Securities and Exchange Commission v. Obus, et al., No. 10-4749 (2d Cir. 2012)
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The SEC filed a civil enforcement action against defendants alleging insider trading in violation of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5. The SEC alleged that Defendant Strickland learned material non-public information in the course of his employment and revealed it to Defendant Black, his friend and hedge fund employee, and that Black in turn relayed the information to his boss, Defendant Obus, who traded the information. The court held that the SEC's evidence created genuine issues of material fact as to each defendant's liability under the misappropriation theory and therefore summary judgment for defendants was erroneous. Accordingly, the court vacated and remanded.
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10-4749-cv SEC v. Obus 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term 2011 4 (Argued: November 18, 2011 Decided: September 6, 2012) 5 6 Docket No. 10-4749-cv -----------------------------------------------------x 7 SECURITIES AND EXCHANGE COMMISSION, 8 Plaintiff-Appellant, 9 10 11 12 13 14 15 16 -- v. -NELSON J. OBUS, PETER F. BLACK, THOMAS BRADLEY STRICKLAND, Defendants-Appellees, WYNNEFIELD PARTNERS SMALL CAP VALUE L.P., WYNNEFIELD PARTNERS SMALL CAP VALUE L.P. I, WYNNEFIELD PARTNERS SMALL CAP VALUE OFFSHORE FUND, LTD., Relief Defendants. 17 -----------------------------------------------------x 18 B e f o r e : 19 WALKER, RAGGI and CARNEY, Circuit Judges. The Securities and Exchange Commission ( SEC ) appeals from an 20 order of the District Court for the Southern District of New York 21 (George B. Daniels, Judge) granting summary judgment to defendants 22 Nelson J. Obus, Peter F. Black, and Thomas Bradley Strickland on 23 the SEC s claims of insider trading in violation of section 10(b) 24 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 25 Rule 10b-5, 17 C.F.R. § 240.10b-5. 26 established genuine issues of material fact with respect to its 27 claims of insider trading under the misappropriation theory. 28 VACATED and REMANDED. 1 We hold that the SEC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 DAVID LISITZA (Mark D. Cahn, Michael A. Conley, Mark Pennington, on the brief), Securities and Exchange Commission, Washington, DC, for Plaintiff-Appellant. JOEL M. COHEN, Gibson Dunn & Crutcher LLP, New York, NY (Mary Kay Dunning, Christopher Muller, Gibson, Dunn & Crutcher LLP, New York, NY, David Debold, Gibson, Dunn & Crutcher LLP, Washington, DC, on the brief), for Defendant-Appellee Nelson Obus. Mark S. Cohen, Sandra C. McCallion, Jonathan S. Abernethy, Cohen & Gresser LLP, New York, NY, for Defendant-Appellee Peter F. Black. Roland G. Riopelle, Sercarz & Riopelle, LLP, New York, NY, for Defendant-Appellee Thomas Bradley Strickland. JOHN M. WALKER, JR., Circuit Judge: The Securities and Exchange Commission ( SEC ) filed this 28 civil enforcement action against defendants Nelson J. Obus, Peter 29 F. Black, and Thomas Bradley Strickland alleging insider trading in 30 violation of section 10(b) of the Securities Exchange Act of 1934, 31 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. 32 alleges that Strickland learned material non-public information in 33 the course of his employment and revealed it to Black, his friend 34 and a hedge fund employee, and that Black in turn relayed the 35 information to his boss, Obus, who traded on the information. 36 District Court for the Southern District of New York (George B. 37 Daniels, Judge) granted summary judgment in favor of the defendants 2 The SEC The 1 on both the classical and misappropriation theories of insider 2 trading. 3 material fact as to each defendant s liability under the 4 misappropriation theory, and therefore that summary judgment for 5 the defendants was erroneous. We hold that the SEC s evidence created genuine issues of 6 7 VACATED and REMANDED. BACKGROUND I. Facts 8 We recite only those facts pertinent to this appeal. 9 non-moving party, the SEC is entitled to have all factual 10 inferences drawn in its favor. 11 Tech. Servs., Inc., 504 U.S. 451, 456 (1992). 12 As the undisputed unless noted otherwise. See Eastman Kodak Co. v. Image The facts are 13 14 A. 15 In May 2001, Strickland worked as an assistant vice president The Planned Acquisition of SunSource and GE Capital s Financing Bid 16 and underwriter at General Electric Capital Corporation ( GE 17 Capital ), a Connecticut-based company that provides corporate 18 financing. 19 Stmt. ) ¶¶ 3, 23-26, 82; Joint Appendix ( JA ) 351 27:13-17. 20 spring, Allied Capital Corporation ( Allied ) had approached GE 21 Capital about financing Allied s planned acquisition of SunSource, 22 Inc. ( SunSource ), a publicly traded company that distributed 23 industrial products. 24 Strickland was assigned to perform due diligence on SunSource as 25 part of the GE Capital team working on the SunSource/Allied Defendants Statement of Undisputed Facts ( Def. 56.1 That JA 373 70:18-71:4; 301 93:14-94:23; 2301. 3 1 financing proposal. 2 59:24-60:12; 646 113:6-8. 3 financial performance, but the parties dispute whether Strickland 4 was authorized to gather information about SunSource s management. 5 Def. 56.1 Stmt. ¶¶ 65-66; SEC s Response to Defendants Joint 6 Statement of Material Facts ( Pl. 56.1 Resp. ) ¶¶ 65-66; 353-54 7 31:4-32:5. 8 9 JA 299-300 88:2-89:5; 373 70:5-9; 454-55 His tasks included analyzing SunSource s In the course of his work, Strickland learned non-public information about SunSource, including the basic fact that 10 SunSource was about to be acquired by Allied. 11 that he understood that Allied s acquisition of SunSource was 12 confidential. 13 384 92:6-13. 14 Strickland received, was marked Extremely Confidential. 15 24. 16 Capital s employee code of conduct, which required employees to 17 safeguard company property [including] confidential information 18 about an upcoming deal. 19 22. 20 containing the companies about which GE Capital and its employees 21 possessed material non-public information, and which were therefore 22 off-limits for securities trading. 23 123:11-124:3; 730 122:6-123:4; 2342-43. 24 not placed on the Transaction Restricted List until June 19, 2001, 25 after Strickland and the GE Capital team had completed their due Strickland testified JA 314 146:8-10; 379-80 83:6-85:14; 383 90:4-91:2; Each page of the transaction s deal book, which JA 2308- In addition, Strickland had reviewed and annually signed GE JA 2270; see JA 314 148:10-22; 436 23:5- GE Capital also maintained a transaction-restricted list, 4 Def. 56.1 Stmt. ¶ 72; JA 554-55 SunSource and Allied were 1 diligence work and submitted a financing proposal to Allied. 2 56.1 Stmt. ¶ 71. 3 policies, SunSource should have appeared on the Transaction 4 Restricted List at an earlier date, and whether it was among 5 Strickland s responsibilities to add SunSource to the list. 6 56.1 Resp. ¶ 73; JA 371-72 67:14-68:7; 646 113:2-8; 730 123:1-9. Def. The parties dispute whether, under GE Capital Pl. 7 B. 8 In the spring of 2001, Black, a friend of Strickland s from 9 The Alleged Tip from Strickland to Black college, worked as an analyst at Wynnefield Capital, Inc. 10 ( Wynnefield ), which managed a group of hedge funds. 