Securities and Exchange Commission v. Schvacho
Filing
62
FINDINGS OF FACT AND CONCLUSIONS OF LAW. The Clerk of Court is ORDERED to enter a verdict and judgment in favor of Defendant Ladislav "Larry" Schvacho. Signed by Judge William S. Duffey, Jr. on 1/7/2014. (dfb)
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UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
1:12-CV-2557-WSD
v.
LADISLAV “LARRY”
SCHVACHO,
Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter is before the Court following a bench trial held from November
18 to 19, 2013, on the Securities and Exchange Commission’s (“Plaintiff” or “SEC”)
claims against Ladislav “Larry” Schvacho (“Schvacho” or “Defendant”).
—1—
FINDINGS OF FACT1
I.
A.
Nature of the Action
This is a civil enforcement action brought by the SEC against Schvacho
alleging Schvacho engaged in trading of the stock of Comsys IT Partners, Inc.
(“Comsys IT”) (formerly NASDAQ: CITP) based on material, nonpublic
information about the acquisition of Comsys IT in violation of Sections 10(b) and
14(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5
and 14e-3. The SEC alleges the inside information was revealed to Schvacho by
Larry L. Enterline (“Enterline”), then-CEO of Comsys IT. Enterline is a long-time
close personal friend and business associate of Schvacho. The SEC alleges that
Schvacho misappropriated material, nonpublic information from Enterline and used
it to trade in Comsys IT stock during the period (the “Period”) between November 9,
2009, and February 2, 2010, the date on which Comsys IT publically announced that
it would be acquired by a competitor, Manpower, Inc. (“Manpower”) (NYSE:
MAN).
1
Having observed the testimony and demeanor of the witnesses for each party, the
Court has weighed all the evidence in reaching its Findings of Fact and has weighed
the credibility of each of the witnesses. Conflicts in the evidence were resolved
based on consideration of the evidence admitted at trial, and the Court’s
determination of the credibility of witnesses.
—2—
The SEC seeks relief against Schvacho in the form of a permanent injunction
enjoining Schvacho from violating Sections 10(b) and 14(e) of the Exchange Act,
disgorgement of ill-gotten gains in the amount of $512,667.86, prejudgment interest,
and civil monetary penalties pursuant to Sections 21(d)(3) and 21A of the Exchange
Act.
B.
Schvacho’s Personal History
Schvacho was born in Slovakia, and immigrated to the United States in 1966.
He graduated from Georgia Tech in 1972 with a bachelor’s degree in electrical
engineering and received a graduate degree in 1974 in industrial management, also
from Georgia Tech. From approximately 1977 until 1987, Schvacho worked for
Reliance Electric Company (“Reliance”) in its Atlanta office. In 1991, Schvacho
began working for Scientific Atlanta as a staff engineer. Schvacho remained
employed by Scientific Atlanta through its acquisition by Cisco Systems (“Cisco”)
in 2005. From 2001 until his retirement in 2009, Schvacho’s annual compensation
from his employer ranged from approximately $100,000 per year to $200,000 per
year. Schvacho retired from Cisco on September 29, 2009, and received a
retirement package. Schvacho reported $386,704 in wages from Cisco on his 2009
tax return.
—3—
C.
The Friendship Between Schvacho and Enterline
Schvacho and Enterline first met when they both worked for Reliance in the
early 1980s. Schvacho reconnected with Enterline when Schvacho began working
at Scientific Atlanta in 1991, when he discovered that Enterline also was employed
there. Beginning in 1991, Schvacho and Enterline became personal friends. The
two would meet socially, approximately once a week, usually on Fridays, when
Enterline was in Atlanta. At some point prior to 2009, Enterline named Schvacho
executor of Enterline’s estate in the event of his death.
Schvacho and Enterline invested in a company called Strategic Management
Incorporated (“SMI”), which Enterline and a partner organized. SMI operated
similar to a private holding company, by acquiring various assets, including
operating businesses, real estate, and public company investments. Schvacho
became a shareholder in SMI sometime in the 1990s when SMI acquired a
technology business, Millennium Technology Associates, owned by Schvacho.
Enterline was the majority shareholder of SMI and ran the company. Enterline and
often discussed SMI’s investments, strategy, and performance. Schvacho remained
a shareholder and board member of SMI until its dissolution on December 31, 2010.
Schvacho received $450,000 in the liquidation of SMI, $252,658.00 of which he
received in 2009.
—4—
D.
Enterline Becomes Chief Executive Officer of Comsys
In December 2000, Enterline became chief executive officer of a staffing
company called Personnel Group of America, Inc. (“PGA”). He moved to
Charlotte, North Carolina, where PGA was headquartered. On August 5, 2003, PGA
changed its name to Venturi Partners, Inc. (“Venturi”). On July 20, 2004, it was
announced that Venturi agreed to merge with Comsys Holding, Inc. in a
stock-for-stock transaction. Comsys Holding was the surviving entity and the
combined company was renamed Comsys IT. (Comsys IT, together with its
predecessor companies PGA and Venturi, are hereafter referred to as “Comsys.”)
On September 30, 2004, Enterline was replaced as CEO of Comsys, but remained on
its board of directors.
On February 2, 2006, Comsys re-hired Enterline as CEO, and Enterline
moved to Houston, Texas, where Comsys was headquartered following the merger.
Enterline maintained a residence in Atlanta, and he and Schvacho met socially when
Enterline was in Atlanta. Schvacho and Enterline also were in telephone contact,
and, on average, Schvacho and Enterline spoke to each other two or three times a
week.
—5—
E.
Enterline’s Efforts to Maintain and Protect Inside Information
During the 2009 to 2010 time period and earlier, Comsys had an insider
trading policy (the “Policy”). Enterline was aware of the Policy and testified he was
careful at all times to comply with it. Enterline understood the policy stated that
“[u]nder United States securities laws it is a crime to pass material, nonpublic
information about [Comsys] to others who use it for personal profit if the
information was obtained in the course of one’s employment and disclosure violates
a duty of confidentiality or otherwise to the employer.” Enterline understood the
policy also prohibited directors, officers, or employees of Comsys from passing on
to others any material, nonpublic information. Enterline understood that news of a
pending or proposed merger would constitute material, nonpublic information.
Enterline had a standard practice for answering questions when asked how
Comsys was doing. His practice was to refer to public statements reported in
Comsys’ press releases or SEC filings. He also might give a cryptic answer of
“fine.” Enterline was also careful to avoid conducting telephone conversations
involving Comsys business in the presence of outsiders. For instance, Enterline
testified that he never placed telephone calls involving Comsys business in the
presence of anyone outside the company. As to calls he received regarding the
business of Comsys, Enterline’s general practice was not to discuss company
—6—
business with others present and to tell a caller that he would have to call them back
later, or he would speak very cryptically, or excuse himself to take the call outside of
the presence of others.
