. Likewise, participations in bank loans are typically granted to other banks, so such protection is not generally required for participations. Furthermore, participations are typically effected by individually crafted documents and are not readily tradable as are most securities.

17. Reves, 494 U.S. at 62.

18. The Supreme Court in Reves emphasized that the tests should be different for shares and notes. A share of common stock is the quintessential security and the public would rightly expect share transactions to be governed by the securities laws. However, "note" is a relatively broad term that encompasses instruments used for both investment and commercial purposes and it is only the former that Congress intended to regulate. See id. "Evidence of indebtedness" is as broad a term as "note," if not broader, and thus reasoning by analogy with Reves is permissible. 19. Id (emphasis in original).

20. Id. (adopting the language of Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)). 21. Id. at 64-65 (adopting the test laid down by the Second Circuit in Exchange Nat. Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126,1137 (2d Cir. 1976)).

22. Id. at 66-67

23. United States v. Austin, 462 E2d 724, 736 ( 1Oth Cir. 1972). 24. See, e.g., Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 938-39 (2d Cir. 1984); American Bank & Trust Co. v. Wallace, 702 F2d 93, 97 (6th Cir. 1983); Great W. Bank & Trust v. Kotz, 532 F.2d 1252, 1257-1258 (9th Cir. 1976); C.N.S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354, 1362-1363 (7th Cir. 1975); Bellah, 495 E2d at 1114 (1974); Banco Espanol de Credito v. Security Pac. Nat'l Bank, 763 F.Supp. 36, 41 (S.D.N.Y. 1991) (citing Reves, 494 U.S. at 64-65). For more consideration of this point, see also Bradley K. Sabel, Loan Participations as Securities under the Glass,Steagall Act, in HANDBOOK, supra note 12. 25. See, e.g., Banco Espanol de Credito v. Security Pac. Nat'l Bank, 973 E2d 51, 56 (2d Cir. 1992), agg 763 F. Supp. 36, 41 (S.D.N.Y. 1991); Gary Plastic Packaging Corp. v. Merrill Lynch, 756 E2d 230, 240-42 (2d Cir. 1985). See also Commercial Discount Corp. v. Lincoln First Commercial Corp., 445 F. Supp. 1263, 1267 (S.D.N.Y. 1978) (holding that " [it is quite logical, and is moreover well established, that a participation in a loan may be a security, even though the underlying loan is not.").

26. 2 Louis Loss &JOEL SELIGMAN, SECURITIES REGULATION 900 (3d ed. 1989). The matter is further complicated by the presence of the phrase only in the definition of security in '33 Act and not also in the otherwise similar definition in the '34 Act, an omission held relevant in Zeller v. Bogue Elec. Mfg. Corp., 476 F.2d 795, 800-801 (2d Cir. 1973). 27. As Buchheit has written, "although [Reves] addressed only . . . are notes 'securities'?, the Court's analysis may also affect the transactions by which commercial banks dispose of their loan assets through the sale of loan derivative products." Lee C. Buchheit, When is a Loan Not a Loan ?, INT'L FIN. L. REV., Nov. 1990, at 29, 29. Compare the application of the four factors in Pollack v. Laidlaw Holdings Inc., 27 F.3d 808, 811-812 (2d Cir. 1994). 28. 973 F.2d at 55 (citing 763 F Supp. at 43). 29. Great W. Bank & Trust v. Kotz, 532 F.2d 1252, 1261-62 (9th Cir. 1976).

30. 973 E2d at 56 (Oakes, CJ., dissenting). 31. Id. at 55 (citing 763 F. Supp. at 43). 32. Reves v. Ernst &Young, 494 U.S. 70, 68 (1990).

33. See Banco Espanol de Credito, 973 F.2d at 59 (Oakes, CJ., dissenting); Landreth Timber Co. v. Landreth, 471 U.S. 681, 681 (1985).

34. A factor Oakes, CJ. found persuasive in his dissenting judgment See Banco Espanol de Credito, 973 F.2d at 60.

35. If this matter came up for decision today it is submitted that most courts would be very slow to disturb the long-standing understanding within the industry. The most likely view would be that taken in Banco Espanol de Credito, "[a]n industry-wide traditional understanding [that] negates the application of federal securities laws to commercial participations in short-term bank loans should not be overridden by this Court's technical acceptance of a literal definition of a statute whose purposes were not so intended and were enacted in a different context." 763 F.Supp. at 46.

36. Buchheit, supra note 27, at 32.

37. For a consideration of the history and function of no-action letters, see Therese H. Maynard, What Is An "Exchange?"-Proprietary Electronic Securities Trading Systems and the Statutory Definition of an Exchange, 49 WASH. & LEE L. REv. 833 passim ( 1992).

38. See Interview with T.S. Link, Davis Polk & Wardwell, in New York, N.Y. (Apr. 23, 1993). 39. For more on Regulation S and Rule 144A, see HAL S. ScoTT & Pt-nt.itp A. WELLONS, INTERNATIONAL FINANCE-TRANSAcTONS, Policy, AND REGULATION 65-91 (2d ed. 1995).

40. The differences include the partial collateralization, the unusual interest rate structures of some bonds, and the unusually long term, often of 30 years. 41. See Steven Murphy, Who Are the Debt Police?, LATNFIN., Sept. 1990, at 45, 48 [hereinafter Debt Police].

42. See Interview with T. S. Link, supra note 38. 43. See Debt Police, supra note 41, at 48. 44. Id. at 50. 45. Id.

46. I record this as a fact without suggesting any impropriety by the regulators.

47. See Interview with Lee C. Buchheit, Partner of Cleary, Gottlieb, Steen & Hamilton, in New York, N.Y. (Dec. 6, 1994).

48. See id.; see also Interview with T.S. Link, supra note 38. 49. For further consideration of what might be an exchange, see Ruben Lee, What is an Exchange?, (Capital Markets Forum of the International Bar Association, London, England 1992). 50. See Maynard, supra note 37, at 841.

51. See THOMAS L. HAZEN, THE LAw OF SEs REGULATION 267-69 (2d ed. 1985). 52. Securities Exchange Act of 1934 3(a) (1), 15 U.S.C. 78c(a) (1) (1994). 53. Securities Exchange Act of 1934 3(a) (1), 15 U.S.C. 78c (a) (1) (1994).

54. See HAZEN, supra note 51, at 264-65. 55. See id. at 265.

56. Securities Exchange Act of 1934 3 3(a) (38), 15 U.S.C. 78c(a) (38) (1994). 57. See Maynard, supra note 37, at 846.

58. See ScoTt & WELLONS, supra note 39, at 54. Table B lists the twelve largest stock markets in the world in 1994 by turnover. The NYSE was the largest, followed by NASDAQ and then the London Stock Exchange. For an excellent history and analysis of the development of NASDAQ see Michael J. Simon & Robert L.D. Colby, The National Market System for Over-the-Counter Stocks, 55 GEo. WASH. L. REV. 17 (1986).

59. See the consideration of this definition by Maynard, supra note 37, at 850-54, 870-75. 60. Registration of an "exchange" is required by section 5 of the '34 Act. Securities Exchange Act of 1934 5, 15 U.S.C. 78f(2) (1994); Maynard, supra note 37, at 834. While the secondary market does not need to be registered as an exchange, the legal obligations upon securities traders apply as fully in an OTC market as in an exchange. 61. Sez Susan Hogg, Sqed until the pips squeak, EMERGING MARTSMarkets Investor Apr. 1995, at 35.

62. End of Year Review, Emerging Market Asset Trading House-Chase Manhattan-The Art of StayingFocused, INT. FIN. REv., Dec. 16, 1995. 63. Id.