11 Stmt. ¶¶ 8-10, 12; JA 313 141:5-6; 933 23:10-19. 12 his due diligence research, Strickland learned from publicly 13 available sources that Wynnefield was a large holder of SunSource 14 stock. 15 Def. 56.1 In the course of JA 312 138:9-140:19; 399-400 123:19-124:16. On May 24, 2001, Strickland and Black had a conversation about 16 SunSource. 17 taking place face-to-face; Black recalled a telephone conversation. 18 Def. 56.1 Stmt. ¶ 98; Pl. 56.1 Resp. ¶ 98. 19 defendants dispute what was said during this conversation. 20 Br. at 44 n.5. 21 his opinion of SunSource s management as part of Strickland s due 22 diligence work. 23 third parties while performing due diligence, and that his practice 24 during such inquiries was to avoid revealing details by stating 25 only that GE Capital was potentially doing business with the We note that Strickland remembered the conversation The SEC and the Def. The defendants maintain that Strickland asked Black Strickland testified that it was common to contact 5 1 relevant company. 2 142:4-24; 315 149:19-150:1; 336 233:13-234:16; 851-52 148:2-149:4. 3 The SEC maintains that Strickland revealed material non-public 4 information by telling Black that Allied was about to acquire 5 SunSource. 6 testimony that contacting large shareholders was not standard due 7 diligence practice at GE Capital and that Strickland and Black 8 discussed SunSource after GE Capital had completed its financing 9 proposal. Def. 56.1 Stmt. ¶¶ 100-102, 104-106; JA 313 Pl. 56.1 Resp. ¶¶ 100-102, 104-106. The SEC relies on JA 301 93:12-16; 463 77:2-6, 574 162:21-163:12; 745-46 10 153:23-154:19; 2325-30. 11 following Strickland and Black s May 24 conversation, described 12 below, raise a strong inference that Strickland told Black about 13 the SunSource/Allied acquisition. The SEC further argues that events 14 C. 15 Obus was Wynnefield s principal and Black s boss. The Alleged Tip from Black to Obus Def. 56.1 16 Stmt. ¶ 1; 934 24:2-16. 17 with Strickland, Black relayed the information he had learned to 18 Obus. 19 1030 42:19-43:19. 20 questions about SunSource s management led Black to suspect (based 21 on SunSource s prior public actions) that SunSource was considering 22 a transaction that would dilute existing shareholders. 23 148:25-150:3. 24 Obus. Immediately after Black s conversation JA 852 149:21-150:2; 861-62 163:22-165:11; 981 118:15-25; Black maintains that Strickland s general JA 852-53 Black testified that he conveyed this suspicion to JA 852 149:21-150:3. The SEC contends that Black told Obus 6 1 that SunSource was about to be acquired by Allied. 2 ¶¶ 111-112. Pl. 56.1 Resp. 3 D. 4 Later that same day, Obus called Maurice Andrien, SunSource s Obus s Call to Andrien 5 CEO. 6 854 152:8-18; 1360 169:7-10. 7 Obus regularly spoke to Andrien about the company. 8 ¶ 121. Obus and Andrien gave different accounts of this phone 9 call. Obus testified that the information from Black led him to Def. 56.1 Stmt. ¶ 122; JA 850 146:12-147:23; 853 150:4-12; As a large SunSource shareholder, Def. 56.1 Stmt. 10 believe that SunSource was considering a transaction that would 11 dilute the value of its public shares, and he called Andrien to 12 voice his concerns. 13 46:10; 1088 139:3-13; 1360-61 169:11-171:3. 14 Obus informed him that Wynnefield had been tipped about SunSource s 15 imminent acquisition: JA 853 150:4-23; 1030-31 43:20-23; 1032 45:20Andrien testified that 16 17 18 19 [I]t was a very funny conversation. And he [Obus] said that he never had a conversation like this before, and didn t know whether he should be having it. 20 21 22 23 He said[,] I always knew you guys would sell SunSource Technology Services [a subsidiary of SunSource] if you could, but I never figured you d sell the whole company. 24 25 26 27 And I said, Nelson, that s just not the kind of thing that I could ever discuss under any circumstances with you. Whether we did, or we didn t, I just refuse to comment about that. 28 29 30 31 He said, well, a little birdie told me that you guys are planning to sell the company to a financial buyer. I said, a little birdie; he said, a little birdie in Connecticut. 7 1 2 3 I said, a little birdie in Connecticut, and he said --I might have even said[,] who would tell you something like that. And he said GE. 4 5 JA 1449 134:11-135:2; 1721-22 542:14-544:17. 6 buyer referred to a buyer planning to add SunSource to an 7 investment portfolio, as opposed to a strategic buyer looking to 8 acquire SunSource for its assets and business capabilities. 9 1355 159:2-19. The term financial JA Black overheard what Obus said on the phone to 10 Andrien. 11 Obus said that a guy from a big conglomerate in Fairfield might 12 be working with SunSource and that Obus hoped SunSource would not 13 dilute shareholders. 14 124:8. 15 Consistent with Obus s testimony, Black testified that JA 853 150:4-12; 863 168:2-8; 983-84 123:19- In any event, whether the Obus call to Andrien was as 16 described by Black and Obus or as described by Andrien, Black was 17 shocked to hear Obus make the call, and tried to signal Obus to 18 stop talking. 19 Obus hung up, Black said, what are you doing? . . . You realize, 20 you know, my friend is going to be fired. 21 Obus then became ashen and very upset because he realized it 22 was a kind of call that could be traced back to Strickland. 23 853 151:1-5; 1365-66 179:21-180:2. 24 fired, Obus would offer Strickland a job at Wynnefield or would 25 help Strickland find another job on Wall Street. 26 987 130:4-10. JA 853 150:13-151:10; 862-63 165:25-167:7. 8 After JA 853 150:13-151:3. JA Obus said if Strickland were JA 853 151:6-10; 1 E. 2 On the same day that Obus spoke with Andrien, Andrien also Weber s Call to Andrien 3 took a call from Alan Weber, a business acquaintance of Obus s and 4 another large investor in SunSource. 5 518:20-519:10; 1710 521:8-522:7. 6 he hoped that SunSource would not be sold to a financial buyer--the 7 same term Andrien recalled Obus using in his phone call. 8 125:16-23; JA 1716-17 533:5-535:2. 9 Obus led Andrien to be fairly certain that news of the planned JA 1140-43 226:7-229:15; 1709 On the call, Weber told Andrien JA 1448 The two calls from Weber and 10 SunSource/Allied acquisition had been leaked. 11 552:7. JA 1724-26 549:21- 12 F. 13 On June 8, 2001, two weeks after the conversation between The June 8, 2001 Trade 14 Strickland and Black, a trader at Cantor Fitzgerald contacted 15 Wynnefield offering 50,000 shares of SunSource at $5.00 per share. 16 JA 2231 70:5-71:8; 2249-50 107:5-108:23. 17 $4.75 per share, and ultimately purchased at that price a total 18 block of 287,200 shares, about five percent of SunSource s 19 outstanding common stock. 20 216:1-7; 2231 70:5-71:8; 2249 106:4-107:23; 2407. 21 that he was unaware of the pending acquisition when he made the 22 trade and that his decision to buy had nothing to do with 23 Strickland s conversation with Black. 24 214:18-215:7; 1138 222:12-15. 