F.
Schvacho’s Investment History
Schvacho had three brokerage accounts during the Period. He had a trading
account with Brown & Company (a company ultimately acquired by E*Trade).
Schvacho also had an individual retirement account with E*Trade (collectively, the
“E*Trade Accounts”). An account with Charles Schwab was used by Schvacho’s
employer to transfer stock options as part of Schvacho’s compensation. Finally,
Schvacho had a 401(k) retirement account at Chase Bank.
In 2008, Schvacho sold all of his publicly-traded securities, including Comsys
stock, because he had lost confidence in the stock market and had doubts about the
overall condition of the economy.
Scvhacho’s investment strategy changed after his retirement from Cisco in the
fall of 2009. Schvacho had significantly greater financial resources available to him
in late 2009 and early 2010 than in earlier years. In 2009, Schvacho reported income
of $658,432, whereas in 2008 his income was $120,769. The increase in 2009
income was a result of Schvacho’s receipt of his Cisco retirement package, proceeds
—7—
from the dissolution of SMI, and sales of stock options in his Charles Schwab
account.
Schvacho discovered that it was possible to actively trade with a portion of his
401(k) retirement account with Chase Bank, and opened a self-directed brokerage
account at Chase on or about January 22, 2010. Schvacho transferred $500,000
from the Chase retirement account to the Chase brokerage account. At this time,
Schvacho had significantly more time to devote to investing and he considered
investing his full-time job.
Schvacho testified that he believed the most profitable approach to investing
was to acquire a large block of a particular stock and hold it for a period of time.
Schvacho evaluated several factors when determining which stock to select. He
looked at market segments, specific companies in that market segment, their
positioning relative to competitors in the segment, the quality of their products, their
management, and various financial metrics.
Schvacho decided to focus on the staffing industry and Comsys in particular
because he had become familiar with the staffing industry generally based on
conversations with Enterline. Schvacho learned that staffing companies were an
excellent indicator of future economic growth. He understood staffing companies
would see an impending recession before other industries due to decreased demand
—8—
for labor. Schvacho further believed that in coming out of a recession, such as in the
2009 time period, staffing companies that provided lower skilled workers
experienced an increase in demand before staffing companies, like Comsys, that
provided skilled professionals to the technology sector.
G.
Schvacho’s Trading in Comsys Stock from 2001 to 2008
Schvacho regularly traded Comsys stock from February 2001 through
January 2008. He first became interested in Comsys because Enterline was the CEO
and he had confidence in Enterline’s managerial skills.
Prior to 2009, Schvacho purchased shares of Venturi or Comsys stock valued
at more than $100,000 during the following three time periods: (1) from October 9,
2003 through December 30, 2003; (2) from December 15, 2006, to January 17,
2007; and (3) from July 24, 2007, through July 30, 2007.
Schvacho did not tell Enterline of his trading in Comsys stock because he
valued his friendship with him and did not want to jeopardize the relationship.
Schvacho believed their friendship would be strained if Schvacho incurred a
substantial loss from his Comsys trading activity because Enterline might feel
responsible for Schvacho’s losses.
—9—
H.
Schvacho’s Trading in Comsys Stock in the Period Leading Up to its
Acquisition by Manpower
At 2:41 p.m. on October 28, 2009, over one week before the SEC alleges
Schvacho’s insider trading began, Schvacho purchased 1,000 shares of Comsys
stock at a total cost of $6,822.69. Also on October 28, 2009, Comsys filed its 8-K,
containing a press release announcing its announcing its financial results for the
third quarter ended September 27, 2009. The release reported that revenue
decreased compared to the third quarter of 2008, but increased compared to the
second quarter of 2009.
The following day, on October 29, 2009, Comsys’ stock opened at $7.25 per
share, but traded as low as $6.76 per share later in the day. At 11:54 a.m., Schvacho
sold 500 shares at $6.87 per share. At 12:31 p.m., he sold the remaining 500 shares
he purchased the day before at $6.94 per share. Schvacho’s proceeds from the sales
totaled $6,905. Schvacho testified that he “panicked” when the intra-day price
decreased, causing him to sell all of the shares he purchased the previous day.
On November 6, 2009, Enterline had a telephone conversation with
Manpower’s CFO, who advised that Manpower was interested in acquiring a
company in the professional staffing sector and that, while Comsys was
Manpower’s preferred acquisition, Manpower was prepared to target another
company for acquisition if it could not strike an agreement to acquire Comsys.
— 10 —
Manpower’s CFO stated that Manpower was willing to pay a fair price for Comsys,
but was unwilling to aggressively set a per share acquisition price just to assure a
deal. Manpower’s CFO acknowledged there remained a significant valuation gap
between Manpower’s valuation of Comsys at $15.00 per share and Comsys’
valuation. Enterline told Manpower’s CFO he would get back to him after Comsys’
quarterly board meeting on November 11, 2009.
On November 6, 2009, Enterline and Schvacho had dinner at SABistro, a
restaurant in Buford, Georgia. During the evening, Schvacho made a payment with
his credit card to the restaurant in the amount of $24.20. Records show that
Enterline made a credit card payment to the restaurant at 8:53 p.m. in the amount of
$189.48. Earlier that day, telephone records show a call between Schvacho and
Enterline on four occasions between 5:48 p.m. and 6:30 p.m., with the longest call
recorded as lasting four minutes. The content of the calls is unknown.
At 7:31 p.m. on November 6, 2009, Enterline placed a call to David Kerr
(“Kerr”), Comsys’ Senior VP of Business Development that was recorded as lasting
for 9 minutes. Enterline testified that he did not, at dinner on November 6, 2009, or
at any other time, tell Schvacho about Manpower’s expression of interest in
discussing a possible acquisition of Comsys and he testified that Schvacho did not
overhear him discussing this interest with anyone else.
— 11 —
On November 7, 2009, Enterline called Schvacho at 3:29 p.m. The call was
recorded as lasting for 6 minutes. The content of the call is unknown.
Two days later, on November 9, 2009, Schvacho purchased 4,100 shares of
Comsys stock, at a total cost of $30,924.37.
On November 9, 2009, records show a call from Enterline to Schvacho at 7:09
p.m. The call was recorded as lasting for 11 minutes. The content of the call is
unknown.
The next day, on November 10, 2009, Schvacho purchased 1,900 shares of
Comsys stock for $14,489.70.
On November 11, 2009, Comsys held its regular quarterly board meeting.
Manpower’s interest in discussing an acquisition of Comsys was a major focus of
the meeting. As a result of the discussion, the Board directed Comsys management
to (1) pursue a possible transaction with Manpower, subject to agreement on a
satisfactory valuation of Comsys stock, (2) engage Baird, a financial consultant, to
assist Comsys with an agreement by Manpower, or any other similar transaction that
might result from their negotiation with Manpower, and (3) in their discussion to
inform Manpower that the minimum consideration the Board would consider to
pursue such a transaction with Manpower was a price for Comsys stock in the range
of $17.00 to $20.00 per share.
