INSIDER TRADING DEFENANT ENTITLED TO RULE 10b5-2 INSTRUCTION
A defendant in an insider trading case is entitled to a jury instruction that he furnished inside information to a person in reliance on a relationship of trust and confidence where he assets a defense under Rule 10b5-2, the Second Circuit held in a decision handed down on Friday. The instruction is proper, the Court held, despite the objection of the government and even though there is evidence the defendant knew the recipient of the information traded. Critical to the Court’s analysis was the fact that the information was furnished lawfully to the defendant in the first instance. U.S. v. Gansman, Docket No. 10-0731-cr (2nd Cir. Decided Sept. 9, 2011).
James Gansman was an attorney employed by the Transactional Advisory Services Department of Ernst & Young, LLP. Through that position he had access to confidential, material non-public information about potential mergers and acquisitions. From 2005 through late 2007 Mr. Gansman repeatedly provided information about pending deals to Donna Merdoch with whom he was having an affair. Ms. Merdoch repeatedly traded in shares of companies engaged in the merger talks prior to the deal announcement.
Mr. Gansman argued at trial that he entrusted the information to Ms. Merdoch based on their relationship of trust and confidence. Ms. Merdoch, who was named as a co-defendant in this case, entered into a cooperation agreement with the government prior to trial. As part of that arrangement she pleaded guilty to fifteen counts of insider trading, one count of making false statements to federal officers and one count of obstruction of justice. At trial there was ample evidence to support the government’s claim that Mr. Gansman knew Ms. Merdoch was using the information to trade, according to the Court of Appeals.
On February 25, 2010 a jury returned a verdict convicting Mr. Gansman on six counts of securities fraud. The insider trading charges were based on the misappropriation theory. The application of this theory is limited in criminal cases the Court noted: “Despite the seemingly ‘dubious validity of an open-ended delegation to an independent agency to go forth and create regulations criminalizing fraud . . the Supreme Court has blessed this delegation of power . . .[in O’Hagan, 521 U.S. at 650 holding that it] may not extend beyond the conduct the Congress intended to encompass in Section 10(b) . . .” Slip at n. 5 (internal citations omitted).
Here the Court held that Mr. Gansman was entitled to an instruction under Rule 10b5-2. That Rule provides in part that “For purposes of this section, a ‘duty of trust or confidence’ exists in the following circumstances, among others . . . whenever 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 . . .“
A defendant in Mr. Gansman’s position can invoke Rule 10b5-2. This is because he lawfully came into possession of the information. The Court went cautioned however that “we question whether that duty of trust or confidence can ever be relevant (or owed) to a person who was never authorized in the first place to have such information. O’Hagan explained that the misappropriation theory proceeds from the principle that a ‘fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information . . ‘ and therefore violate Section 10(b).” Slip at n. 10 (emphasis original).
The government’s framing of the issue such that the question is whether trust and confidence is owed under Rule 10b5-2 to an individual who transmits the information with the knowledge and intent that it will be used to trade is “neither useful nor instructive” the Court stated. Mr. Gansman put on a defense that he intended to commit securities fraud when the information was transmitted to Ms. Murdoch. According, Mr. Gansman was entitled to an instruction.
In this case there is no error however because the district court gave a Rule 10b5-2 instruction that was sufficient, although it was not the one requested by Mr. Gansman. The instruction he offered provide in part:
“In this case, Mr. Gansman contends that he did not provide Donna Merdoch with material nonpublic information with the understand that Murdoch would use the information to purchase or sell securities. Any material nonpublic information that Murdoch may have received from Mr. Gansman was shared with her as part of a relationship of trust and confidence, in which they had a history and practice of sharing work and personal confidences such that Mr. Gansman reasonably expected that Murdoch would keep any confidences he shared with her confidential and certainly expected that she would not use those confidences to buy or sell securities. Unbeknownst to Mr. Gansman, Murcoch used information he conveyed to her in confidence to trade securities for her benefit and the benefit of others . . . “
It would not have been error for the district court to give this instruction, the Second Circuit held. At the same time the Court cautioned that evidence of a past relationship of trust and confidence does not necessarily mean that the duty of trust and confidence existed at the time of the communication.
In this case by refusing to give the instruction offered by Mr. Gansman the district court did not error because it gave an alternate which was sufficient. It stated in part: “In this case, Gansman contends that he did not [provide Murdoch with inside information] with the understanding that she would use [it] to buy and sell securities. Accordingly, to [Gansman], any material non [-] public information that Murdoch may have received from him was shared with her as part of a relationship in which they shared work and personal confidences.” This was sufficient the Court held. Accordingly, the Court affirmed the conviction.
Mr. Gansman previously settled a parallel civil action with the Commission (here).
Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click on the following link: file:///C:/Users/tom/AppData/Local/Temp/CET1DSW-DS1.html