25 represented about the same number of shares as Wynnefield had Wynnefield counteroffered JA 1126 201:11-16; 1130 208:2-6; 1134 Obus testified JA 1132 211:9-17; 1133-34 The June 8, 2001 purchase 9 1 bought in October 2000, the last time Obus believed he had seen 2 such a large block of shares available for purchase. 3 201:7-16; 1127-28 204:15-205:5; 1137 221:5-7; 2407. 4 2001, Wynnefield sold 6,000 shares of SunSource. JA 1126 On June 11, JA 2407. 5 G. 6 On June 19, 2001, Allied publicly announced that it was Allied s Acquisition of SunSource 7 acquiring SunSource for $10.38 per share in cash or stock. 8 2344. 9 increase of $4.54 (or 91.5 percent) over the prior day s closing JA SunSource s stock closed that day at $9.50 per share, an 10 price. 11 purchase of SunSource stock nearly doubled in value (from the $4.75 12 purchase price to $9.50), producing a paper profit to Wynnefield of 13 over $1.3 million. 14 purchased another 150,000 shares of SunSource at prices over $9.40 15 per share. JA 1856-57 812:15-814:21. JA 2407. Wynnefield s June 8, 2001 On June 19 and June 20, Wynnefield JA 2407. 16 H. 17 In June or July 2001, Obus contacted Andrien to ask when the Obus s Call to Russell 18 merger with Allied would close; Andrien referred Obus to Daniel 19 Russell, Allied s CFO. 20 and 21 testified that he called to express his preference to be paid in 22 Allied stock, rather than in cash, and to ask that Allied extend 23 the closing date of the merger to lower Wynnefield s tax 24 liabilities. 25 testified that Obus told him that Obus was tipped off to the deal JA 1232 378:11-379:14; 1804 709:4-24. Russell s recollections of their phone call differ. JA 1232 379:11-18; 1373-74 195:14-196:16. 10 Obus Obus Russell 1 between Allied and SunSource, and when Russell asked what that 2 meant, Obus changed the subject. JA 2190 202:6-204:1. 3 I. 4 In July and August 2002, the SEC subpoenaed Obus and Black The 2002 SEC Subpoenas 5 about the SunSource trades. 6 2002, Strickland also received an SEC subpoena and contacted Black 7 to arrange a meeting. 8 told Obus about Strickland s request to meet, realizing that 9 Strickland might want to discuss the subpoenas. JA 2410-19; 2429-34. On August 8, JA 2420-28; 837-38 123:14-125:15. Black JA 849-50 144:22- 10 145:22; 998-99 153:10-154:10; 1093 147:6-19; 838 125:16-24. 11 and Black agreed that Black should try to avoid discussing 12 SunSource or the subpoenas and encourage Strickland to be truthful. 13 JA 1095 150:5-18; 1100 158:4-21; 1102 161:1-9; 1369 187:4-14; 1370 14 188:14-25. 15 Obus At their meeting, Strickland told Black that he had informed 16 GE Capital s counsel that he did not recall any conversation about 17 SunSource. 18 127:18. 19 SunSource in May 2001, before the acquisition was announced. JA 20 317 159:18-23; 401 127:3-18; 867 174:11-17; 871 180:3-181:1. When 21 Black told Obus about the meeting, Obus told Black to tell 22 Strickland about Obus s conversation with Andrien, and to encourage 23 Strickland to tell GE Capital s counsel about the May conversation 24 between Black and Strickland. 25 191:11; 1099-1100 157:16-21. JA 315-16 152:25-153:19; 317 157:25-158:10; 401 126:3- Black reminded Strickland that they had discussed JA 999 154:25-155:9; 877-78 190:17- 11 1 J. 2 After receiving the SEC s subpoena related to SunSource, GE GE Capital s Internal Investigation 3 Capital conducted an internal investigation into Strickland s 4 conduct. 5 interviewing Strickland and other GE Capital employees and thus did 6 not include statements from Andrien or Russell. 7 460 70:15-71:12; 487-88 125:22-126:9. 8 that while Strickland had disclosed information outside of [GE 9 Capital] pertaining to SunSource, JA 463 76:2-12, he did not JA 2408-09. The internal investigation did not go beyond JA 459 68:20-69:7; The investigation concluded 10 discuss the nature of the specific transaction being contemplated, 11 JA 2408. 12 GE Capital s confidentiality restrictions. 13 the investigation, Strickland was denied a bonus and salary 14 increase, but was not terminated. 15 in his file stating that he should have consulted a manager or 16 counsel before discussing SunSource with a third party. 17 09; 459 69:9-24; 469 89:5-18. 18 of GE Capital said that the investigation concluded that Strickland 19 made a mistake but was trying to do some underwriting when he 20 called Black. 21 II. 22 Nevertheless, his conduct demonstrated a disregard of JA 2408. Following A letter of reprimand was placed JA 2408- Testifying later, a representative JA 490 131:8-14; 468-69 87:25-88:8; 487 125:7-9. Prior Proceedings The SEC filed a civil complaint against Strickland, Black and 23 Obus on April 25, 2006, that (as later amended on June 15, 2007) 24 alleged that the defendants were liable for insider trading in 25 violation of section 10(b) and Rule 10b-5 under both the classical 12 1 and the misappropriation theories of insider trading. 2 classical theory, the SEC alleged that Strickland, through his work 3 for GE Capital, became a temporary insider of SunSource and owed a 4 duty to SunSource s shareholders not to share material non-public 5 information about the company s acquisition. 6 misappropriation theory, the SEC claimed that Strickland had a duty 7 to GE Capital, his employer, to keep information about SunSource s 8 acquisition confidential, and that he breached that duty by tipping 9 Black. 10 Under the Under the The district court granted the defendants summary judgment 11 motion on both theories, SEC v. Obus, No. 06-civ-3150(GBD), 2010 WL 12 3703846, 2010 U.S. Dist. LEXIS 98895 (S.D.N.Y. Sept. 20, 2010), but 13 the SEC appeals only with respect to the misappropriation theory. 14 In the portion of its decision addressing that theory, the district 15 court held that, even assuming Strickland told Black material non- 16 public information about the SunSource/Allied deal, the SEC had 17 failed to establish a genuine issue of fact as to whether 18 Strickland breached a fiduciary duty to his employer, GE Capital. 19 2010 WL 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48. 20 district court based this finding on GE Capital s internal 21 investigation, which concluded that Strickland had not breached a 22 duty to his employer, and on the fact that SunSource was not placed 23 on GE Capital s Transaction Restricted List until after the 24 SunSource acquisition was publicly announced. 25 court further held that the SEC failed to establish facts 13 Id. The The district 1 sufficient for a jury to find that Strickland s conduct was 2 deceptive. 3 98895, at *47. 4 had not breached a duty, neither Black nor Obus could have 5 inherited that duty, and thus they also could not be held liable 6 under the misappropriation theory. 7 held that the SEC failed to present sufficient evidence that Obus 8 subjectively believed that the information he received was 9 obtained in breach of a fiduciary duty. 10 2010 U.S. Dist. LEXIS 98895, at *50-51. 2010 WL 3703846, at *14-15, 2010 U.S. Dist. LEXIS Because the district court found that Strickland 11 12 Finally, the district court 2010 WL 3703846, at *16, DISCUSSION I. 13 Standard of Review We review de novo the district court s grant of summary 14 judgment. 15 2012). 