— 12 —
On November 11, 2009, Schvacho purchased 1,400 shares of Comsys stock
for $10,860.00. At 5:31 p.m., Enterline sent a text message to Schvacho. Records
show that at 9:31 p.m., Schvacho called Enterline. The call was recorded as lasting
for 7 minutes. The content of the text message and the call is unknown.
On November 12, 2009, Enterline called Manpower’s CFO, advised him that
$17.00 to $20.00 per share was the valuation range set by Comsys’ board, and that
Manpower ought to be able to get to that range with additional due diligence.
Manpower’s CFO expressed a willingness to proceed with negotiations.
On November 12, 2009, Schvacho purchased 5,500 shares of Comsys stock
for $46,349.50.
On November 13, 2009, records show a call from Enterline to Schvacho at
2:47 p.m. The call was recorded as lasting 6 minutes. The content of the call is
unknown. Sometime on November 13, 2009, Schvacho purchased 400 shares of
Comsys stock for $3,050. The time of the purchase is unknown.
On November 14, 2009, Schvacho called Enterline at 8:30 a.m. and 8:31 a.m.
Each call was recorded as lasting one minute.2 On November 15, 2009, Enterline
called Schvacho at 2:31 p.m. and 2:32 p.m. Each call was recorded as lasting one
2
The evidence was that a caller is charged one minute for a call even if the call only
triggers the recipient instrument’s voicemail. Thus, a record of a one minute call is
not evidence of an actual exchange of information between the parties.
— 13 —
minute. Schvacho called Enterline at 3:25, and the call was recorded as lasting one
minute. Enterline called Schvacho at 4:14 p.m. and 4:15 p.m. Again, each call was
recorded as lasting one minute. The content, if any, of these calls is unknown.
On November 17, 2009, Comsys entered into an engagement letter with Baird
for Baird’s financial advisory services in connection with a possible merger or sale
of Comsys. The final draft of the Baird engagement letter was circulated to
Enterline by email at 10:00 a.m.
At 11:56 a.m., Enterline called Schvacho. The call was recorded as lasting 5
minutes. The content of the call is unknown. Also on November 17, 2009,
Schvacho purchased 3,600 shares of Comsys stock for $29,903.90. At 7:41 p.m. on
November 17, 2009, Enterline sent Schvacho a text message. The content of the call
is unknown.
On November 18, 2009, Schvacho purchased 700 shares of Comsys stock for
$5,926.00.
On November 19, 2009, Manpower and Comsys entered into a confidentiality
agreement. On November 19 and 20, 2009, representatives of Comsys met with
representatives of Manpower at Baird’s offices in Milwaukee. At some point on
November 19, 2009, Schvacho purchased 3,400 shares of Comsys stock for
$20,174.90. At 6:39 p.m. on November 19, 2009, Schvacho called Enterline. The
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call was recorded as lasting 3 minutes. At 6:55 p.m., Enterline called Schvacho.
The call was recorded as lasting 7 minutes. The content of these calls is unknown.
Schvacho did not execute any trades on Friday, November 20, 2009. That evening,
Enterline called Schvacho at 7:30 p.m. and the call was recorded as lasting 19
minutes. The content of the call is unknown.
Between November 9, 2009, and November 19, 2009, Schvacho purchased a
total of 20,000 shares of Comsys stock. Comsys’ stock price increased consistently
throughout that period. On November 9, 2009, Schvacho purchased stock in
Comsys at a price as low as $7.31 per share. On November 19, 2009, Comsys’ stock
hit an intraday high price of $8.48 per share.
Schvacho did not trade in Comsys stock between November 19, 2009, and
December 16, 2009. During this period, Schvacho and Enterline continued to speak
on the phone frequently. Phone records show short calls between Schvacho and
Enterline, including calls recorded as lasting one minute, on November 22,
November 24, November 25, November 26, November 27, November 29,
December 4, December 5, December 6, December 8, December 9, December 10,
December 11, December 12, and December 15. The content of these calls is
unknown. During this period, Schvacho did not make any trades in Comsys stock.
— 15 —
a. Schvacho and Enterline’s Sailing Trip to Florida
On December 12, 2009, Enterline and Schvacho drove in Enterline’s car from
Atlanta to St. Petersburg, Florida, to sail Enterline’s sailboat from St. Petersburg to
Fort Myers, Florida. Schvacho and Enterline departed St. Petersburg on December
13th and arrived in Fort Myers the next day, December 14th.
Enterline had a briefcase with him on the sailboat that he stowed away in the
forward stateroom, where he slept. The briefcase did not have a lock. Enterline does
not recall having in the briefcase any documents regarding the transaction with
Manpower or other information about Comsys. Enterline also had with him on the
boat a Blackberry device that was not password protected. Enterline testified that he
had no reason to believe that Schvacho might have gone through his briefcase or
accessed his Blackberry during their overnight trip on the boat.
On December 14, 2009, Manpower’s CEO contacted Baird and stated that
Manpower was prepared to move forward with a possible acquisition of Comsys at a
valuation of $17.50 per share of Comsys stock, with the consideration consisting of
50% cash and 50% Manpower stock. Enterline testified that he did not tell
Schvacho about this development, and that he did not discuss it in his presence.
On December 15, 2009, David Stamford, a friend of Enterline’s, drove
Schvacho and Enterline from Fort Myers back to St. Petersburg. Stamford’s
— 16 —
girlfriend was present during the drive to St. Petersburg. Enterline placed several
telephone calls to other Comsys employees on December 15th.
After arriving in St. Petersburg, Schvacho drove Enterline’s car back to
Atlanta. Enterline returned to Atlanta by plane. While Schvacho was driving
Enterline’s car to Atlanta, Schvacho called Enterline at 5:49 p.m. The call was
recorded as lasting for 29 minutes. The content of the call is unknown. Enterline
sent Schvacho a text message at 7:00 p.m. The content of the text is also unknown.
At some unknown time on December 15, 2009, Kerr emailed Enterline a
Confidentiality Agreement that Comsys entered into with Kforce, another interested
merger party.
On December 16, 2009, Enterline called Schvacho at 7:56 a.m. The call was
recorded as lasting 7 minutes. The content of the call is unknown.
b. Comsys and Manpower Move Forward with the Acquisition
On December 16, 2009, Enterline flew from St. Petersburg to Charlotte for a
meeting of Comsys’ executive and compensation committee. He landed in
Charlotte at approximately 12:30 p.m. The full Comsys board met by telephone
following the executive and compensation committee meeting. Management
reported on the Manpower proposal and Enterline reported on his scheduled dinner
with Kforce’s CEO. The board directed management to (1) seek an increase in the
— 17 —
consideration offered by Manpower without jeopardizing the transaction, but with
the goal of obtaining Manpower’s best and final offer; and (2) determine as quickly
as possible whether Kforce’s interest in a merger was sufficient to be considered,
understanding that doing so could jeopardize the transaction with Manpower.