64. See Paul Kilby, Smoother Sailing?, LATINFIN., Sept. 1995, at 34, 38. 65. See EMERGING MARKERS TRADERSASSOCIATION 1996 ANNuA. REPORT 5 (1997). "The marketplace for Emerging Markets debt instruments is mainly an [OTC] market composed of dealers, brokers and investors located worldwide but linked informally through a network of broker screens as well as normal telecommunication channels." Id. at 57. 66. Securities Exchange Act of 1934 3(a) (1), 15 U.S.C. 78c(a) (1) (1997).

67. David E. Van Zandt, The Regulatory and Institutional Conditions for an Inter national Securities Market, 32 Va J. Int'l L/ 47,57 (1991).

68. LId. at 48.

69. Id at 49.

70 Van Zandt's article was not written from this perspective. I have extracted these five factors from his analysis and trust that I have not done his work an injustice.

71. See id. at 48. \

72. See id. at 49.

73. See id, at 50-54.

74. See id. at 67-70. At first glance, this characteristic may appear procedural rather than substantive. However, as Van Zandt points out, the purchase of the same security in New York where the settlement is usually in five days, or in London where settlement is usually in fourteen days, or in Paris where the settlement is usually in one month, is a different economic proposition. See id. Therefore, prices in the three markets cannot be the same. Likewise, the analysis is also affected depending on whether or not the market requires physical delivery. See id. 75. See id. at 70-78.

76. For a full description of the Emerging Market Traders Association and its functions, see EMERGING MARKET TRADERS ASSOCIATION, 1997 ANNUAL REPORT (1998).

77. Much of the following analysis is anecdotal, for which I make no apologies. Statistics are simply not available. Insider trading, front running, and market manipulation are all potentially illegal, and traders engaged in them are likely to keep their activities secret. See Steve Thel, S850,000 in Six Minutes-The Mechanics of Securities Manipulation, 79 CORNELL L. REv. 219, 222-23 (1994).

Philip T. Sudo & Andrew Albert, Gain Seen in Loan Trading AM. Banker, May 21, 1987, at 1,23.

79. To go short is to sell an asset one does not own-and therefore to rely on a decline in the market price so that when one purchases the asset to meet one's contractual obligation a profit will be made as the price has fallen. Short positions were most commonly effected at this stage of the market in one of two ways. The less common way was by "borrowing the debt"; i.e. acquiring debt, either through a swap or sale, with an express contract to sell the debt back to the supplier at a certain price on a given future date, and then selling or swapping the debt today so that similar

debt will have to be acquired in the future to meet the obligation (in the author's experience, such transactions were done with some regularity and the supplier of the debt took the view that they were lending their debt for a fee). The more common way of going short was to take advantage of the usual three week settlement period and contract to sell debt not currently owned (and buy it in the market before the settlement date). See Interview with Martin W. Schubert, Chairman, European InterAmerican Finance Corporation, in New York, N.Y. (Apr. 22,1993). This three-week period could at times be extended by agreement to as much as seven to eight weeks, which provided even more scope for going short. See Interview with Michael Pettis, now of Bear Stearns & Co, in New York, N.Y. (Feb. 20, 1996) [hereinafter Pettis Interview II]. In the former type of transaction, unless the counterparty were told, they could not be certain that a trader was taking a short position and in the more common type of transaction, without being told, the counterparty would have no indication at all. Forward contracts in which debt is sold at a given price for delivery at a certain date in the future were not common in this market.

80. See Peter Truell, U.S. Grand Jury Probes a Wild, Murky Market in Third World Debt, WALL ST. J., Dec.12, 1990, at Al [hereinafter U.S. Grand Jury]. 81. Id. 82. Id.

83. See Peter Truell, Loans by U.S. Banks to Latin America Borrowers Come Under Scrutiny of Fed, WALL ST.J.,June 11,1990, at A3 [hereinafter Loans by U.S. Banks].

84. The Royal Bank of Canada's representative on the negotiating committee lodged a formal complaint.

85. Michael Chamberlin is now Executive Director of the Emerging Markets Traders Association.

86. See Loans by U.S. Banks, supra note 83.

87. See D. M. Zornow & T. M. Obermaier, The LDC Debt Market, 9 REv. oF BANKING & FIN. SERVICES 195 ( 1993); Lee C. Buchheit, Advisory Committees: What's in a Name?, IN-T'L FIN. L. REv.,Jan. 1991, at 9, 9.

88. Schubert identified this type of insider trading when he said, "[f]or the Latin American investor, private or institutional in the know, with close government contacts, speculative buying has reaped huge rewards in the past and will continue to do so in the future as insider knowledge in this unregulated market is more a factor than in most other markets, which are regulated." See Martin W. Schubert, The Risks and Rewards of Investment in the High Yield Latin American Debt Market, Speech Delivered at the Latin High Yield Conference 23 (May 30-31, 1990) (transcript on file with author). See also the words of Andrew Quale, "[t]he risk of possible insider trading violations is particularly high in an informal, unregulated market such the secondary market for LDC debt, especially when the traders in such marketplace may have ready access to persons who have non-public information concerning the status of negotiations between LDCs and their creditor banks or may themselves be actively involved in such negotiations." Andrew C. Quale Jnr., Tapping the International Capital Markets Using Sophisticated Asset Securitization Techniques, Speech Delivered at the Latin High Yield Conference 13 (May 30-31, 1991) (transcript on file with author).

89. Simon Nocera reportedly said, "There is no question in my mind about the integrity of this market. There are a lot of insider rumors, but that's exactly like any other market." Kelley Holland, Tropical Heat at Citibank, Bus. WK., May 17, 1993, at 86, 86. Kathy Galbraith reportedly said that insider trading claims are "simply a load of bull." Debt Police, supra note 41, at 50. Saleh Daher likewise believed the major banks' internal regulation, such as Chinese walls, worked well. See Telephone Interview with Saleh Daher, Partner at Turan Corp. (Apr. 22, 1993). 90. Martin Schubert said that commercial banks "without question" breached the wall between debt restructuring and trading. Interview with Martin W. Schubert, supra note 79. Hector Megy was equally emphatic: "I can guarantee that the big traders use their corporate finance information. If you think Chinese walls exist in this market, you'd be absolutely wrong." Telephone Interview with Hector Megy, President of Megy Advisors, Inc. (Apr. 22, 1993). Stephen Dizard was even more explicit, reportedly nominating Bankers Trust, Chase Manhattan Bank, Manufacturers Hanover and Morgan Guaranty as banks that used debt restructuring information in debt trading. All four banks, not surprisingly, denied the accusation. See Debt Police, supra note 41, at 49. In addition to Schubert and Dizard, "XX" (name withheld on request) expressed the view that inside information is abused by the major commercial banks. See Interview with XX,

former trader with J.P. Morgan, in New York, N.Y. (Apr. 19, 1993). See also the reports of insider trading abuses in Holland, supra note 89; Zornow & Obermaier, supra note 87. 91. Debt Police, supra note 41, at 49.

92. Dizard considered that these two banks carefully observed market proprieties. See Debt Police, supra note 41. With respect to Citicorp, Saleh Daher confirmed this view. See Telephone Interview with Saleh Daher, supra note 89. These two banks had major roles in the ongoing restructurings but were less significant players in the secondary market for LDC debt. 93. This is generally called a "re-lending" right.

94. See Truell, supra note 80; Gary N. Kleiman, Failure by the Fed: LDC Debt Trading Goes Unsupervised, AM. BANKER, Mar. 31,1992, at 5.