16 that there is no genuine dispute as to any material fact and the 17 movant is entitled to judgment as a matter of law. 18 P. 56(a).1 19 that a reasonable jury could return a verdict for the nonmoving 20 party. 21 In reviewing a motion for summary judgment, [t]he evidence of the 22 non-movant is to be believed, and all justifiable inferences are to Huppe v. WPCS Int l Inc., 670 F.3d 214, 217 (2d Cir. Summary judgment is appropriate where the movant shows Fed. R. Civ. A factual dispute is genuine if the evidence is such Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 1 Rule 56 was amended in a non-substantive manner after the district court granted summary judgment. We cite the current version of the Rule. 14 1 be drawn in [its] favor. 2 II. Id. at 255. Legal Background 3 A. 4 Insider trading--unlawful trading in securities based on 5 material non-public information--is well established as a violation 6 of section 10(b) of the Securities Exchange Act of 1934 and Rule 7 10b-5. 8 United States, 445 U.S. 222, 226-30 (1980); SEC v. Texas Gulf 9 Sulphur Co., 401 F.2d 833, 847-48 (2d Cir. 1968) (en banc); In re The Misappropriation Theory of Insider Trading See Dirks v. SEC, 463 U.S. 646, 653-54 (1983); Chiarella v. 10 Cady, Roberts & Co., 40 S.E.C. 907 (1961). 11 theory of insider trading, a corporate insider is prohibited from 12 trading shares of that corporation based on material non-public 13 information in violation of the duty of trust and confidence 14 insiders owe to shareholders. 15 second theory, grounded in misappropriation, targets persons who 16 are not corporate insiders but to whom material non-public 17 information has been entrusted in confidence and who breach a 18 fiduciary duty to the source of the information to gain personal 19 profit in the securities market. 20 U.S. 642, 652 (1997); United States v. Chestman, 947 F.2d 551, 566 21 (2d Cir. 1991) (en banc). 22 because the misappropriator engages in deception (as required for 23 liability under that section and Rule 10b-5) by pretending loyalty 24 to the principal while secretly converting the principal s 25 information for personal gain. Under the classical Chiarella, 445 U.S. at 228. A United States v. O Hagan, 521 Such conduct violates section 10(b) O Hagan, 521 U.S. at 653 (internal 15 1 quotation marks omitted). 2 the deception be in connection with the purchase and sale of any 3 security is met because the information is of a sort that [can] 4 ordinarily [be] capitalize[d] upon to gain no-risk profits through 5 the purchase or sale of securities. 6 Falcone, 257 F.3d 226, 233-34 (2d Cir. 2001). 7 concerned only with liability under the misappropriation theory. 8 9 The requirement under section 10(b) that Id. at 656; United State v. This appeal is One who has a fiduciary duty of trust and confidence to shareholders (classical theory) or to a source of confidential 10 information (misappropriation theory) and is in receipt of material 11 non-public information has a duty to abstain from trading or to 12 disclose the information publicly. 13 was developed under the classical theory to prevent insiders from 14 using their position of trust and confidence to gain a trading 15 advantage over shareholders. 16 Dirks, 463 U.S. at 660. 17 the misappropriation context, but the disclosure component operates 18 somewhat differently. 19 on a fiduciary duty to the source of the information, only 20 disclosure to the source prevents deception; disclosure to other 21 traders in the securities market cannot cure the fiduciary s breach 22 of loyalty to his principal. 23 Morgan Stanley Inc., 719 F.2d 5, 13 (2d Cir. 1983) (fiduciary duty 24 of disclosure to employer does not imply duty to disclose to the 25 public). The abstain or disclose rule See Chiarella, 445 U.S. at 227-30; Abstain or disclose has equal force in Because the misappropriation theory is based O Hagan, 521 U.S. at 655; see Moss v. Under either theory, if disclosure is impracticable or 16 1 prohibited by business considerations or by law, the duty is to 2 abstain from trading. 3 120 (2d Cir. 1993). See United States v. Teicher, 987 F.2d 112, 4 B. 5 The insider trading case law is not confined to insiders or Tipping Violations of Insider Trading Laws 6 misappropriators who trade for their own account. 7 and Rule 10b-5 also reach situations where the insider or 8 misappropriator tips another who trades on the information. 9 Dirks, 463 U.S. 646, the Court addressed the liability of an Section 10(b) In 10 analyst who received confidential information about possible fraud 11 at an insurance company from one of the insurance company s former 12 officers. 13 some of his clients, and some of them, in turn, sold their shares 14 in the insurance company based on the analyst s tip. 15 Court held that a tipper like the analyst in Dirks is liable if the 16 tipper breached a fiduciary duty by tipping material non-public 17 information, had the requisite scienter (to be discussed 18 momentarily) when he gave the tip, and personally benefited from 19 the tip. Id. at 660-62. 20 defined: it includes not only pecuniary gain, such as a cut of 21 the take or a gratuity from the tippee, but also a reputational 22 benefit or the benefit one would obtain from simply mak[ing] a 23 gift of confidential information to a trading relative or friend. 24 Id. at 663-64. 25 liable if he knows or should know that the information was received Id. at 648-49. The analyst relayed the information to Id. The Personal benefit to the tipper is broadly When an unlawful tip occurs, the tippee is also 17 1 from one who breached a fiduciary duty (such as an insider or a 2 misappropriator) and the tippee trades or tips for personal benefit 3 with the requisite scienter. 4 tipping liability doctrine was developed in a classical case, 5 Dirks, but the same analysis governs in a misappropriation case. 6 See Falcone, 257 F.3d at 233. See id. at 660. The Supreme Court s 7 C. 8 Liability for securities fraud requires proof of scienter, 9 Scienter defined as a mental state embracing intent to deceive, manipulate, 10 or defraud. 11 (1976). 12 support a section 10(b) civil violation. 13 Court has yet to decide whether recklessness satisfies section 14 10(b) s scienter requirement, see Matrixx Initiatives, Inc. v. 15 Siracusano, 131 S. Ct. 1309, 1323 (2011), we have held that 16 scienter may be established through a showing of reckless 17 disregard for the truth, that is, conduct which is highly 18 unreasonable and which represents an extreme departure from the 19 standards of ordinary care, SEC v. McNulty, 137 F.3d 732, 741 (2d 20 Cir. 1998) (internal citations and quotation marks omitted); see 21 SEC v. U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998) 22 (recognizing that eleven circuits hold that recklessness satisfies 23 the scienter requirement of section 10(b)). 24 requirement set forth in Hochfelder (and the recklessness variation 25 in McNulty) to apply broadly to civil securities fraud liability, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12 Negligence is not a sufficiently culpable state of mind to 18 Id. While the Supreme We read the scienter 1 including insider trading (under either the classical or 2 misappropriation theory), and to tipper/tippee liability. 