The Origin of Insider Trading

The Philippines Sugar Estates Development Company

In September 1903, Francisco Gutierrez Repide, a Spanish national, purchased 800 shares of the Philippines Sugar Estates Development Company from a British national, Eleanor Erica Strong.

But it wasn’t quite that simple.

Strong’s agent, another British national, who had the authority to broker sales on her behalf, had offices in the same Manila building as Repide, which is likely how Repide came to know of the available shares. But Repide went to great lengths to disguise his involvement in the acquisition. Inquiries to Strong’s agent were made through an independent broker who was hired by Repide’s brother-in-law and the shares were then transferred to Repide’s brother in Spain before finally coming into his control.

It is difficult to precisely measure the value of these shares retrospectively, given the exchanges were executed in Mexican, Spanish, and United States currencies, but the U.S. Supreme Court would later estimate that Repide paid the equivalent of around $2000. More importantly, according to the court, in less than two months time, the value of those 800 shares purchased from Strong increased by approximately 3800%, to more than $137,000 (the equivalent of about $5 Million today).

How did Repide know Philippines Sugar Estates Development stock was about to go to the moon?

Well, he was the President (and by all indications at that time the sole active employee) of the Philippines Sugar Estates Development Company.

I.

Philippines Sugar Estates Development was a real estate holding company, incorporated in the United States, which was founded by Repide and a small cadre of fellow European settlers for the express purpose of buying distressed assets from other colonists, particularly religious orders, as they were fleeing the Philippines under threat from Filipino revolutionaries and/or American occupation forces. In January 1901, the Company executed its largest acquisition, as the Dominican Friars withdrew from Luzon island. Philippines Sugar Estates Development purchased the largest tract of the 400,000 or so acres which would come to be known as the “Friar Lands.”

Repide and his fellow directors, as well as a handful of smaller speculators, rightly anticipated that while the U.S. government would have happily allowed the Friar Lands to be repatriated from the tyrannical Catholic Church, they would not allow them to be “socialized” from legitimate private property-holders. To avoid this, the U.S. Governor General, William Howard Taft, would negotiate a purchase from the speculators. The initial offer was roughly $6 Million for the combined plots.

As the largest claimant, Philippines Sugar Estates Development Company, represented by Repide, became the lead negotiator for all the property-holders and, by the Summer of 1903, the only holdout. In September, when he was orchestrating the purchase of Strong’s shares, Repide (and Repide alone) knew that the only thing standing in the way of a windfall for the Company’s shareholders was his negotiating tactics.

In October, the U.S. increased their offer to $7.5 Million (around $270 Million today), and Repide accepted. The deal was executed in December, liquidating the Philippines Sugar Estates Development Company upon completion. 800 shares were worth roughly $143,000.

Even before Repide elaborately grifted Strong of her measly 800 shares, he owned more than 30,000.

II.

It is not clear that Eleanor Erica Strong ever set foot in the Philippines. Nor in the United States. She died in London in 1915. It was her American husband, Dr. Richard Pearson Strong, who purchased the Philippines Sugar Estates Development Company shares on her behalf. He first traveled to the Philippines shortly after graduating from Johns Hopkins Medical School. He had enlisted as an army surgeon near the outset of the Spanish-American War, but was quickly promoted to co-director of the Army Pathological Laboratory, a position he remained in until December 1902, after which he stayed in Manila for most of the next decade as a civilian studying and treating dysentery, cholera, and pneumonic plague.¹

While the Strongs were co-plaintiffs in the eventual case against Repide, their relationship is pretty mysterious. I have found no mention of Erica in any of the obituaries or other biographical materials about her husband, who remarried shortly after her death. If the couple ever cohabitated, the period was very brief, as Richard spent the vast majority of their married years living in Manila, though he does seem to have made occasional trips back to Europe, especially London and Berlin, during which they were presumably reunited.

Given the pace of international mails, it’s possible that the Strongs did not even know their stake in the Philippines Sugar Estates Development Company had been sold by their agent until after the Friar Lands transaction was complete.

But as somebody who resided in the Philippines throughout the tumult of American invasion and occupation, Dr. Strong was well positioned to figure out, in due time, what had taken place, and they filed suit against Repide a few months later, in January of 1904. The local court in Manila found in favor of the Strongs that year, but Repide (now a multimillionaire) doggedly appealed and eventually, as the Philippines was then a U.S. territory, the case was heard by the U.S. Supreme Court.

III.

Strong v. Repide was argued in March of 1909. The decision, in favor of the Strongs, was delivered two months later. It was written by Rufus Peckham, one of the last he would author prior to his death later that year.

Via this ruling, the concept of insider trading enters U.S. jurisprudence.

As Peckham puts it, “The probable value of the shares in the very near future was thus unknown to anyone but the defendant.”

Though the defendant never spoke any outright deceit (the most common grounds for fraud), the lower court found he “had been guilty of fraud in concealing certain facts from the seller,” and the intent of this concealment was evident in the elaborate effort to disguise the true identity of the buyer. Peckham affirms this as ground for fraud.

But Justice Peckham, reputed to be one of the most business-friendly justices of the Gilded Age, is careful to depart from the ruling of the lower courts which asserted that any executive of a publicly-traded corporation had a duty to disclose conflicts of interests in personal transactions and to not knowingly harm the interests of shareholders.

Peckham does not endorse this more expansive conception of an insider. Instead suggesting a very narrow definition. Somebody who has almost exclusive decision-making power, personally owns a majority stake in the company, and is in the process of a negotiation for the sale of the entire property of the company. These are very rare circumstances indeed.

So, though this is the decision which establishes a standard of insider trading, that standard is so narrow that, in practice, the decision was treated as permission to continue and even increase a wide variety of deceitful and manipulative practices in securities trading. The next two decades were the peak of market manipulation in U.S. finance.

The peak, at least, until now.

1. While Dr. Strong would have a long career as a Harvard professor, and would receive commendations from governments in Asia, Africa, and the Americas for his work on various epidemics, he is most remembered for a cholera vaccine trial on Filipino prisoners which resulted in half of they dying from bubonic plague.