95. U.S. Grand Jury, supra note 80. See also Peter Truell, Inquiry Focuses on Ex-Trader of Foreign Debt, WALL ST. J., Mar. 19, 1993 at C1 [hereinafter Ex-Trader of Foreign Debt] (it is probably also a coincidence that Daniel Young, one of the traders on Manufacturers Hanover's London desk, was later implicated in a major trading scandal); Interview with YY (name withheld on request), a senior LDC debt trader in New York, N.Y. (Apr. 1993) (certainly, confidential market sources attest to Young's probity); United States v. Chestman, 947 E2d 551, 569 (2d Cir. 1991) (providing details of the later scandal).

96. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, THOMSON'S INT'L BANKNG REG. July 19, 1993, at 1, 4; Holland, supra note 89.

97. The trader claims he was able to draw the inference that the negotiations were unlikely to lead to a concrete result from the last-minute change in the leadership of Panama's negotiating team at the debt restructuring talks, which was public information. He claimed his trading was based on a superior understanding of Panamanian politics not non-public information. See Citibank Probe Clears Trader of Insider Trading Suspicions, LDC DEBT REP., May 10, 1993, at 5. 98. As the principal trading units are in major banks concerned with their reputation, disclosure is a major sanction.

99. Harry McVea, Fashioning a System of Civil Penalties forlnsider Dealing: Sections 61 and 62 of the Financial Services Act 1986, J. Bus. L., at 344, 360 (July 1996).

100. A conclusion in which I am supported by Fritz Link, among others. See Interview with T.S. Link, supra note 38.

101. For the former proposition, see GENNARO F. VITO & RONALD M. HOLMES, CRIMINOLOGYTHEORY, RESEARCH AND PoLICY (1994); and for the latter proposition, see J.L. Miller & Andy B. Anderson, Updating the DeterrenceDoctrine, 77J. CRIM. L. & CRIMINOLOGY 418, 438 (1986).

102. Interview with Michael Chamberlin, Executive Director of the Emerging Markets Traders Association, in New York, N.Y. (Dec. 8, 1994). 103. See Interview with YY, supra note 95. 104. Id

105. Richard Voorhees, Taming the Wild West?,IsTFm., Dec. 1991, at 9, 9. 106. Schubert, supra note 88, at 23.

107. For a more detailed explanation of Chinese walls, see generally HARRY MCVEA, FINANCIAL CONGOLOMERATES AND THE CHINESE WALL ( 1993).

108. See infra text accompanying note 145. For instance, it was common for bankers involved in the negotiations leading up to the implementation of a debt-equity scheme to notify their trading desk that the scheme was pending so that the desk could acquire a stock of the debt before prices rose upon the public announcement of the go-ahead for the scheme. See Interview with T.S. Link, supra note 38.

109. See infra text accompanying note 145. 110. For example, see infra text accompanying notes 196 and 204. 111. See genera/y Zornow & Obermaier, supra note 87.

112. See Quale, supra note 88, at 13. According to Fritz Link, the Federal Reserve conducted an extensive and rigorous investigation of a number of banks in this market in late 1991 and the first quarter of 1992. See Interview with T.S. Link, supra note 38. 113. Telephone interview with the Federal Reserve Bank (Apr. 23,1993). 114. See Interview with Saleh Daher, supra note 89.

115. Percival v. Wright,9 B.RC. 786 (Ch. 1902). 116. Id. at 791; 7 Loss & SELIGMAN, supra note 26, at 3469. 117. Strong v. Repide, 213 U.S. 419 (1909).

118. Lazenby v. Goodwin, 253 S.E.2d 489, 491-92 (N.C. Ct. App. 1979). See the decisions of the New Zealand Supreme Court and Court of Appeal in Coleman v. Myers, [H.C. 1977] 2 N.Z.L.R. 225, particularly at 266-280 where Mahon J. ably chronicles the evolution of these doctrines in the United States and elsewhere and identifies the weaknesses in Percival u Wright; and at 328-334 per Cooke J. in the Court of Appeal. See Coleman v. Myers [CA. 1977] 2 N.L.Z.R 297, 328-34.

119. See HENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET 22 (1966). 120. See McVee., supra note 107, at 104.

121. See Commercial Nat'l Bank in Shreveport v. Parsons, 144 E2d 231, 238-39 (5th Cir. 1944); Westwood v. Continental Can Co., 80 F.2d 494 (5th Cir. 1935); Hotchkiss v. Fischer, 136

KaN. 530 16 P.2d 531 (1932); Jacobson v. Yaschik, 249 S.C. 577, 582-86, 155 S.E. 2d 601, 604-06 (S.C. 1967).

122. See Goodwin v. Agassiz, 283 Mass. 358, 361-64, 186 N.E. 659, 660-61 (1933); see generally Harry Shulman, Civil Liability and the Securities Acts, 43 YALE LJ. 227, 231-32, 238-40 (1933). 123. See Goodwin v. Agassiz, 283 Mass. 361-64,186 N.E. 66-1. 124. 7 Loss & SELIGMAN, supra note 26, at 3476.

125. See, e.g., United States v. O'Hagan, 521 U.S. 642 (1997); SEC v. Texas Gulf Suphur Co., 401 F.2d 833, 848 (2d Cir.1968) (the firstjudicial proceeding to hold directors or officers liable for trades in an organized stock market). See also Arthur Fleischer, Jr., Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 VA. L. REv. 1271, 1278 (1965); HENRY G. MANNE, supra note 119, at 39-46; Ross Buckley, United States v. O'Hagan: Completing the Insider Trading Mosaic, 72 AUSTR LJ. 412 (1998).

126. The other principal type of insider trading was on the basis of inside knowledge of a debtor's impending course of action with respect to a restructuring, the payment of interest, approval of a debt-equity conversion scheme, etc. This type of insider trading was most often by investors who were nationals of the debtor nation and/or had very good connections there. See supra text accompanying note 79.

127. United States v. Margiotta, 688 F.2d 108,125 (2d Cir. 1982) . 128. United States v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991 ). 129. See Buchheit, supra note 87, at 9. In Buchheit's words, "ne country, Brazil, tried inviting all of its [700-800] commercial bank lenders to New York in late 1982 for a chat about the subject of Brazilian debt. The result of this meeting was not such as to commend this approach to other sovereign debtors." Id.

130. Rule lOb-5 was promulgated by the SEC under section 10(b) of the '34 Act and is codified in 17 C.ER. 240. Detailed analyses of the complexities of how and when rule lOb-5 prohibits the trading of securities on material non-public information are beyond the scope of this work. For further information, see Zornow & Obermaier, supra note 87; 7 Loss & SELIGMAN, supra note 26; HAZEN, supra note 7 at 407-08. For treatment by the courts, see, e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980).

131. See, e.g., SEC v. Dirks, 463 U.S. 646, 657 (1983); United States v. Chiarella, 445 U.S. 222 (1980); United States v. Bryan, 58 F.3d 933 (4th Cir. 1995); SEC v Clark 915 E2d 439 (9th Cir. 1990); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968). In the words of Louis Loss: " [t] he Rule lOb-5 story tempts the pen. For it is difficult to think of another instance in the entire corpus juris in which the interaction of the legislative, administrative rulemaking, and judicial processes has produced so much from so little." 7 Loss & SELIGMAN, supra note 26, at 3485. 132. See Zornow & Obermaier, supra note 87, at 198. It is irrelevant whether the inside information prompted the trade. The government only has to prove that the trader was in possession of such information when it effected a trade with the counterparty. The government does not have to prove that the information was the motivation for the trade. See id. at 199. 133. See, e.g., Clark, 915 F.2d at 439. For example, an employee who breaches his employment duties by using confidential information gained in the course of his employment would be liable under this theory notwithstanding the fact that the employee owed no duties to the party from which it acquired the shares. This basis of liability is not generally accepted in the United States. See Bryan, 58 F.3d at 933.