3 e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 167-68 (2d 4 Cir. 1980). 5 tipping or trading, just as in securities fraud cases across the 6 board, the unlawful actor must know or be reckless in not knowing 7 that the conduct was deceptive. 8 9 10 See, In every insider trading case, at the moment of With this background, we turn specifically to the scienter requirements for both tippers and tippees under the misappropriation theory. 11 1. Tipper Scienter 12 To be held liable, a tipper must (1) tip (2) material non- 13 public information (3) in breach of a fiduciary duty of 14 confidentiality owed to shareholders (classical theory) or the 15 source of the information (misappropriation theory) (4) for 16 personal benefit to the tipper. 17 to the first three of these elements. 18 deliberately or recklessly, not through negligence. 19 tipper must know that the information that is the subject of the 20 tip is non-public and is material for securities trading purposes, 21 or act with reckless disregard of the nature of the information. 22 Third, the tipper must know (or be reckless in not knowing) that to 23 disseminate the information would violate a fiduciary duty. 24 the tipper need not have specific knowledge of the legal nature of The requisite scienter corresponds 19 First, the tipper must tip Second, the While 1 a breach of fiduciary duty, he must understand that tipping the 2 information would be violating a confidence. 3 As the Supreme Court and commentators have recognized, the 4 first and second aspects of scienter a deliberate tip with 5 knowledge that the information is material and non-public--can 6 often be deduced from the same facts that establish the tipper 7 acted for personal benefit. 8 that the inquiry into the tipper s scienter requires courts to 9 focus on objective criteria, i.e., whether the insider receives a 10 direct or indirect personal benefit from the disclosure ); Donald 11 C. Langevoort, Insider Trading: Regulation, Enforcement, and 12 Prevention § 4.04[1] (1992 ed.) ( The requirement that the tipper 13 act with scienter . . . is effectively subsumed in proof that the 14 insider s motive was personal benefit. ). 15 scienter is strong because the tipper could not reasonably expect 16 to benefit unless he deliberately tipped material non-public 17 information that the tippee could use to an advantage in trading. 18 The third aspect of scienter, that the tipper acted with knowledge 19 that he was violating a confidence, will often be established 20 through circumstantial evidence. 21 misappropriation itself is deceitful, O Hagan, 521 U.S. at 653, 22 evidence that the tipper knowingly misappropriated confidential 23 information will support an inference that the misappropriator had 24 a mental state embracing intent to deceive, manipulate, or 25 defraud, Hochfelder, 425 U.S. at 193 n.12. See Dirks, 463 U.S. at 663-64 (holding The inference of Because the act of 20 1 Because a defendant cannot be held liable for negligently 2 tipping information, see Hochfelder, 425 U.S. at 193 & n.12, 3 difficult questions may arise when a tip is not apparently 4 deliberate or when the alleged tipper s knowledge is uncertain. 5 The line between unactionable negligence and actionable 6 recklessness is not a bright one. 7 cannot avoid liability merely by demonstrating that he did not know 8 to a certainty that the person to whom he gave the information 9 would trade on it. But, we have held that a tipper One who deliberately tips information which he 10 knows to be material and non-public to an outsider who may 11 reasonably be expected to use it to his advantage has the requisite 12 scienter. . . . One who intentionally places such ammunition in the 13 hands of individuals able to use it to their advantage on the 14 market has the requisite state of mind . . . . 15 at 167. 16 establish tipper scienter. 17 94 (2d Cir. 2011) (approving jury instructions that allowed the 18 jury to consider whether [the defendant tipper] deliberately 19 closed his eyes to what would otherwise have been obvious to him ). 20 By the same token, there is a valid defense to scienter if the 21 tipper can show that he believed in good faith that the information 22 disclosed to the tippee would not be used for trading purposes. 23 See id. 24 25 Elkind, 635 F.2d Moreover, conscious avoidance can be sufficient to United States v. Gansman, 657 F.3d 85, Assume two scenarios with similar facts. In the first, a commuter on a train calls an associate on his cellphone, and, 21 1 speaking too loudly for the close quarters, discusses confidential 2 information and is overheard by an eavesdropping passenger who then 3 trades on the information. 4 conversation is conducted knowingly within earshot of a passenger 5 who is the commuter s friend and whom he also knows to be a day 6 trader, and the friend then trades on the information. 7 first scenario, it is difficult to discern more than negligence and 8 even more difficult to ascertain that the tipper could expect a 9 personal benefit from the inadvertent disclosure. In the second, the commuter s In the In the second, 10 however, there would seem to be at least a factual question of 11 whether the tipper knew his friend could make use of material non- 12 public information and was reckless in discussing it in front of 13 him. 14 benefited by making a gift of the non-public information to his 15 friend, or received no benefit because the information was revealed 16 inadvertently through his poor cellphone manners. Similarly, there would be a question of whether the tipper 17 2. 18 Like a tipper, a liable tippee must know that the tipped Tippee Scienter 19 information is material and non-public. 20 some level of knowledge that by trading on the information the 21 tippee is a participant in the tipper s breach of fiduciary duty. 22 This last element of tippee scienter was addressed in Dirks, which 23 held that a tippee has a duty to abstain or disclose only when the 24 insider has breached his fiduciary duty . . . and the tippee knows 25 or should know that there has been a breach. 22 And a tippee must have 463 U.S. at 660 1 (emphasis added). 2 the tipper s duty to abstain or disclose. 3 whether the Dirks rule is in conflict with Hochfelder s holding 4 that negligence does not satisfy section 10(b) s scienter 5 requirement because the knows or should know rule, repeated in 6 numerous Second Circuit cases,2 sounds somewhat similar to a 7 negligence standard. 