805 F. Supp. 2d 601
N.D. Ill.2011Background
- SEC alleges insider trading in FECI around Fortress acquisition; Griffiths and Cliff Steffes knew of sale before public announcement.
- Griffiths and Cliff Steffes worked for FECR, a FECR officer and a trainman, respectively; they were bound by FECR/ FECI codes of conduct forbidding trading on material nonpublic information.
- Acquisition process began with Morgan Stanley selling FECI; multiple confidential bids and management meetings occurred Feb–Apr 2007; tours and rail trips occurred in March–April 2007.
- Defendants and family members began substantial FECI purchases from late March 2007, resulting in large profits after Fortress offered $3.5B and announced the deal May 8, 2007.
- SEC alleges a pattern: conversations among defendants followed by large, atypical trades; tip disclosures allegedly to Rex C. Steffes and others.
- Court addresses Rule 12(b)(6) dismissal standard and heightened pleading requirements for fraud, and ultimately denies the motions to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether possession of material nonpublic information is pled plausibly | Griffiths knew sale; combined facts show material nonpublic info | Insufficient specifics; information not clearly material | Plausible possession pleaded; sufficient at this stage |
| Whether misappropriation theory is pled adequately | Tipping pattern and subsequent trades show misappropriation | Phone calls alone not enough; need content of tips | Pled with plausible inferences; still viable at pleading stage |
| Whether breach of fiduciary duty is plausibly alleged | Tippee receivership and insider's duty breach via disclosure | Information not confidential or misused for personal advantage | Breaches plausibly alleged; duty violation supported by facts |
| Whether scienter is sufficiently pled | Concealment and pattern of suspicious timing support scienter | Rule 9(b) pleading requires more specifics on state of mind | Scienter adequately pled when viewed in entirety |
Key Cases Cited
- Dirks v. SEC, 463 U.S. 646 (U.S. 1983) (insider trading liability when information is misused in breach of fiduciary duty)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality standard for omitted facts in securities trading)
- Cherif v. SEC, 933 F.2d 403 (7th Cir. 1991) (classical vs. misappropriation theories of insider trading)
- Maio v. SEC, 51 F.3d 623 (7th Cir. 1995) (misappropriation theory and insider tipping framework)
- SEC v. Binette, 679 F. Supp. 2d 153 (D. Mass. 2010) (piecemeal information and insider trading via misappropriation theory)
- SEC v. Evans, 486 F.3d 315 (7th Cir. 2007) (tipping can support insider trading liability)
- United States v. Newman, 664 F.2d 12 (2d Cir. 1981) (insider trading theories and fiduciary duty concepts)