134. Buckley, supra note 125, at 414 (1998).

135. For more information on Chinese walls, see generally McVea, supra note 107. 136. In a modern building equipped with electronic swipe card readers for after-hours access, this separation is relatively easy to implement. The reader records the identity of each party who enters through it (or at least the identity of the card they are using). 137. See Broker Policies on Inside Information, Report by Division of Market Regulation [1989-90 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1 84,520 (Mar. 1990). 138. This is especially the case as many of the major market makers are U.S. money center banks sitting on steering committees. For a major debtor such as Mexico, the uniform imposition of a restricted list by traders could well exclude the majority of market makers from trading its debt and deny the market depth and liquidity. At times of heightened uncertainty, such as during a restructuring, this lack of depth and liquidity could readily lead to dramatic and distressing levels of volatility.

139. See Loans by U. S. Banks, supra note 83.

140. See U.S. Grand jury, supra note 80. An incident involving J.P. Morgan is often cited as evidence of the opacity and efficacy of the major banks' Chinese walls. At the end of the third quarter of 1989, traders at J.P. Morgan reportedly went long in (i.e. acquired) LDC debt only a few days before their bank announced it would raise loan loss reserves to 100% of its LDC exposure. See Third World Debt, BAN LEx, Dec. 25, 1989, at 4, 4. Traditionally throughout the market's history an increase in reserves has led to a decline in market prices. However, does one example of a major bank's Chinese wall working mean it always works?

141. Hector Megy was in no doubt and stated: "[i]f you think the Chinese walls work in the market-you'd be absolutely wrong .. I know because I have been watching the market for so long". Interview with Hector Megy, supra note 90.

142. It is essential that the departments are housed on different floors and staff members from one department are not allowed on the floor of the other-even without conversation, the demeanor and facial expressions of bankers involved in restructuring negotiations could tell the debt traders all they need to know.

143. Cowboys Catch the 7.33, ECONOMIST, Mar. 27, 1993, at 83. 144. See Telephone Interview with Peter Truell, Wall Street Journal, New York, N.Y. (Apr. 22, 1993).

145. For instance, Chinese walls are more likely to be effective because a broker-dealer affiliate is a separate corporation from the bank. The affiliate sits on the steering committees for debt-equity programs, restructurings, and the like. In addition, a broker-dealer affiliate has its own, separate research staff from the bank. See Interview with T.S. Link, supra note 38. The popularity of new bond issues by LDCs in 1992 and 1993 created a need for new Chinese walls in the trading houses; walls that in the main were not put in place. An investment bank involved in the structuring and pricing of a new eurobond issue, for instance, might learn valuable confidential information that could affect the price of that country's secondary market debt. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 1. While the information is unlikely to be as price sensitive as the progress of a restructuring, and in many bond issues no such information would come to light, there remains a clear risk of the bank's traders learning of material non-public information-a risk that very few investment banks protected themselves against. Almost invariably the banks' emerging markets division handled both new bond issues

and secondary market trading. Some traders, surprisingly, saw absolutely no problem with the one person heading new issues and secondary market trading. See Interview with WW (name withheld upon request), trader with experience at major banks in New York and London, in London, England (May 5, 1993).

146. See Interview with WW, supra note 145.

147. Likewise, if the trader learns of a major intended sale by a client, the trader might sell the same debt from its trading portfolio in advance of the client's trade and then buy the client's debt to restock its trading portfolio. If the trader's sale depressed market prices at all, the client will only be paid the new, lower price and the trader will have profited at the client's direct expense.

148. See Interview with Martin Schubert, supra note 79. 149. See Interview with YY, supra note 95.

150. For example, see the prosecution of Young & Liberatore for theft of a corporate opportunity from Manufacturers Hanover. See infra text accompanying note 175.

151. Cowboys Catch the 733, supra note 143. 152. See Interview with WW, supra note 145. 153. See Telephone Interview with Peter Truell, supra note 144.

154. See Interview with Lee C. Buchheit, supra note 47. 155. Front-running of LDC loans by a trader for his or her own account would have been against bank policy in most banks.

156. The secondary role of the trading desk was to earn profits by speculating on the secondary market. See U.S. Grand Jury, supra note 80, at A6. 157. See Steven Murphy, Mutiny on the Debt Desk, LATIFIN., Sept. 1990, at 53, 53 [hereinafter Mutiny]; Peter Truell, New Clues Surface to Security Pacific's Closing of Debt Unit-Credit-Trading Operation Was Shut Down in 1989, Puzzling Many Traders, WALL ST. J., June 19, 1990, at A22 [hereinafter New Clues Surface]; U.S. Grand Jury, supra note 80. 158. Stephen Maitland-Lewis, George Buxton, and William Cisneros. See U.S. Grand Jury, supra note 80.

159. See Mutiny, supra note 157.

W160. See New Clues Surface, Supra note 157.

161. See id: U.S. Grand Jury. supra not e80.

162 See U.S. Grand Jury, supra note 80.

163 See id.

164 See id.

165 id.

166 See id,

167 See id.

168. See Cowboys Catch the 7.33 supra note 143 at 83

169. One joined Bank of Tokyo as a trader, the other two went into different fields of investment banking. See U.S. Grand Jury, supra note 80; Mutiny, supra note 157, at 54. The banker who elected to stay in this market had tremendous difficulty securing another trading position at a time when anyone with any trading experience was typically besieged with offers from executive recruitment firms. Eventually the traderjoined Bank of Tokyo, a very low prestige trading house in this market-yet another example of the common fate of whistleblowers. See Pettis Interview II, supra note 79.

170. U.S. Grand Jury, supra note 80 (quoting Bruce Hasenkamp). 171. The Federal Reserve conducts its investigations confidentially and will not comment unless an investigation leads to prosecutions and/or disciplinary action.

172. See Ex-Trader of Foreign Debt, supra note 95. The above account of the matter is from the publicly available sources. However, it may reflect only Manufacturers Hanover's version of events; what actually occurred may not be so clear-cut. 173. The parallels with the Angotti case are striking.

174. The details in the above paragraph are all as alleged in the indictment of Daniel Young and George Liberatore, as described in Zornow & Obermaier, supra note 87; and FEDERA REsERvE BANK, PRESS RELEASE, (May 17, 1993). See also Peter Truell, Two Indicted in Trading Scam Involving Debt, WALL ST.J., May 18, 1993, at A3 [hereinafter Indicted in Trading Scam]; Peter Truell & Thomas T. Vogel, Secretary 's Suspicions Led to New York Probe and Indictments Against Two Debt Traders, WALL ST. J., May 21, 1993, at A5D; LDC Trader Indictments Sully Debt Market's Image, IAC, May 24, 1993, available in Lexis, Nexis Library, IAC File.

175. In violation of N.Y. Penal Law 105.05 (1) and N.Y. Banking Law 673. See Zornow and Obermaier, supra note 87, at 197. That is, Liberatore was charged with bribing Young to misuse his position at Manufacturers Hanover and Young was charged with taking the benefit offered. See id. 176. See Indicted in Trading Scam, supra note 174; FEDERAL RESERVE BANK, supra note 174. 177. Interview with Martin Schubert, supra note 79. See also Interview with Felix Robyns, Managing Director, Emerging Markets, Bankers Trust, in London, England (May 5, 1993). There were stories in the Autumn of 1992 of some bankers trying hard to drive down the price of Argentine debt so as to be able to effect a debt-equity conversion cheaply. See Holland, supra note 89, at 86. 178. See Interview with YY, supra note 95.