8 (2010) (negligence requires foreseeability, which concerns what 9 the actor should have known ). In such a case, the tippee is said to inherit The parties dispute See Restatement (Third) of Torts § 3, cmt. g We think the best way to 10 reconcile Dirks and Hochfelder in a tipping situation is to 11 recognize that the two cases were not discussing the same knowledge 12 requirement when they announced apparently conflicting scienter 13 standards. Dirks knows or should know standard pertains to a 2 See, for example, SEC v. Warde, 151 F.3d 42, 47 (2d Cir. 1998) (SEC must establish that tippee knew or should have known that [tipper] violated a relationship of trust by relaying [the] information ); Falcone, 257 F.3d at 229 (tippee assumes a fiduciary duty when the tippee knows or should know that there has been a breach ( internal quotation marks omitted)); SEC v. Monarch Fund, 608 F.2d 938, 942 (2d Cir. 1979) (distinguishing the tippee who knows or ought to know that he is trading on inside information from the outsider who has no reason to know he is trading on the basis of such knowledge ). Our only case to vary from this formulation is United States v. Mylett, 97 F.3d 663 (2d Cir. 1996). In Mylett we stated that a tippee must subjectively believe that the information received was obtained in breach of a fiduciary duty. Id. at 668. For that proposition Mylett cited a statement from Chestman, 947 F.2d at 570, that the defendant tippee knew that the tipper had breached a duty. An earlier discussion in Chestman, however, gives the familiar Dirks knows or should know standard. 947 F.2d at 565. In Mylett it was clear that the defendant knew that the tipper held a position of trust and confidence at the company the tip concerned, so there was no need for the court to examine the should know standard from Dirks. 97 F.3d at 667-68. 23 1 tippee s knowledge that the tipper breached a duty, either to his 2 corporation s shareholders (under the classical theory) or to his 3 principal (under the misappropriation theory), by relaying 4 confidential information. 5 on the tippee s own knowledge and sophistication, and on whether 6 the tipper s conduct raised red flags that confidential information 7 was being transmitted improperly. 8 intentional (or McNulty s requirement of reckless) conduct pertains 9 to the tippee s eventual use of the tip through trading or further This is a fact-specific inquiry turning Hochfelder s requirement of 10 dissemination of the information. 11 established if a tippee knew or had reason to know that 12 confidential information was initially obtained and transmitted 13 improperly (and thus through deception), and if the tippee 14 intentionally or recklessly traded while in knowing possession of 15 that information. Thus, tippee liability can be 16 D. Tipping Chains 17 One last question presented by this case is how a chain of 18 tippers affects liability. 19 uncommon, see, e.g., Dirks, 463 U.S. at 649-50; Falcone, 257 F.3d 20 at 227; United States v. McDermott, 245 F.3d 133, 135-36 (2d Cir. 21 2001); and follow the same basic analysis outlined above. 22 will be liable if he tips material non-public information, in 23 breach of a fiduciary duty, to someone he knows will likely 24 (1) trade on the information, or (2) disseminate the information 25 further for the first tippee s own benefit. Such chains of tipping are not 24 A tipper The first tippee must 1 both know or have reason to know that the information was obtained 2 and transmitted through a breach, and intentionally or recklessly 3 tip the information further for her own benefit. 4 must both know or have reason to know that the information was 5 obtained through a breach, and trade while in knowing possession of 6 the information. 7 conscious avoidance. 8 (S.D.N.Y. 1988) (finding scienter satisfied where the defendants, 9 tippees at the end of a chain, did not ask [about the source of 10 11 12 The final tippee Chain tippee liability may also result from See SEC v. Musella, 678 F. Supp. 1060, 1063 information] because they did not want to know ). * * * To summarize our discussion of tipping liability, we hold that 13 tipper liability requires that (1) the tipper had a duty to keep 14 material non-public information confidential; (2) the tipper 15 breached that duty by intentionally or recklessly relaying the 16 information to a tippee who could use the information in connection 17 with securities trading; and (3) the tipper received a personal 18 benefit from the tip. 19 tipper breached a duty by tipping confidential information; (2) the 20 tippee knew or had reason to know that the tippee improperly 21 obtained the information (i.e., that the information was obtained 22 through the tipper s breach); and (3) the tippee, while in knowing 23 possession of the material non-public information, used the 24 information by trading or by tipping for his own benefit. Tippee liability requires that (1) the 25 1 III. Application 2 Applying these standards to the defendants in this case, we 3 conclude that the SEC presented sufficient evidence to create 4 genuine issues of material fact as to Strickland s, Black s, and 5 Obus s liability under the misappropriation theory. 6 A. 7 Turning first to Strickland, the SEC presented sufficient Strickland 8 evidence to survive summary judgment. 9 Strickland, an employee of GE Capital, owed GE Capital a fiduciary First, it is undisputed that 10 duty. 11 confidential information qualifies as property and undisclosed 12 misappropriation of such information . . . by an employee 13 violate[s] a fiduciary duty ); Restatement (Third) of Agency § 8.05 14 (2006) ( An agent has a duty . . . not to use or communicate 15 confidential information of the principal for the agent s own 16 purposes or those of a third party. ). 17 sufficient evidence that Strickland knew he was under an obligation 18 to keep information about the SunSource/Allied deal confidential, 19 including Strickland s testimony that he knew it was confidential, 20 the deal book that had every page marked Extremely Confidential, 21 and Strickland s annual review of GE Capital s employee code of 22 conduct, which contained provisions on confidentiality. 23 defendants make much of SunSource s absence from GE Capital s 24 Transaction Restricted List until after the deal was publicly 25 announced, this fact is not determinative to our analysis. See O Hagan, 521 U.S. at 654 (holding that a company s 26 Moreover, the SEC presented While the 1 Moreover, there is a separate question of fact whether it was 2 Strickland himself who should have added SunSource to the list at 3 an earlier date. 4 knew he owed GE Capital a duty to keep information about the 5 SunSource/Allied acquisition confidential and not to convert it for 6 his own profit. 7 Thus there is sufficient evidence that Strickland More hotly disputed is whether the SEC presented sufficient 8 evidence to allow a jury to conclude that Strickland told Black 9 that SunSource was about to be acquired--i.e., whether the alleged 10 tip actually occurred.3 11 evidence that Strickland tipped Black; both maintained in 12 depositions that Strickland asked Black general questions about 13 SunSource s management as part of his due diligence work, but 14 revealed nothing about a sale to Allied. 15 held that a tip needs to be established by direct evidence (indeed, 16 such a requirement would restrict successful tipping cases to those 17 in which at least one party cooperated with the government, or 18 where the government had a court-authorized surreptitious 19 recording). 20 found that the government had presented enough evidence to prove 21 the content of a tip beyond a reasonable doubt based only on As is often the case, there is no direct However, we have never See McDermott, 245 F.3d at 139. 