On December 16, 2009, Schvacho purchased 1,800 shares of Comsys stock
for $15,120.00. On December 17, 2009, Schvacho purchased 1,200 shares of
Comsys stock for $10,098.00.
On December 17, 2009, Enterline called Kforce’s CEO to confirm their
dinner plans. During the conversation, Enterline informed Kforce’s CEO that other
strategic discussions they were having made it imperative that Kforce be prepared to
move quickly and decisively in any negotiations with Comsys. Kforce’s CEO
responded that, because of Comsys’ other discussions, Kforce elected not to pursue
its discussions with Comsys.
c. Schvacho Picks Up Enterline at the Atlanta Airport
On December 18, 2009, Enterline’s assistant emailed Schvacho to inform him
that Enterline would arrive in Atlanta the following morning at 8:46 a.m. That same
day, Enterline called Schvacho. The call was recorded as lasting for 4 minutes. The
content of the call is unknown.
— 18 —
On December 19, 2009, Schvacho drove Enterline’s car to pick Enterline up
at Hartsfield-Jackson International Airport in Atlanta. The flight arrived early.
Enterline’s phone records show that Enterline sent Schvacho a text message at
8:27 a.m. Schvacho called Enterline at 8:51 a.m. The call was recorded as lasting 1
minute. The content of the email and call is unknown. Enterline drove Schvacho to
Schvacho’s house in Lilburn, Georgia.
At 9:33 a.m. on December 19, 2009, Enterline called Kenneth Bramlett
(“Bramlett”), Comsys’ general counsel. The call was recorded as lasting 23
minutes. The content of the call is unknown.
d. Comsys and Manpower Complete the Acquisition
On December 21, 2009, Manpower’s CFO contacted Baird to state that
Manpower was willing to increase its valuation of Comsys stock to $17.65 per share.
Manpower’s CFO advised that this was Manpower’s “best and final offer.” On
December 21, 2009, Schvacho purchased 2,600 shares of Comsys stock for
$22,648.00.
On December 22, 2009, Schvacho purchased 1,500 shares of Comsys stock
for $13,584.95. At 7:25 p.m. on December 22, 2009, Schvacho called Enterline.
The call was recorded as lasting for 6 minutes. The content of the call is unknown.
— 19 —
On December 23, 2009, Enterline received an email at 6:01 a.m. with
presentation materials for a conference call of the Comsys board scheduled for that
day. During the call, the board unanimously agreed to move forward with the
transaction with Manpower. At 9:57 a.m. on December 23, 2009, Enterline called
Schvacho. The call was recorded as lasting for 9 minutes. The content of the call is
unknown. On December 23, 2009, Schvacho purchased 2,200 shares of Comsys
stock for $19,882.75. At 7:37 p.m. on December 23, 2009, Enterline called
Schvacho. The call was recorded as lasting for 8 minutes, and the content of the call
is unknown. At 7:49 p.m., Enterline called Schvacho. The call was recorded as
lasting for 7 minutes. The content of the call is unknown.
On December 24, 2009, Baird sent to Manpower, on behalf of Comsys, a
proposed term sheet outlining the proposed terms of the transaction between
Comsys and Manpower.
Schvacho and Enterline communicated on all but one day between December
25, 2009, and January 1, 2010. Phone records show that on December 25, Schvacho
called Enterline twice and Enterline called Schvacho once and sent him one text
message; on December 26, Schvacho sent Enterline one text message; on December
27, Enterline sent Schvacho one text message; and on December 28, each sent the
— 20 —
other one text message and Enterline called Schvacho. The content of the text
messages and calls is unknown.
On December 29, 2009, Enterline called Schvacho at 6:38 p.m. The call was
recorded as lasting 18 minutes. The content of the call is unknown. On December
30, 2009, at 3:27 p.m., Schvacho purchased 500 shares of Comsys stock for
$4,490.00. Also on December 30, 2009, Enterline called Schvacho at 4:12 p.m. The
call was recorded as lasting 12 minutes. The content of the call is unknown.
On December 31, 2009, Schvacho purchased 2,000 shares of Comsys stock
for $22,539.90.
On January 1, 2010, Enterline called Schvacho at 10:56 a.m. The call was
recorded as lasting for 5 minutes. The content of the call is unknown. On January 5,
2010, Enterline called Schvacho at 7:39 a.m. The call was recorded as lasting for 9
minutes. The content of the call is unknown. On January 5, 2010, Schvacho
purchased 5,500 shares of Comsys stock for $51,622.75.
On January 5, 2010 at 3:45 p.m., Comsys received a revised term sheet from
Manpower.
On January 6, 2010, Enterline called Schvacho at 8:36 a.m. The call was
recorded as lasting for 3 minutes. The content of the call is unknown. On January 6,
2010, Schvacho purchased 3,700 shares of Comsys stock for $33,785.00. At 10:30
— 21 —
a.m. on January 6, 2010, Comsys’ board met by telephone and authorized Comsys to
move forward with the transaction in accordance with the terms set forth in the term
sheet received the previous day. The Board directed management and Baird to
conduct appropriate due diligence of Manpower. After the market closed on January
6, 2010, Comsys issued its pre-announcement revising its projection for the fourth
quarter of 2009, to reflect improved revenues and earnings. The closing price for
Comsys’ stock on January 6th was $9.14 per share. Following the announcement,
the price increased to $11.00 per share when trading opened on January 7th.
Schvacho and Enterline continued to speak frequently during the period
between January 7 to 19, 2010. Phone records show that Enterline called Schvacho
on January 7, January 11, January 13, twice on January 16, and twice on January 19.
The content of these calls is unknown. Schvacho did not trade in Comsys stock
during this period.
On January 20, 2010, Schvacho purchased 8,800 shares of Comsys stock for
$113,284.00.
On January 22, 2010, Schvacho called Enterline at 3:35 p.m. The call was
recorded as lasting for 3 minutes. At 7:05 p.m., Enterline called Schvacho and the
call was recorded as lasting for 9 minutes. At 7:15 p.m., Enterline call Schvacho and
the call was recorded as lasting for 2 minutes. On January 23, 2010, Enterline called
— 22 —
Schvacho at 10:49 a.m. and the call was recorded as lasting for 26 minutes. On
January 24, 2010, Enterline called Schvacho at 2:46 p.m. and Schvacho called
Enterline at 3:41 pm. Both calls were recorded as lasting one minute. The content of
these calls is unknown.