179. See Interview with Martin Schubert, supra note 79. See also Interview with Felix Robyns, supra note 177; Interview with YY, supra note 95; EMERGING MARKET TRADERS ASSOCIATION, 1997 DEBT TRADING VOL. SURV., Feb. 28, 1998; Richard Voorhees, The Bull Run of '93, LATINFIN., Sept. 1993, at 28, 29-30.

180. Consider the debt of the former Soviet Union as an example of the extreme volatility of some exotic debt. In the first 8 months of 1993 its price went from 14 cents on the dollar to 44 cents on the dollar and in August alone rose from 25 cents to 44 cents before ending at 37 cents. See Voorhees, supra note 179, at 30. Trading volume in Russian debt was estimated at between $3 billion and $4 billion in 1993. See Tracy Corrigan, Risk and Reward: Secondary Market Investors Turn to Eastern Europe, FIN. TIMES, Sept 20, 1993, at 23.

181. Another minor market abuse, which will not be considered in any depth in this work, is parking. Parking involves a bogus sale of securities to another party. In January, 1993 the director of LDC trading at First Boston left the firm after allegedly "parking" some $9 million of Venezuelan securities in breach of SEC rules. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 4. In this case, the "sale" was made at year-end so that First Boston would not have to carry extraordinarily large reserves against its holding of these securities. The extraordinarily large reserves were called for by a quirk in accounting guidelines. For an analysis of the elements of parking, see Zornow & Obermaier, supra note 87, at 199-200. 182. EDNA CAREW, THE LANGUAGE OF MONEY 200 (1996).

183. Interview with XX, supra note 90 (XX was a former trader for this major trading house). See also Interview with WW, supra note 145.

184 Interview with XX, supra note 90.

185. Id.

186 See generally Zornow & Obermaier, supra note 87.

187 See id.

188 Interview with VV (name withheld on request) a trader in a boutique trading house, in New York, NY (apr. 1993)

189 Id. The screens did not quote "live" prices for Ecuadorian debt: prices were indicative only. Trades could be conclude only by subsequent negotiation with the trader who had posted the price. thus there was the potential for tis type of manipulation.

190. Id.

191 See Holland., Si[ra note 89 at 86

192 Securities Exchange Act of 1934 codified at 15 USC sec sec 78 a et seq. (1988).

193 Securities Exchange Act of 1934 sec 2(3) 15 USC sec 78b(3). (4) (1994); Thel, supra note 71, at 219

194. See Daniel R. Fischel & David J. Ross, Should the Law Prohibit "Manipulation" in Financial Markets?, 105 HARV. L. REv 503, 512-529 (1991). 195. See id. at 522-23; Thel, supra note 77, at 221.

196. See generally Thel, supra note 77 (arguing persuasively against Fischel & Ross' thesis); see also 8 Loss & SELIGMAN, supra note 26, at 3939 (accepting manipulation as a fact of life, stating that it "is probably as old as the securities markets . . ." and that "[t]o judge from this type of [recent] historical experience, manipulation seems no more capable of total eradication than its first cousin, fraud.' ").

197. See Thel, supra note 77, at 222-23; see also Franklin Allen & Douglas Gale, Stock Price Manipulation, 5 REv. FIN. STUD. 503 (1992); Franklin Allen & Gary Gorton, Stock Price Manipulation, Market Microstructure and Asymmetric Information, 36 EuR ECON. Rtv. REv. 624 (1992); Robert A. Jarrow, Market Manipulation, Bubbles, Corners, and Short Squeezes, 27 J. FIN. & QUANTITATIVE ANALYSIS.Ys 311 (1992).

198. Rex v. de Berenger, 105 Eng. Rep. 536 (KB. 1814). 199. Id. For an excellent summary of the history of regulation of market manipulation in the U.K. and the United States, see 8 Loss & SEI IGMAN, supra note 26, at 3942-52. 200. 8 Loss & SELIGMAN, supra note 26, at 3949. 201. See 8 id. at 3947.

202. See Goddard v. United States, 86 E2d 884 (lOth Cir. 1936); Harris v. United States, 48 F.2d 771 (9th Cir. 1931).

203. The New York provisions were originally in the N.Y. Penal Law of 1909 and are now to be found in the N.Y. General Business Law. N.Y. GEN. Bus. 339 (McKinney 1998). 204. United States v. Brown, 5 F.Supp. 81,85 (S.D.N.Y. 1933), aff'd, 79 E2d 321 (2d Cir.1935). The conviction was affirmed on appeal but the Second Circuit expressly declined to address the issue of general market manipulation as a crime, preferring to base their decision on the narrower grounds of touting, wash sales, and the like. Nonetheless, the appellate court did not overrule "the district court's holding to the effect that interference with a free and open market by manipulative trading is itself fraudulent." See 8 Loss & SELIGMAN, supra note 26, at 3949. Judge Woolsey's statement appears to represent the U.S. common law today. 205. See Thel, supra note 77, at 291, 291 n.345.

206. Rule lOa-1 prohibits short sales of exchange listed stocks except on or after an up-tick, 17 C.ER. 240.10a-1 (1998). Rule 15cl-8 prohibits broker-dealers in certain circumstances from offering securities represented to be at the market price, unless an independent market exists, 17 C.ER. 240.15cl8 (1998). SEC Fraud and Misrepresentation Rule, 17 C.ER. 240.15cl-2 (1998). Several rules are no longer in effect. See SEC Rule lOb-21 (T) regulated short-selling in connection

with secondary offerings into the market, 17 C.F.R . 240.10121 (T) (removed and reserved, 62 ER. 520, 543 (1997)); Rule lOb-2 prohibited the payment of compensation to a person for soliciting a third person to purchase a security on an exchange, 17 C.ER. 240.10b-2 (removed and reserved, 58 Fed. Reg. 18145 (1993)).

207. Securities Act of 1933 1 17(a), 15 U.S.C. 77q (1994); Securities Exchange Act of 1934 10(b),15(c) (1)-(2) (1994); Rule lOb-5,17 C.ER. 240.10b-5 (1998).

208. See generally Zornow & Obermaier, supra note 87. 209. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977). 210. See Thel, supra note 77, at 293. 211. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). 212. Securities Exchange Act of 1934 9(a) (1), 15 U.S.C. 78(i) (a) (1) (1994). 213. Securities Exchange Act of 1934 32(a), 15 U.S.C. 78ff(a) (1994).

*+LWC;ev J tS 194 ut-.

216. There is no evidence that the Federal Reserve approved, or was even aware, of current trading practices in the market. Contrast the approach taken seven years later by Gerald Corrigan, President of the New York Federal Reserve Bank. See infra Part III.B.

217. The author's inquiries of officers within the Federal Reserve, who it was suggested had been involved in investigations into this market in the early 1990s, were always met with a curt "no comment" or a profession of, something the author finds unlikely, ignorance.

218. Some of the regulators, however, were at least keeping an interested and astute eye on developments. The OCC was well informed about the market, as the insightful addresses in 1987 of the Comptroller and Deputy Comptroller to various conferences and congressional subcommittees bear out. See International Bank Lending: Hearings Before the Subcomm. on Financial Institutions Supervision, Regulation, and Insurance of the House Comm. on Banking, Finance, and Urban Affairs, 98th Cong. (1983) (statement of C. Todd Conover, Comptroller of the Currency); Exchange Rates and Third World Debt: Hearings Before the Subcomm. on International Finance and Monetary Policy of the Senate Comm. on Banking, Housing, and Urban Affairs, 100th Cong. (1987) (statement of Robert R. Bench, Deputy Comptroller of the Currency); Robert R. Bench, Debt/Equity Conversion: A Strategy for Easing Third World Debt, 1987 HERITAGE FOUNDATION CTR FOR INT'L EC>ON. GROWTH 60.