3 In McDermott, we There is no dispute that if Strickland passed along such information, it would have qualified as material and non-public. Unannounced acquisitions are a prototypical example of material non-public information. Basic Inc. v. Levinson, 485 U.S. 224, 23839 (1988); SEC v. Warde, 151 F.3d at 47 (the materiality of a planned acquisition is not open to doubt ). 27 1 evidence that the tipper and tippee were having an affair and 2 frequently spoke to each other on the phone; the tippee greatly 3 increased her trading activities after the affair began; the tippee 4 frequently traded in stocks about which the tipper had confidential 5 information; the timing of the phone calls and trades was 6 consistent with tipping; and the tippee s trades were profitable. 7 Id. at 138-39; see also Warde, 151 F.3d at 47-48 (pattern of phone 8 calls and trades can support an inference of tipping). 9 SEC presented the following evidence: 10 Here, the (1) Strickland and Black, who were college friends, had a 11 conversation about SunSource on May 24, 2001, three days 12 after GE Capital submitted its financing proposal to 13 SunSource. 14 shareholders was not part of due diligence, and Strickland 15 himself had never done so in the past. 16 Strickland s superiors stated that contacting (2) Black immediately told his superior, Obus, about the 17 conversation, and Obus immediately called Andrien to tell 18 him, as Andrien testified, that he had heard from a 19 little birdie in Connecticut that SunSource was planning 20 to sell the company to a financial buyer. 21 asked who the little birdie was, Obus responded that it 22 was GE. When Andrien 23 (3) Wynnefield purchased a large block of stock about two 24 weeks after the conversation by increasing a broker s 25 offer of 50,000 shares to an actual purchase of 287,200 28 1 shares. 2 announced, this investment nearly doubled in value. 3 (4) In a later conversation between Obus and Russell, Obus 4 told Russell that he had been tipped off about the 5 [SunSource] deal. 6 After SunSource s acquisition was publicly (5) Black and Strickland met to discuss the case immediately 7 after Strickland was subpoenaed by the SEC. 8 subsequently provided very similar accounts of the May 24 9 conversation (contradicted by the testimony of Andrien and They 10 Russell). 11 told GE Capital s counsel that he did not remember having 12 any conversation with Black about SunSource. 13 To be sure, the defendants challenge the credibility of much of 14 this evidence and point to other facts that suggest a more innocent 15 explanation. 16 required to credit the testimony relied on by the SEC and to draw 17 all inferences in its favor. 18 infer from the SEC s evidence that Strickland did tell Black that 19 SunSource was about to be acquired. 20 Prior to the meeting with Black, Strickland had However, on summary judgment, the district court was A rational jury could reasonably In addition, the SEC presented sufficient evidence for a jury 21 to find that Strickland knew the material non-public information 22 was ammunition that Black was in a position to use. 23 635 F.2d at 167. 24 fund that traded in stocks (sufficient knowledge in itself) and, 25 additionally, that Black s hedge fund traded in SunSource shares. See Elkind, Strickland knew that Black worked for a hedge 29 1 This evidence easily supports a finding of knowing or reckless 2 tipping to someone who likely would use the information to trade in 3 securities. 4 The district court relied on GE Capital s internal 5 investigation to determine that Strickland breached no duty by 6 tipping Black, reasoning that the alleged victim of the breach of 7 fiduciary duty did not consider itself a victim. 8 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48. 9 error, however, because the internal investigation was not See Obus, 2010 WL This was 10 indisputably reliable, and because its conclusions were 11 contradicted by other evidence. 12 based only on interviews with Strickland and other GE Capital 13 employees; it did not have the benefit of evidence from outside 14 sources such as Andrien or Russell, the primary witnesses relied on 15 by the SEC. 16 corporate interests that may or may not coincide with the public 17 interest in unearthing wrongdoing and affording a remedy. 18 finally, the conclusion of such an internal investigation cannot 19 bind a jury, which will make its own independent assessment of the 20 evidence. 21 that Strickland simply made a mistake and did not breach his duty 22 of confidentiality to GE Capital, or, that Strickland breached his 23 duty by tipping. 24 summary judgment. GE Capital s investigation was More broadly, the GE investigation was motivated by And The jury, after reviewing the evidence, might conclude That factual dispute cannot be resolved on 30 1 Next, although the district court did not reach the issue, it 2 is readily apparent that the SEC presented sufficient evidence 3 that, if the tip occurred, Strickland made the tip intentionally 4 and received a personal benefit from it. 5 benefit to include making a gift of information to a friend. 6 U.S. at 664; see Warde, 158 F.3d at 48-49 (the close friendship 7 between the alleged tipper and tippee was sufficient to allow the 8 jury to find that the tip benefitted the tipper). 9 undisputed fact that Strickland and Black were friends from college Dirks defined personal 463 Here, the 10 is sufficient to send to the jury the question of whether 11 Strickland received a benefit from tipping Black. 12 U.S. at 664. 13 respect to whether Strickland intentionally tipped Black. 14 is sufficient for a jury to conclude that Strickland intentionally 15 or recklessly revealed material non-public information to Black, 16 knowing that he was making a gift of information Black was likely 17 to use for securities trading purposes. 18 94. 19 See Dirks, 463 This same evidence creates a question of fact with And it See Gansman, 657 F.3d at Finally, the district court erred by requiring the SEC to make 20 an additional showing of deception beyond the tip itself. 21 Obus, 2010 WL 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48- 22 50. 23 confidential information deal in deception. 24 the jury accepts that a tip of material non-public information 25 occurred and that Strickland acted intentionally or recklessly, See As explained in O Hagan, employees who misappropriate 31 521 U.S. at 653. If 1 Strickland knowingly deceived and defrauded GE Capital. 2 all the deception that section 10(b) requires. 3 That is The SEC thus presented sufficient evidence to establish a 4 genuine issue of material fact with respect to whether Strickland 5 tipped Black, whether Strickland knowingly or recklessly breached a 6 duty to his employer by doing so, whether Strickland knew there was 7 a high likelihood that the tip would result in the trading of 8 securities, and whether Strickland tipped for his own personal 9 benefit. 10 The district court therefore erred in granting summary judgment to Strickland. 11 B. 12 Assessing Black s tippee liability requires us to determine Black 13 whether Black inherited Strickland s duty of confidentiality. 14 Black s liability therefore depends first on whether Strickland 15 breached a duty to his employer in tipping Black. 