by T. GormanPosted on Posted in SECActions

The SEC has been aggressive in bringing insider trading cases. While the high profile Galleon and expert network criminal cases typically garner the headlines, it is the actions being brought by the SEC which may have a much more significant impact on the law of insider trading. Cases such as SEC v. Cuban, 3:09-cv-2050 (N.D. TX.), which could redefine the question of duty, and SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 30, 2010), which may rewrite the mosaic theory, could expand the scope of liability.

SEC v. Doyle, Civil Action No. 11-cv-4964 (S.D.N.Y. July 20, 1011) is another example of a case which challenges existing insider trading law. The case centers on the acquisition of Brink’s Home Security by Tyco International, Inc. on January 18, 2010. Prior to the announcement defendant Robert Doyle obtained inside information about the transaction from a person identified as one of Tyco’s investment bankers according to the SEC. After obtaining that information Mr. Doyle, on January 14 and 15, 2010, purchased call options and 250 Brink’s shares.

Following the deal announcement the share price for Brink’s stock increased over 30%. The day after the announcement Mr. Doyle initially entered a “do not exercise” order as to the options. That would forfeit over $60,000 in profits. After several conversations with a broker he exercised the options and took the profits. In May he acquired 191 shares of Tyco in exchange for his 250 Brink’s shares pursuant to the merger agreement. Overall Mr. Doyle had profits of $88,555.

The inside information the Commission claims Mr. Doyle obtained is as follows:

1) Information about travel to Boca Raton: On August 19, 2009 the Banker flew to ADT’s headquarters in Boca Raton, Florida to prepare a presentation for Tyco’s management. The Banker “mentioned” to Mr. Doyle that he was flying to Boca Raton on Tyco’s corporate jet. He did not disclose the reason for the trip but Mr. Doyle knew the banker often worked on mergers.

2) Presentation document: In late August 2009 the Banker visited Mr. Doyle’s home. He inadvertently left a copy of a presentation to Tyco’s management about the proposed Brink’s purchase. It identified Tyco as the “Acquirer” and Brink’s as “Target.”

3) Changes in travel plans: During a January 13, 2010 during a phone conversation with the Banker Mr. Doyle “gleaned from changes in the Banker’s travel schedule that the transaction was imminent.

The Commission’s complaint alleges that by trading under these circumstances “Doyle breached his duty of trust and confidence to the Banker” and violated the insider trading laws.

The complaint does not detail any facts to support the conclusion that Mr. Doyle and the Banker had a relationship of trust and confidence. There is no allegation that the two people are relatives, friends or business associates. Nothing is stated about how long the two people knew each other.

Likewise, there is no allegation that the Banker asked Mr. Doyle to keep anything confidential. There is no allegation that the Banker expected Mr. Doyle to keep any information confidential. Similarly, there is nothing in the complaint suggesting that the Banker entrusted Mr. Doyle with inside information pursuant to such a relationship. To the contrary, the Banker does not appear to have entrusted Mr. Doyle with anything. Nothing in the “mention” of traveling to Boca entrusted Mr. Doyle with inside information. Nothing in the change of travel plans phone call entrusted Mr. Doyle with inside information. And, the presentation document was, according to the complaint, left “inadvertently,” not entrusted to, or misappropriated by, Mr. Doyle.

At best it might be inferred that Mr. Doyle and the Banker have some kind of relationship but such an inference is hardly not sufficient to support the SEC’s claim of unlawful conduct. The essence of the SEC’s claim seems to be that obtaining inside information – assuming that the presentation document contains material non-public information – creates a relationship of trust and confidence and a duty which supports a claim of unlawful insider trading. Yet putting together bits and pieces of information with data inadvertently acquired does not create the kind of duty alleged in the SEC’s complaint. Doyle more than pushes the edge of what constitutes insider trading, it appears to rewrite the law.

Nevertheless, Mr. Doyle settled with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay a civil penalty of $44,277.50.

by T. GormanPosted on Posted in SECActions

The Eighth Court held that a person who pleads guilty to a criminal violation of Section 10(b) and Rule 10b-5 is entitled at sentencing to invoke the “no knowledge” provision of Exchange Act Section 32(a) to try and avoid a term of imprisonment. U.S. v. Behrens, No. 10-3505 (8th Cir. Filed July 13, 2011). The defendant has the burden to establish the defense.

Bryan Behrens was indicted on one count of securities fraud, six counts of mail fraud, five counts of wire fraud and nine counts of money laundering. Eventually he pleaded guilty to a singe count of securities fraud alleging violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder. At sentencing he attempted to invoke the “no knowledge” provision in Section 32(a) to avoid a prison sentence. The district court held that this defense does not apply because the defendant pleaded guilty to a statutory offense and the provision does not apply to persons “convicted of violating criminal securities laws.”

The Eight Circuit reversed. Section 32(a) provides in pertinent part that “no person shall be subject to imprisonment under this section [which provides for criminal liability for willful violations of the Act] for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” Here Mr. Behrens pleaded guilty to a violation of Section 10(b) which by its plain terms includes a violation of a Commission rule or regulation: “It shall be unlawful . . . To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . .” Based on this language the Court concluded that Section 10(b) “makes the violation of a Securities and Exchange Commission . . rule or regulation an element of the offense.”

The Court bolstered its conclusion by citing the Supreme Court’s decision in U.S. v. O’Hagan, 521 U.S. 642 (1997). There the Court held that in criminal securities “there are two sturdy safeguards . . regarding scienter.” One is the requirement that to establish a violation of Section 10(b) and Rule 10b-5 the government must prove the person acted “willfully.” The other it that “a defendant many not be imprisoned for violating Rule 10b-5 if he proves that he had no knowledge of the rule.”

Here the district court incorrectly concluded that the “no knowledge” defense did not apply. Accordingly the case was remanded for resentencing.

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