On January 25, 2010, Schvacho purchased 500 shares of Comsys stock at the
price of $12.40 per share for a total cost of $6,200.00. Also on January 25, 2010,
Enterline called Schvacho at 5:46 p.m. and the call was recorded as lasting for 1
minute. At 9:04 p.m., Enterline called Schvacho and the call was recorded as lasting
for 11 minutes. The content of these calls is unknown.
On January 26, 2010, Schvacho purchased 2,634 shares of Comsys stock for
$33,319.68.
On January 27, 2010, Schvacho called Enterline at 9:42 a.m. The call was
recorded as lasting for 8 minutes. The content of the call is unknown.
On January 28, 2010, at 7:30 p.m., Comsys’ board met by telephone for an
update on the progress of the proposed transaction with Manpower. Comsys
management and Baird reported that Manpower had completed its due diligence and
was prepared to move forward at the price it proposed.
On January 29, 2010, Enterline called Schvacho at 8:11 a.m. and the call was
recorded as lasting for 1 minute. Enterline called Schvacho again at 8:12 a.m. The
— 23 —
call was recorded as lasting for 15 minutes. At 9:02 a.m., Schvacho called Enterline
and the call was recorded as lasting for 1 minute. Schvacho called Enterline at 9:03
a.m. at a different phone number. The call was recorded as lasting for 3 minutes.
The content of these calls is unknown. Also on January 29, 2010, Schvacho
purchased 10,000 shares of Comsys stock for $127,541.40.
On January 31, 2010, Schvacho and Enterline communicated multiple times.
Enterline called Schvacho at 9:13 a.m. and the call was recorded as lasting for 14
minutes. At 5:04 p.m. and at 6:24 p.m., Enterline called Schvacho, with each call
recorded as lasting for 1 minute. At 9:00 p.m., Schvacho called Enterline and the
call also was recorded as lasting for 1 minute. At 9:02 p.m., Schvacho called
Enterline at a different phone number and the call was recorded as lasting for 7
minutes. The content of these calls is unknown.
During the evening of January 31, 2010, Comsys’ board met by telephone for
an update on the proposed transaction, including the negotiation of the merger
agreement. Counsel advised the board that negotiation and preparation of the
merger agreement should be substantially completed in time for its presentation to
the board at its meeting scheduled for the following day.
On February 1, 2010, Schvacho purchased 8,775 shares of Comsys stock for
$115,243.50. The Comsys board met as scheduled on February 1, 2010, to consider
— 24 —
the near-final draft of the merger agreement and to receive Baird’s opinion as to the
financial fairness of the transaction. The board unanimously approved the merger
and recommended that Comsys’ stockholders adopt the merger agreement and its
terms. The merger agreement was executed by Comsys and Manpower on the
evening of February 1, 2010. The transaction was publicly announced the morning
of February 2, 2010.
On February 2, 2010, Enterline called Schvacho at 9:40 a.m. The call was
recorded as lasting for 1 minute. At 11:14 a.m., Schvacho called Enterline and the
call was recorded as lasting for 1 minute. The content of these calls is unknown. On
February 2, 2010, Schvacho sold 35,813 shares of Comsys stock, representing half
of his Comsys holdings, for total proceeds of $626,144.04.
Schvacho had a notebook that he principally used to record trading activity in
Comsys stock. In the middle of the pages reflecting Schvacho’s tracking of Comsys
market activity is a page that relates primarily to a race that Schvacho helped
organize for an arthritis charity. The race took place on December 12, 2009. The
page before the arthritis race page tracks Comsys market activity on November 19
and November 20, 2009. The page after the arthritis race page tracks Comsys
market activity beginning about a month later, on December 16, 2009, and some
period thereafter. The arthritis race page contains a number of calculations Schvacho
— 25 —
made to figure out the length of the race course. Those calculations involve numbers
expressed in the hundreds and thousands. None of them include a decimal point.
Near the bottom of the page, in the left-hand margin, the number 17.50 is written and
circled. That number does not appear to relate to the calculations shown on the rest
of the page. Given the placement of the page in the notepad, it is possible that the
circled number 17.50 was written sometime in December but before Schvacho
began recording trades on December 16th.
Schvacho does not remember why he had written and circled “17.50” on his
notepad or what the number represented. On the page of the notebook on which
Schvacho calculated his profits—which appears several pages after the page on
which Schvacho wrote the figure “17.50”—Schvacho used “$17.48” per share to
calculate his profits. The opening price of the stock the day the merger was
announced was $17.48. There are a number of blank pages at the end of the
notebook, and there was available blank space on the page on which he calculated
his profits and on the page where he tallied the number of shares he had bought.
I.
Enterline Did Not Intentionally Provide Schvacho Inside Information
Regarding Comsys
The Court evaluated the credibility of Enterline’s testimony and found the
testimony, and the manner in which it was presented at trial, to be credible and
believable. The Court finds that Enterline did not intentionally provide Schvacho
— 26 —
with inside information regarding the acquisition of Comsys by Manpower or any
other Comsys confidential information and took steps to assure that he did not
discuss Comsys business, and especially Comsys’s discussions with Manpower, in
Schvacho’s or another person’s presence.
J.
Enterline Lacked Knowledge of Schvacho’s Trading in Comsys
Schvacho did not tell Enterline, and Enterline did not know, that Schvacho
had purchased stock in Comsys during the nine years Schvacho traded stock in
Comsys, including during the period immediately preceding Manpower’s
acquisition of Comsys. Schvacho stated he did not tell Enterline he was trading
Comsys stock because he valued his friendship with Enterline and did not want to
jeopardize the relationship. Schvacho actively traded in Comsys stock over many
years, including before the time the SEC alleges he used inside information. The
trades made before the period of alleged use of inside information were significant,
including trades made between October 9, 2003, and July 30, 2007, that were valued
at over $100,000.
Enterline first learned in June 2010 that Schvacho had purchased stock in
Comsys, after Enterline had been contacted by FINRA as part of its investigation
relating into trading of Comsys stock prior to the Manpower acquisition.
— 27 —
Enterline testified he felt betrayed when he learned that Schvacho had traded
in the stock of his company. Enterline was concerned about the appearance of
impropriety associated with Schvacho’s trades and his personal reputation as the
CEO of a public company. At the time of trial, the relationship between Enterline
and Schvacho was significantly estranged.
K.
Additional Findings of Fact
The SEC admits that any inside information that Schvacho might have had
about Comsys came from Enterline. That is, the SEC admits Enterline was the sole
possible source of any alleged inside information obtained by Schvacho. The Court
finds Enterline never intentionally provided inside information about Comsys to
Schvacho. Enterline repeatedly and consistently denied ever having discussed
inside information about Comsys with Schvacho or in his presence. The Court
credits and accepts Enterline’s testimony in this regard as true.