219. See Debt Police, supra note 41, at 47. 220. See Interview with YY, supra note 95.

221. See Mike Zellner, No More Mr. Nice Guy, IATnNFIN., Sept. 1990, at 46, 46. For more on these manipulations of the Ficorca program, see Martin Schubert, The Mexican Debt Crisis and Debt/Equity Conversions One Year Later, Address Delivered at the 43d Annual Plenary Meeting of the Mexico-United States Business Committee 24-25 (Nov.4-7, 1987) (transcript on file with author); Loans by U.S. Banks, supra note 83.

222. See Interview with YY, supra note 95. 223. See id.

224. See Corrigan is Watching, L-AiFr., Jan./Feb. 1992, at 43, 43; Corrigan had apparently been stimulated to act by the reporting of market abuses by Peter Truell in The Wall Street Journal. See Interview with T.S. Link, supra note 38. 225. See Corrigan is Watching, supra note 224, at 43.

226. See James R Krause, Fed Probes Third World Debt Trades at Top Banks, AM. BAt,Jan. 17, 1992, at l, 9.

227. See id. Contrast the regulatory regime for stock exchange specialists, which imposes upon them a raft of special regulations and enforces these through random detailed one-week inspections of each specialists' activities and books. These random inspections are conducted by the exchanges about eight times each year. See also Hazen, supra note 7, at 534-35.

228. Interview with T.S. Link, supra note 38. 229. See Interview with Lee C. Buchheit, supra note 47. 230. See Interview with Michael Chamberlin, supra note 102. 231. Interview with YY, supra note 95. 232. Krause, supra note 226, at 9.

233. See Corrigan Issues Regulatory Threats Over Swaps, LDC Debt Markets, THOMSON'S INT'L BANKING Rros, Feb.17, 1992, available in LEXIS, Bankng Library, IACBN File. Corrigan was, by now, also the new Chairman of the Basle Committee of Banking Supervisors. 234. Interview with YY, supra note 95.

235. See Kleiman, supra note 94. While the New York Federal Reserve sent a letter to CEOs of New York based banks on March 20, 1992 registering concern over certain trading activities, the Federal Reserve did not appear particularly interested in taking on the formal regulation of the market. See Mary Ambrosio, Guidelines for Trading LDC Debt Should Be Issued this Summer, THOMSON'S INT'L BANKING REGULATOR, June 22, 1992, available in LEXIS, Bankng Library, IACBN File. There were unconfirmed rumors that the LDC debt market was being used for the laundering of drug proceeds. See Henry Tricks, Budding LDC Debt Market Seen Ripe for Regulation, REuTRs, June 9, 1992, (visited Oct. 30, 1992) (citing Scott MacDonald, of the OCC).

236. See Interview with T.S. Link, supra note 38. 237. See Interview with Michael Chamberlin, supra note 102. 238. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 1. 239. See Tricks, supra note 235.

240. See BuLLIN (Emerging Markets Traders Ass'n), 3d Quarter 1993, at 1. See also Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 1. Cf. Ambrosio, supra note 235. See also Michael M. Chamberlin, Regulating the Emerging Markets Trading Industry (July 13, 1994) (unpublished manuscript, on file with author).

241. See Voorhees, supra note 224. Other sources have identified the trading house as Eurinam, and thus the chairman in question as Martin Schubert. 242. See id.

243. Debt Police, supra note 41, at 49.

244. Regulatory initiatives of a general kind to control the debt crisis and ensure the survival

of the financial system in the 1980s are beyond the scope of this work. However, there are parallels with the regulation of this market. The regulation of the debt crisis was characterized by inaction and promising proposals never implemented. See generally Lee C. Buchheit, Alternative Techniques in Sovereign Debt Restructuring, 1988 U. ILL. L. Rtv. 371, 379-80 (1989) (characterizing U.S. regulatory policy regarding LDC lending as schizophrenic within the context of the Allocated Transfer Risk Reserve (ATRR)); Manuel Monteagudo, The Debt Problem: The Baker Plan and the Brady Initiative: A Latin American Perspective, 28 IN'L LAw. 59, 65-66, 77-78 (1994) (discussing the creation and relative ineffectiveness of the International Lending Supervision Act (ILSA) and the ATRR); and Impact of Accounting and Regulatory Procedures on the Third World Debt Problem Before the Subcomm. on Int'l Dev., Fin., Trade and Monetary Policy of the House Comm. on Banking, Fin. and Urban Affairs., 101 st Cong. (1989) (statement of Allan Mendelowitz, Director, Trade, Energy and Finance Division, U.S. General Accounting Office). In short, the topic of the creation, carrying and subsequent trading of LDC debt had a long history of being put in the "too-hard" baskets of regulators. 245. See Debt Police, supra note 41, at 49.

246. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 4. See also Zornow & Obermaier, supra note 87, at 196.

247. While the debt crisis shook the international financial system to its core, the subsequent trading in the debt has had no similar effects.

248. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 4. 249. See Kelley Holland, The LDC Debt Market: It's a Jungle Out There, Bus. WK., Mar. 15, 1993, at 86, 86-87.

250. In the words of Alex Rodzianko, "[i In theory, there's no need for a policing function in a private market, as there would be in a public market." Debt Police, supra note 41, at 49.

251. One market observer notes, "[w]ith mainline banks like J.P. Morgan actively promoting the sale of Latin debt as high-yield investment securities, the LDC market is no longer an interbank affair." Id.

252. A "broker" is defined in the '34 Act to include any person, other than a bank, in the business of buying and selling securities for others. Securities Exchange Act of 1934 3 3(a) (4), 15 U.S.C. 78c(a) (4) (1997). See also HAZEN, supra note 7, at 397. A "dealer" is defined in the '34 Act to include any person, other than a bank, in the business of buying or selling securities for his or her own account. Securities Exchange Act of 1934 3(a) (5), 15 U.S.C. 78c(a) (5) (1997). See also HAZEN, supra note 7, at 397. Banks may now fall within these definitions in some situations. See id. at 399.

253. Section 15(a) requires registration of all broker-dealers who are engaged in business involving securities transactions. Securities Exchange Act of 1934 1 15(a), 15 U.S.C. 78o(a) (1997). See generally, HAzEN, supra note 7, at 380.

254. The credibility of this perspective depends upon one's view of the foresight of regulators.

255. As is customary with U.S. legislation, this Act is commonly referred to by the names of

the members of Congress who put it forward. Its central provisions are to be found in sections 19, 20, 21 and 32 of the Banking Act of 1933. Section 19 prohibits national banks from making loans on securities to brokers or dealers in securities; section 20 prohibits affiliates of banks from being principally engaged in issuing, underwriting or publicly selling securities; section 21 prohibits securities firms from taking deposits; and section 32 prohibits individuals in the securities business from serving as directors, officers or employees of a bank. Banking (Glass-Steagall) Act of 1933, 12 U.S.C. 374(a), 377, 378, 78 (1994).

256. After the Crash of 1929, U.S. regulators came believe that the separation of underwriting from deposit taking would insulate deposit taking institutions from undue risk and lead to a more stable system.