16 U.S. at 660. 17 sufficient evidence for a jury to so conclude. 18 See Dirks, 463 For the reasons already stated, we hold that there is Next, the SEC must establish that Black knew or should have 19 known that Strickland breached a fiduciary duty when he passed 20 along the tip, see id. at 660, and thus inherited Strickland s duty 21 to abstain or disclose.4 Black, a sophisticated financial analyst, 4 Here the duty to disclose, as applied to Black, would have required Black to disclose his intention to trade to the source of the information, GE Capital, because Black inherited Strickland s duty, which was owed by Strickland to GE Capital. As noted in our previous discussion, if such disclosure was impracticable, Black s 32 1 testified that he knew Strickland worked at GE Capital, which 2 provided loans to businesses; that he knew Strickland was involved 3 in developing financing packages for other companies and performing 4 due diligence; and that information about a non-public acquisition 5 would be material inside information that would preclude someone 6 from buying stock. 7 that Black knew or had reason to know that any tip from Strickland 8 on SunSource s acquisition would breach Strickland s fiduciary duty 9 to GE Capital. This is sufficient for the jury to conclude See Warde, 151 F.3d at 48 (sufficient that tippee 10 knew that the tipper was a director of the company with which the 11 tip was concerned because a sophisticated party should know that 12 board members cannot convey material non-public information to 13 outsiders). 14 the jury find that Black deliberately lied to the SEC about his 15 conversation with Strickland. 16 Such a conclusion of course would be reinforced should Because, according to the SEC, Black himself did not trade on 17 the SunSource information but instead tipped his boss, Obus, the 18 SEC must also present evidence that Black derived some personal 19 benefit from relaying the tip. 20 personal benefit set forth in Dirks, this bar is not a high one. 21 Based on the evidence that Black worked for Obus and that 22 Wynnefield traded in SunSource stock, a jury could find that by 23 passing along what he was told by Strickland, Black hoped to curry In light of the broad definition of duty was to abstain from trading or disseminating the information further. 33 1 favor with his boss. 2 reputational advantage as an example of a personal benefit). 3 jury could find that Black conveyed Strickland s tip in order to 4 improve his standing with Obus, it could also find that Black acted 5 recklessly or intentionally in passing on the information. 6 Moreover, because Black was well aware that Wynnefield held 7 SunSource stock, the jury could find that he knew that there was a 8 reasonable expectation that Obus would trade in SunSource on 9 Wynnefield s behalf while in possession of the tip. See Dirks, 463 U.S. at 663 (citing 10 635 F.2d at 167. 11 If a See Elkind, send the question of Black s liability to a jury. The SEC thus presented sufficient evidence to 12 C. 13 As the final alleged tippee in the chain, Obus s duty to Obus 14 abstain or disclose is derivative of Strickland s duty. 15 his liability depends first on Strickland having breached a duty to 16 GE Capital. 17 evidence on this issue. 18 had reason to know that the SunSource information was obtained 19 through a breach of fiduciary duty. 20 Black was aware of Strickland s precise position at GE Capital, 21 there was not evidence that Obus had the same level of knowledge. 22 We need not decide if Obus s bare knowledge that Strickland worked 23 for GE Capital (of which there was evidence), along with Obus s 24 status as a sophisticated financial player, was enough for Obus to 25 have had reason to know that Strickland breached a duty to GE Therefore, As explained above, the SEC has presented sufficient Next, the SEC must show that Obus knew or 34 While there was evidence that 1 Capital by talking to Black. 2 evidence of Obus s call to Andrien and his conversation with Black 3 about the call. 4 believed Black s information was credible and thus knew that it 5 originated from someone entrusted with confidential information; 6 and (2) that Obus recognized that Strickland might lose his job as 7 a result of the information he had conveyed to Black, demonstrating 8 Obus s knowledge that Strickland had acted inappropriately. 9 together, this evidence is sufficient to allow a jury to infer that Here, there is the additional From this, a jury could infer (1) that Obus Taken 10 Obus was aware that Strickland s position with GE Capital exposed 11 Strickland to information that Strickland should have kept 12 confidential. 13 recollections of the conversation with Black and the call with 14 Andrien would not permit the inference that Obus knew Strickland 15 had breached a duty. 16 the jury s task to decide whose testimony to credit and what 17 conclusions to draw from that testimony. 18 The defendants counter by arguing that Obus s But when the evidence is conflicting, it is Finally, the SEC must establish that Obus traded while in 19 knowing possession of material non-public information. 20 States v. Royer, 549 F.3d 886, 899 (2d Cir. 2008). 21 that the June 8, 2001 SunSource purchase was not unusual for 22 Wynnefield, that the trade was not initiated by Obus, and that Obus 23 sold back some of the SunSource shares before the Allied deal was 24 publicly announced. 25 Obus was in knowing possession of material non-public information United Obus argues None of these facts are relevant to whether 35 1 when he traded on June 8. 2 SEC s evidence that Obus told Andrien and later Russell that he 3 bought the shares on a tip is sufficient for the jury to find that 4 Obus subjectively knew he possessed material non-public information 5 when he made the June 8 purchase, whether or not his purchase was 6 directly caused by his knowledge of the pending acquisition.5 7 id. 8 about whether Obus knew that Strickland had breached a duty to GE 9 Capital and whether Obus traded in SunSource stock while in knowing See Teicher, 987 F.2d at 120-21. The See Accordingly, the SEC has established genuine questions of fact 10 possession of the material non-public information that SunSource 11 was about to be acquired. 12 CONCLUSION 13 For the foregoing reasons, the district court s order granting 14 summary judgment to the defendants is VACATED and the case is 15 REMANDED for further proceedings consistent with this opinion. 5 The district court suggested that Obus s calls to Andrien might insulate Obus from liability because the calls were hardly evidence of deception or stealth. Obus, 2010 WL 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *49. This misapprehends the duty Obus inherited. If the SEC s evidence is believed, Strickland (and, derivatively, Black and Obus) owed a duty to GE Capital not to use information about SunSource for personal benefit. See supra n.4. Even if Obus had told Andrien that he was trading based on a tip, it would have done nothing to absolve Obus of his inherited duty to GE Capital, the source of the information. See O Hagan, 521 U.S. at 654 n.6. 36
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