The SEC does not have any evidence of the actual communications between
Schvacho and Enterline between November 6, 2009, and February 2, 2010. The
SEC does not have any direct evidence of the content of any communications
between Enterline and other Comsys executives that it alleges Schvacho may have
overheard between November 6, 2009, and February 2, 2010. The SEC does not
have any direct evidence that Schvacho was in the presence of Enterline while
— 28 —
Enterline had a telephone or other conversation in which inside information was
discussed with anyone, including other Comsys employees. The SEC did not offer
any record of the content of any text messages between Enterline and Schvacho.
The SEC admits that its proof of the insider trading is based on circumstantial
evidence based on Schvacho’s trading activity, phone and text message records, the
fact that Enterline and Schvacho dined together at a restaurant on November 6, 2009,
and were together from December 12-14, 2010, in connection with the transport of
Enterline’s sailboat from St. Petersburg to Ft. Myers, Florida, and the note written in
the notebook that Schvacho used principally to track market activity in Comsys
stock during the period of November 9 or 10, 2009, through February 1, 2010.
II.
CONCLUSIONS OF LAW
The SEC alleges that Schvacho violated Sections 10(b) and 14(e) of the
Exchange Act and Rules 10b-5 and 14e-3 promulgated by the SEC thereunder. The
SEC seeks injunctive relief against Schvacho to prohibit Schvacho from violating
Sections 10(b) and 14(e) of the Exchange Act, to disgorge Schvacho of gains in the
amount of $512,667.86, plus prejudgment interest, and the imposition of civil
penalties pursuant to Sections 21(d)(3) and 21A of the Exchange Act.
— 29 —
A.
Liability for Violating Section 10(b) and Rule 10b-5
a. Elements
The SEC alleges that Schvacho violated Section 10(b) of the Exchange Act
and Rule 10b-5. (Compl. at ¶¶ 57-65; Pretrial Order at 20.) Section 10(b) of the
Exchange Act and Rule 10b-5 make it unlawful for a person to employ any device,
scheme, or artifice to defraud someone else in connection with the purchase or sale
of a security. 15 U.S.C. § 78(j)(b); 17 C.F.R. § 240-10b-5.
To prove that Schvacho engaged in insider trading in violation of Section
10(b) of the Exchange Act and Rule 10b-5, the SEC must prove by a preponderance
of the evidence each of the following three elements: First, that Schvacho used an
instrumentality of interstate commerce in connection with the purchase or sale of a
security. Id. Second, that Schvacho used a device, scheme, or artifice to defraud in
connection with the purchase or sale of a security. Id. Third, that Schvacho acted
with scienter, that is he acted knowingly or with severe recklessness. Id. Cf. Aaron
v. SEC, 446 U.S. 680, 686 n.5 (1980).
The SEC alleges that Schvacho engaged in “insider trading.” A person may
engage in insider trading when he purchases or sells a security on the basis of
material, nonpublic information in breach of a duty of trust or confidence owed
direct, indirectly, or derivatively to the corporation that issued the security, to the
— 30 —
corporation’s shareholders, or to the information’s source.
The SEC specifically relies in this action on a misappropriation theory of
insider trading. Insider trading may occur when a person misappropriates material,
confidential information and then trades securities on the basis of that information.
See United States v. O’Hagan, 521 U.S. 642, 652 n.23 (1997). Cf. 17 C.F.R. §
240.10b5-2. This breaches the duties of confidentiality and loyalty that the person
owes to the source of the information. Id. The person’s use of the confidential
information defrauds the source of the exclusive use of that information. Id. Here,
SEC alleges misappropriation by Schvacho’s violation of a duty of confidentiality
and loyalty owed to Enterline.
To prove misappropriation, the SEC must show, by a preponderance of the
evidence, that Schvacho misappropriated inside information from Enterline, that
Schvacho owed Enterline a duty of confidentiality, and that Schvacho used the
inside information to trade Comsys shares. Id. The SEC acknowledges that it does
not have any direct evidence of misappropriation of insider information and instead
relies only on circumstantial evidence of misappropriation generally based on
various telephone calls that Schvacho had with Enterline, text messages sent
between them, and that they were in the presence of each other at a dinner, during a
drive to Florida and to the airport, and on a sailing trip. It also relies on trades in
— 31 —
Comsys stock Schvacho made in temporal proximity to the time periods when
Schvacho and Enterline communicated or were together and on the “17.50” entry in
Schvacho’s notebook. Finally, the SEC relies on the evidence of the timing of
discussions between Comsys and Manpower and Enterline’s participation in them.
See SEC v. Ginsburg, 362 F.3d 1292, 1298 (11th Cir.2004) (“The SEC must prove
violations of § 10(b) . . . by a preponderance of the evidence, and may use direct or
circumstantial evidence to do so.”); SEC v. Steffes, 805 F. Supp. 2d 601, 614-15
(N.D. Ill. 2011); SEC v. Michel, 521 F. Supp. 2d 795, 822-25 (N.D. Ill. 2007).
The parties do not dispute that the SEC has satisfied its burden of proof with
respect to the first element required to prove a Section 10(b) violation, agreeing that
Schvacho used an instrumentality of interstate commerce in connection with the
purchase of Comsys stock. The parties do dispute that the SEC has proved the
second and third elements of a Section 10(b) violation.
b. The SEC Failed to Satisfy its Burden of Proof that Schvacho
Possessed Material, Nonpublic Information About Comsys.
The Court finds that the circumstantial evidence that the SEC offered at trial is
insufficient to prove, by a preponderance of the evidence, that Schvacho possessed
material, nonpublic information about Comsys and used such information to trade in
Comsys stock with scienter. The SEC’s case is based on the litigation theory that
Schvacho traded in Comsys stock using his access to material, nonpublic
— 32 —
information he obtained from Enterline and that such access violated a duty of
confidentiality that Schvacho owed to Enterline.3 “Potential ‘access’ [however] to
material, nonpublic information, without more, in insufficient to prove [the
defendant] actually possessed such information.” SEC v. Rorech, 720 F. Supp. 2d
367, 410 (S.D.N.Y. 2010); see also SEC v. Horn, No. 10-cv-955, 2010 WL
5370988, at *6 to *7 (N.D. Ill. Dec. 16, 2010) (granting summary judgment to
defendant where SEC failed to demonstrate what specific information was in
defendant’s possession). It is this proof failure that precludes the Court from finding
for the Plaintiff.
The SEC offers two evidentiary theories to support its misappropriation
claim: (1) that Enterline confided to Schvacho material, non-public information
about Comsys and its business plan, specifically Comsys’ merger and acquisition
plans; or (2) that Schvacho obtained material, non-public information from Enterline
3
A duty of confidentiality is owed for the purposes of Section 10(b) and Rule 10b-5
when “a person agrees to maintain information in confidence” or when “the person
communicating the material nonpublic information and the person to whom it is
communicated have a history, pattern, or practice of sharing confidences, such that
the recipient of the information knows or reasonably should know that the person
communicating the material nonpublic information expects that the recipient will
maintain its confidentiality.” 17 C.F.R. § 240.10b5-2(b). See also United States v.