257. The Federal Reserve System is comprised of 12 banks and 25 branches. 258. See Zornow & Obermaier, supra note 87, at 196. In the words of Richard Breeden, former Chairman of the SEC, " [w] e have to be terribly, terribly sensitive to the fact that we are entrusted at the public level with responsibility for promoting the stability of the market and the safety of the public's funds, whether they are in a bank, a securities firm, a commodities firm or an insurance company, and there is an economic and macroeconomic purpose that is very important to protecting that stability." Administrative Conference of the United States Colloquy: Globalization of Securities and Financial Market Regulation in the 1990s, 10 ANN. REv. BANKING L. 345, 365 (1991). 259. See RM. PECCHIOLI, PRUDENTIAL SUPERVISION IN BANKING 156 (1987). 260. See id.

261. See generally HAZEN, supra note 7, at 254 (discussing the requirements of registration and distribution of a spin-off corporation). 262. See id. at 385. 263. See id. at 385-387.

264. One proposal is for one single standard-setting organization with a separate enforcement agency. See the comments of Judge Stanley Sporkin in Administrative Conference of the United States Colloquy: Globalization of Securities and Financial Market Regulation in the 1990s, 10 ANN. REv. BANC L. 345, 348 (1991). The proposal of the Chicago Mercantile Exchange calls for one cabinet level department, the Federal Financial Regulatory Service, with eight divisions created along functional lines-so that all activity of the one type is regulated by the one division. See Michael H. Moskow, Rethinking Bank Regulation in an Era of Change, Presented at Positioning Financial Institutions for Turbulent Times 1-6 (May 31,1996) (on file with author).

265. Mission Statement reproduced on inside front cover of EMERGING MARKETS TRADERS AssoCIATIoN, 1993 ANNUAL REPORT (1994). The EMTA is exempt from federal income tax under

501 (c) (6) of the Internal Revenue Code and from state and local taxes under similar provisions of state and local tax laws. Id. at 20.

266. See Michael M. Chamberlin & Thomas E. Winslade, Regulating the LDCDebt Markets, INT'L FIN L. REV., Aug. 1992, at 16.

267. Dead Credits Society, LATINFlN.,Jan./Feb., 1991, at 8. The initial officers of the Association were: Nicolas Rohatyn (.P. Morgan) chairman, Stephen Dizard (Salomons) and Peter Geraghty (NMB) vice chairmen, Kathy Galbraith (Chase Manhattan) treasurer, and Alex Rodzianko (Manufacturers Hanover) secretary. See id.

268. This name change was in line with the general change in name for the LDC debt market.

269. Id. at 14.

270. EMERGING MARKETS TRADING ASSOCIATION,, 1996 ANNUAL REPORT 6 (1997). 271. EMERGING MARKETS TRADING ASSOCIATION, 1993 ANNUAL REPORT 5 (1994); and EMERGING MARKETS TRADING ASSOCIATION, 1996 ANNUAL REPORT 30 ( 1997) . 272. The Breakfast Club, LATINFiN., Mar. 1991, at 63, 63. 273. Hugo Verdegaal, a member of the LDC Debt Traders Association, was asked in the interview, "Isn't there an element of self-regulation here, in the sense that you are making market

practices more uniform?" His reply: "I would say no-not in the way you do business in a day to day basis, or in the way it relates to the laws and regulations of the country in which you are operating." Id. Yet the professed aim of the Association, given by Nicolas Rohatyn in answer to the preceding question, was to make the trading in loans and bonds more simple, smooth and efficient by agreeing on various market practices, which definitely impacts on the way business is done day-to-day. Id.

274. 3 WILLIAM SHAKESPEARE, THE COMPLETE OXFORD SHAKEsPFsE 1143 (Stanley Wells & Gary Taylor eds., Oxford Univ. Press 1987) (1604). Some commentators believe that the EMTA was formed in response to pressure from the Federal Reserve Bank of New York. On this point and on earlier ideas for a traders' association see The Making of a Market, INSTITUMONAL INVESTOR, Apr. 1994, at 66, 66. Certainly, EMTA's work on a Code of Conduct for the Market was undertaken at the behest of the Federal Reserve Bank of New York. 275. The Federal Reserve Board reportedly conducted a short-lived examination of the market in 1990. See Peter Truell, Fed Is Investigating Trading Practices in Market for Developing-Country Debt, WALL ST. J., Feb. 19, 1993, at A3 [hereinafter Fed is Investigating]. In the semi-annual LatinFinance survey of LDC debt traders published in March 1991, three out of four respondents expected additional scrutiny of the market in the future by the US government because of the growing business in Brady bonds and the growth of the market for non-bank investors. In mid-1990 articles began to appear in newspapers and journals raising the specter, from the trader's perspective, of a pressing need for external regulation. See U.S. Grand Jury, supra note 80; Loans by U.S. Banks, supra note 82 ("the Federal Reserve is looking into some suspected irregularities and improprieties in the so-called secondary loan market." Id.); see also Debt Police, supra note 41.

276. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association (Sept. 30, 1992) (on file with author) (" [f]or the past nine months, the Board has been working with the Association's legal counsel to develop a Code of Conduct. . .").

277. See id.

278. See Bruce Wolfson, Paving the Paper Trail, LATItv FIN., Apr., 1991, at 49, 51. 279. See Memorandum from Nicolas S. Rohatyn, Chairman, LDC Debt Traders Association, Market Practices Approved to Date-Bulletin #1, to Members of the LDC Debt Traders Association (June 27, 1991) (on file with author). The practices specified included the following: (1) confirmations to be sent by seller within 24 hours of trade date; (2) execution of confirmations by buyer not necessary unless otherwise agreed or required by law; (3) standard settlement period for loan assets to be three weeks from trade date; (4) for bond sales, instructions to be submitted to appropriate clearing house within 48 hours of the verbal agreement on the trade; (5) the relevant default interest rate to be paid by a non-settling bond buyer to the seller is the Euroclear Overdraft Rate; (6) a non-settling bond seller should pay compensation to the buyer for damages occurred, with compensation claims to be filed within 30 days of actual settlement; and (7) for loans, the counterparty obliged to pay over interest amounts should do so promptly, irrespective of whether it has received the interest, provided: (a) such interest has in fact been paid by the agent or servicing bank; and (b) the parties are able to verify where in the assignment chain such interest was paid.

280. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Recommended Treatment of Interest on Interest for Argentina Medium-Term Debt (June 17, 1992) (on file with author). 281. Including the final trading date, expiry date, netting procedures, pricing of accrued

interest and the like for when-issued trades. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Recommended Trading Practices Argentina 1992 Financing Plan (July 16, 1992) (on file with author).

282. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Recommended Trading Practice Concerning Pricing of Accrued but Unpaid Interest on Debt to be Exchanged for Bonds Under the Argentina 1992 Financing Plan (Sept. 1992) (on file with author); Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Market Practice Concerning Issuance of Argentina Brady Bonds into Escrow (Feb. 1993) (on file with author).

283. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Recommended Trading Practice Concerning Settlement of When-Issued Trades of Bonds to be Issued Under Brazil's 1989/1990 Interest Arrangements (Oct. 1992); Memorandum, Recommended Trading Practice Concerning Settlement of When-Issued Trades of Bonds to be issued on the First Exchange Date Under Brazil's 1989/1990 Interest Arrangements (Nov. 18, 1992) (on file with author).

284. See Memorandum from the Emerging Markets Traders Association to the Members of the Emerging Markets Traders Association, Recommended Trading Practice Concerning Certain Payments Made Between Trade Date and Settlement Date for Loan Sales (Jan. 1993) (on file with author).

285. See Emerging Markets Traders Association Draft Memorandum, Market Practices for Options (Feb. 12, 1993) (on file with author). 286. See Chamberlin, supra note 240, at 3.

287. Virtually each quarterly Bulletins issued by the EMTA from 1994 onwards identifies at least one new market practice recommended by the Association.

288. See BuLLETrN (Emerging Markets Traders Ass'n.), 2d Quarter 1995, at 3; EMTA Recommends Shorter Settlt Period for Brady Bond Trades, PRESS RELEASE (Emerging Markets Traders Ass'n), May 2, 1995.

289. See BULLETIN (Emerging Markets Traders Ass'n), 4th Quarter 1995, at 3. 290. See BULLETIN (Emerging Markets Traders Ass'n), 3d Quarter 1994, at 2. 291. See Bul l:FTiN (Emerging Markets Traders Ass'n), 2d Quarter 1994, at 2. 292. See Bul:r F TILc*eriN (Emerging Markets Traders Ass'n), 3d Quarter 1994, at 2. 293. See EMERGING MARTS TRADERS ASSOCIATION, 1994 ANNUAL REPORT 1 (1995). 294. See Standard Terms for Assignments of Loan Assets (Emerging Markets Traders Ass'n) (on file with Law and Policy in International Business). See also BULLETIN (Emerging Markets Traders Ass'n), 1st Quarter 1995, at 4. These standard terms had been on the drawing board for years, and if the EMTA had been more active in its early years, the standard terms would have been in place to ameliorate the backlogs that developed in 1993. See Interview with Thomas Winslade, then Executive Director of the EMTA, in New York, N.Y. (Apr. 23, 1993). 295. See BuLLETIN (Emerging Markets Traders Ass'n), 4th Quarter 1994, at 2. 296. See BULLETIN (Emerging Markets Traders Ass'n), 3d Quarter 1996, at 6; BULLETIN (Emerging Markets Traders Ass'n), 4th Quarter 1996, at 8.

297. See Kilby, supra note 64, at 38; EMTA-Moving ahead, INT'L FIN. REV., Dec. 1995, at 74, 74. 298. See EMERGING MARKETS TRADERS AssocIATION, 1995 ANNUAL REPORT 13 (1996) . 299. See BULLETIN (Emerging Markets Traders Ass'n), 1st Quarter 1995, at 6. 300. Michael Chamberlin, EMTA Offers Electronic Matching for Brady Bonds and Loans, INT'L FIN. L. REv.,June 1996, at 48, 50.

301. See EMCC Receives Clearance, INT'L FIN. REv., Feb. 21, 1998, at 11; Lift off-At Last, EMERGING MARKETS INVESTOR, Apr. 1998, at 5, 5.

302. See EnterpisingEMTA, EMERGING MARKETS INVESTOR, Sept. 1996, at 7, 7. 303. See EMCC Receives Clearance, supra note 301, at 11. 304. See BULLETIN (Emerging Markets Traders Ass'n), 3d Quarter 1997, at 5-6. See EMERGING MARKETS TRADERS ASSOCIATION, 1994 ANNUAL REPORT 9 (1995). See EMERGING MARKETS TRADERS ASSOCIATION, 1992 TRADING VOL. SURV., Sept. 15, 1993. 307. See BULLETIN (Emerging Markets Traders Ass'n), 3d Quarter, 1996, at 4. 308. See id; BULLETIN (Emerging Markets Traders Ass'n), 2d Quarter 1997, at 6. 309. See BULLETIN (Emerging Markets Traders Ass'n), 3d Quarter 1996, at 4.

310. EMERGING MARKETS TRADERs ASSOCiATION, CODE OF CONDUCT (1993) (on file with Law and Policy in International Business) [hereinafter EMTA CODE OF CONDUCT].

311. Part A(1) (c) of the Code provides that "[t]he Association is a voluntary trade association that does not have any formal rulemaking or enforcement powers. Accordingly, neither this Code nor the Market Practices recognized from time to time by the Association are legally binding on its Members or have the force of law. Nevertheless, in the interest of a fair and efficient market, all Members are expected to use their best efforts to comply with the letter and spirit of this Code .Id. pt. A(1) (c)

312. See EMERGING MT's TRADERS ASSOCIATON, Introduction to EMTA and the Emerging Markets, EMTA MANUAL, pt. I (1995). 313. See Chamberlin, supra note 240, at 6. 314. Id.

315 See EMTA code of conduct, supra note 310, pt A; Chamberlin, supra note 240, at 5

316. Chamberlin, supra note 240.

317 Id at 3.

318 See id. at 5

319 See id at 4. The Code does not have hte standing to superede other regulatory regimes.

320 Id at 110 n. 12, 11 n. 13 Tor more information, see the summary of the code's provisions in Zornow & Obermaier, supra note 87,

321 EMTA code of conduct, supra note 310, pt B(1).

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k-fl C:*tS;S`-;fA` it"t;:00` :; : 0V `Sl;S f: Cidiw no,*%, at 3.4. I.q-uw 1(5). tS:: >`*`'i:

325. These trading principles and procedures are set forth in part B of the Code. EMTA CODE OF CONDUCT, supra note 310, pt. B.

326. See Emerging Markets Traders Association Issues Voluntary Code of Conduct, supra note 96, at 4. 327. Michael Chamberlin says that the EMTA receives daily calls by traders in dispute over a transaction and that by pointing to the Code, the EMTA's Market Practices, or other external sources of guidance the EMTA is usually able to resolve the dispute (because most traders are willing to abide by recognized market and industry practice). See Interview with Michael Chamberlin, supra note 102.

328. See U.S. SENTENCING GUIDELINES MANUAL 8 SAl.1 (1998). 329. See Zornow & Obermaier, supra note 87, at 201. 330. U.S. SENTENCING GUIDEUNES MANUAL 8A1.2, cmt. 3K (1998). 331. Zornow & Obermaier, supra note 87, at 200, 201. 332. Id. at 202.

333. The EMTA's founding Chairman, Nicolas Rohatyn, and Executive Director, Thomas Winslade, came from Morgan Guaranty.

334. SeeInterviewwith Felix Robyns, supra note 177; Interview with Felix Robyns, supro note 177; Interview with YY, supra note 95. 335. See Tim Herrington & Richard Parlour, The Regulation of Glob Trading and Investment, 7 J. INT'L BANKING L. 9, 11 (1992).

336. See EMERGING MARKETS TRADERS ASSOCIATION, 1993 ANNUAL REPORT 17 ( 1994) .

337. See Interview with Michael Chamberlin, supra note 102. 338. See Interview with T.S. Link, supra note 38. 339. See id.

340. See Interview with Michael Chamberlin, supra note 102. 341. See Interview with Thomas Winslade, supra note 294.

342 Interview with ZMichael Pettis, now a Mangingh director of bear Stearns & Co, in New york, NY (Apr. 24. 1993

* Associate Professor of Law, Co-Director, Centre for Transnational Business Law, Bond University, Gold Coast, 4229, Australia. An abridged version of this material will appear in a forthcoming book, tentatively titled EmergingMarkets Debt- An Analysis of the Secondary Market, to be published by Kluwer Law International, London, in early 1999. While the views and opinions herein are solely mine, I would like to thank Ian Cameron for his helpful comments on earlier drafts, Michael Hobson for his assistance with the footnotes, the Emerging Markets Traders Association, in particular Michael Chamberlin and Jonathon Murno, for generously providing funding and materials to assist the research for this article, and the sponsors of the Coral Sea Scholarship for a scholarship that funded three months in the United States, which the foundational research for this and other articles facilitated. I would like to dedicate this article to Ian Cameron in recognition of his central role in its conception.

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