O’Hagan, 521 U.S. 642, 652 n.23 (1997). Even if Schvacho owed a duty of
confidentiality to Enterline, the Court concludes the SEC has not proved by a
preponderance of the evidence that any disclosure of inside information occurred or
that Schvacho used it to trade in Comsys stock.
— 33 —
indirectly by, for example, overhearing Enterline’s communications with third
parties or by accessing confidential information about the potential acquisition that
Enterline may have left in a briefcase on the sailboat Schvacho and Enterline
transported from St. Petersburg to Ft. Myers, Florida.
The SEC contends that Enterline intentionally or carelessly revealed inside
information to Schvacho, but trusted that Schvacho would not trade using it. The
SEC’s evidence at trial largely focused on records of times of telephone calls and
text messages between Schvacho and Enterline during the period 2001 through
February 2010, with particular focus on the period October 2009 through February
2010, and the purchase and sale of Comsys stock during these periods. The SEC
juxtaposes the stock purchases and sales with these phone calls, arguing that a
“pattern” exists between conversations and stock transactions that shows,
circumstantially, that Schvacho had engaged in trading activity using inside
information, the source of which was Enterline. While facially interesting, this
pattern and the other evidence upon which the SEC relies does not prove, by a
preponderance of the evidence, that Schvacho misappropriated insider information
to make the trades alleged by the SEC.
The SEC selects an interpretation of the evidence that ignores other
interpretations that discredit the SEC’s misappropriation theory in this matter. The
— 34 —
SEC and Schvacho presented significant evidence of a long and close relationship
between Enterline and Schvacho. Included in the evidence presented was the
unrebutted testimony that they spoke by phone and visited in person with unusual
frequency.4 The SEC presents certain of these communications that occurred in
close proximity to Schvacho’s trades in Comsys shares to claim this temporal
evidence supports that Enterline either intentionally or inadvertently passed along
inside information that Schvacho misappropriated. While this timing is interesting it
is not persuasive and does not meet the SEC’s burden of proof in this case. The
evidence was that Enterline and Schvacho spoke with each other with enormous
frequently about matters that Enterline and Schvacho acknowledged concerned
mainly their personal relationship and sometimes about the common business
venture in which they were involved, but which is not at issue in this litigation. The
SEC’s suggestion that each of the conversations they referenced was followed by a
trade in Comsys stock, and thus the communication must have included inside
information, is not supported by the evidence directly or circumstantially and is not
supported by a practical interpretation of the evidence. The SEC contends Schvacho
4
The SEC did not present any evidence, including phone records, to show that the
frequency or pattern of communication and the times when Enterline and Schvacho
were together was any different during the period when the SEC contends that
insider information was misappropriated by Schvacho than it was before the insider
trading allegedly began.
— 35 —
overheard calls between Enterline and Comsys personnel on two separate occasions:
(1) during the dinner at SABistro on November 6, 2009 and (2) when Schvacho
picked up Enterline at Atlanta Hartsfield-Jackson International Airport on
December 19, 2009. On November 6, 2009, Enterline and Schvacho had dinner at
SABistro. The dinner concluded at approximately 8:53 p.m., which is the time
Enterline made a payment on his credit card in the amount of $189.48. Enterline
placed two calls that evening, one at 7:31 p.m. to Kerr, which was recorded as
lasting 9 minutes, and a second at 7:47 p.m. to a blocked number, which was
recorded as lasting 5 minutes. There is no evidence that the second call at 7:47
involved Comsys business.
The SEC failed to present any evidence regarding the time that Schvacho and
Enterline first met at SABistro or that Enterline placed the calls at the dinner table5
as opposed to excusing himself, as was his general practice when discussing
business matters. There is not any basis to conclude that either of the two calls in
question occurred in Schvacho’s presence and the evidence is further that Enterline
placed both calls. The Court finds implausible the SEC’s suggestion that Enterline,
in the presence of Schvacho and others, would have placed a call to discuss
5
The SEC did not call as a witness any other person who attended this dinner to
support that Enterline had discussions in the earshot of others about Comsys
business or the potential merger.
— 36 —
confidential information regarding a potential merger. The Court concludes that
Schvacho did not obtain inside information by overhearing Enterline’s telephone
calls on November 6, 2009.
Regarding the December 19, 2009, event when Schvacho drove Enterline
home from the airport, there is nothing to support that they discussed anything
regarding Comsys during this short trip and the SEC’s conclusion that insider
information was shared is based on the fact that they were together and that, two
days later Schvacho purchased Comsys shares. Considering this evidence
individually and in the aggregate with other evidence presented, the Court finds that
the SEC has failed to adduce sufficient evidence to meet its burden of proof that
Schvacho discussed Comsys business in the presence of Schvacho or others and, in
fact, Enterline testified that he would not and did not have such discussions with
others or in earshot of them. There is, at most, scant, unconvincing circumstantial
evidence that suggests the unconfirmed possibility that Schvacho obtained material,
nonpublic information by overhearing calls between Enterline and other Comsys
executives or accessing confidential documents regarding the pending acquisition.
That does not meet the SEC’s burden of proof in this litigation.
The SEC’s interpretation of the evidence is contradicted, convincingly, by the
testimony of Enterline. Enterline, a business professional with an unblemished
— 37 —
history of leadership in the private sector, testified emphatically that he did not and
would not disclose proprietary, inside information to Schvacho or any other person
to whom such information was not permitted to be disclosed. Enterline offered his
unqualified testimony that he did not disclose inside information to Schvacho and
specifically did not disclose to him any information about Comsys’s consideration
or decision regarding mergers with or acquisitions of or by other companies.
Enterline was well-versed in Comsys’ policy prohibiting and guarding against the
disclosure of inside information. He knew disclosure of inside information had
criminal consequences. Enterline presented convincing testimony that his business
practice was not even to discuss business matters over the phone or in person with
people with whom he was allowed to engage in such discussions when others were
present. Enterline testified that when individuals asked him how Comsys was doing,
his standard practice was to answer “fine,” avoiding the possibility he would
inadvertently disclose company information. Enterline testified that he was vigilant
about avoiding conducting any business conversations in the presence of others, and
his general practice was to put the call off by telling a caller that he would have to
call them back later. Other times he would either speak cryptically or walk away
from the individuals in his presence. In short, his practice was to avoid
conversations about Comsys’s business and to defer them until he was able to
— 38 —
discuss such matters outside of the presence of others, including Schvacho. To
accept the SEC’s interpretations of the circumstantial evidence upon which the SEC
relies, the Court would have to believe that Enterline, over a period of years,
intentionally or carelessly passed along sensitive, private and confidential inside
information to Schvacho without regard to the serious consequences that would
follow if he did. Enterline, who the Court finds to be a credible witness6 who offered
credible, believable testimony, discredited the SEC’s interpretation of the evidence.
That Enterline was a credible witness is punctuated by the SEC’s examination of
Enterline at trial. The examination did not attack Enterline’s specific testimony or
his credibility generally. The SEC did not offer any evidence that Enterline’s
testimony was other than credible and truthful.
The Court also has considered the evidence that the SEC claims discredit
Schvacho’s testimony at trial. The Court specifically considered the claimed
inconsistencies in Schvacho’s testimony including his testimony about his Comsys
investment strategy and his belief that Comsys share value increase would lag
behind the performance of non-specialty staffing companies, that he engaged in
6
In finding Enterline to be a credible witness the Court considers his interest in the
outcome of this litigation, his recollection of facts and events, his candor, his
responsiveness to questions, that he was not impeached by inconsistent statements,
and that he no longer is friends with Schvacho. In short, his testimony was credible
and believable.
— 39 —
what the SEC characterized as a “panic” sale of stock in late October 2009, and
Enterline’s possession of a briefcase during the mid-December 2009, St. Petersburg
to Ft. Myers, Florida, sailboat transit trip that the SEC contends may have had inside
information about Comsys’s discussions with Manpower and a possible
combination of the companies. That these inconsistencies are not material is
particularly underscored by Enterline’s testimony that the briefcase he had did not
have merger business documents in it, that it was stored in his sleeping compartment
at the bow end of the boat in a locker, and that there was no evidence anyone had
accessed it. This suggests the overreaching, self-serving interpretation that the SEC
imposed on the evidence presented at trial.7 That Schvacho may have jumped the
7
The SEC also contends that Schvacho overheard Enterline discussing the potential
merger during their December 11, 2009, through December 14, 2009, trip to Florida.
The SEC failed to produce any evidence that Enterline engaged in phone
conversations in Schvacho’s presence during the sailing trip. Enterline testified that
he did not participate in any telephone calls during the period that he and Schvacho
were sailing from St. Petersburg to Fort Myers. On December 15, 2009, David
Stamford and his girlfriend drove Schvacho and Enterline from Fort Myers back to
St. Petersburg. There is no evidence any of the calls Enterline placed to other
Comsys employees on December 15 occurred in Schvacho’s presence.
The evidence also fails to support the SEC’s assertion that Schvacho obtained
inside information on December 19, 2009, when Schvacho picked up Enterline from
Atlanta Hartsfield-Jackson International Airport. Enterline’s flight was scheduled
to land at 8:46 a.m., but phone records show that Schvacho placed a call to Enterline
at 8:51 a.m., which is recorded as lasting for 1 minute. Enterline and Schvacho then
drove to Schvacho’s house in Lilburn, Georgia. At 9:33 a.m., Enterline placed a
23-minute call to Bramlett. The Court concludes that Schvacho was not in
Enterline’s presence during this call.
— 40 —
gun in selling Comsys stock on the basis of an intraday price decrease and that he
may have, from time to time, varied from his stated trading philosophy is not
sufficient evidence to show that Schvacho testified falsely at trial or to allow the
Court to find the SEC met its burden of proof in this case. Finally, the Court
considered the “17.50” entry in Schvacho’s notebook. The Court finds one possible
explanation of the “17.50” figure is that it is a rounded valuation of Comsys shares at
some point in time prior to the merger, but there is no direct evidence to support this
interpretation or when the entry was written and while it is an odd entry and oddly
placed in the notebook, its meaning even in the context of all the other evidence in
this case is not, alone or in the aggregate with other evidence, sufficient for the Court
to find that it aids the SEC in meeting its burden of proof in this case.
Finally, the Court notes the complete absence of any testimony of the content
of any conversation or communication between Enterline and Schvacho to support
any exchange of inside information to Schvacho. That the SEC did not present any
evidence of any text message upon which it relied at trial is telling since text
message content often is available from providers of text messaging services. Even
if it was not, for some reason, available to the SEC in this case, the fact still is there is
not any evidence of the content of any communication between Enterline and
Schvacho to support any communication of insider information—deliberately or
— 41 —
carelessly—from Enterline and Schvacho and to conclude otherwise would require
the Court to improperly speculate that there was.
The Court finds that the evidence does not support the SEC’s theory that
Schvacho misappropriated inside information by hearing calls from or overhearing
calls between Enterline and other Comsys executives or from reviewing confidential
Comsys documents in Enterline’s possession.
Accordingly, the Court finds and concludes that the SEC failed to meet its
burden to prove that Schvacho possessed material, nonpublic information about
Comsys during the period between November 6, 2009, and February 2, 2010, and
did not purchase or sell Comsys stock using inside information. The SEC has not
proved, by a preponderance of the evidence, its claim under Section 10(b) of the
Exchange Act and Rule 10b-5.
B.
Schvacho is not Liable for Violating Section 14(e) and Rule 14e-3.
a. Elements
The SEC alleges that Schvacho violated Section 14(e) of the Exchange Act
and Rule 14e-3. (Compl. at ¶¶ 66-68; Pretrial Order at 20.) Liability under Section
14(e) of the Exchange Act and Rule 14e-3 arises if the following four elements are
present:
(a) If any person has taken a substantial step or steps to
commence or has commenced a tender offer and another person is in
— 42 —
possession of material information relating to such tender offer;
(b) which information the other person knows or has reason to
know is nonpublic;
(c) which information the other person knows or has reason to
know has been acquired directly or indirectly from the offering person,
from the issuer of the securities sought or to be sought in such tender
offer or from an officer director, partner or employee or any other
person acting on behalf of the offering person or issuer; and
(d) the other person purchases . . . any security to be sought or
sought in such tender offer.
Tender Offers, 45 Fed. Reg. 60,410, 60,413 (Sept. 12, 1980). The SEC must prove
each of these elements by a preponderance of the evidence. SEC v. Garcia, No. 10
CV 5268, 2011 WL 6812680, at *9 n.5 (N.D. Ill. Dec. 28, 2011).
The Court concluded in the context of the SEC’s claim under Section 10(b)
and Rule 10b-5, that the SEC had failed to prove that Schvacho possessed material,
nonpublic information about Comsys. For these same reasons, SEC’s claim under
Section 14(e) and Rule 14e-3 has not been proved by a preponderance of the
evidence. See id. at *9 (noting the SEC must prove possession of material,
nonpublic information under both charges).
III.
CONCLUSION
Accordingly, for the foregoing reasons,
IT IS HEREBY ORDERED that the Clerk of Court enter a verdict and
judgment in favor Defendant Ladislav “Larry” Schvacho.
— 43 —
SO ORDERED this 7th day of January 2014.
— 44 —
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