SEC v. TalbotSEC v. Talbot
- Reporters:
- Before:
- David R. Thompson, Kim McLane Wardlaw, Sandra S. Ikuta
Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel, Michael L. Post, Senior Counsel, Washington, D.C., for plaintiff-appellant Securities and Exchange Commission.
Richard Marmaro, Lance A. Etcheverry, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California; Preeta D. Bansal, Timothy G. Nelson, Sarah E. McCallum, Of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for defendant-appellee J. Thomas Talbot.
WARDLAW, Circuit Judge:
J. Thomas Talbot, a member of the board of dirеctors of Fidelity National Financial, Inc., a Delaware corporation, traded on confidential information about the impending acquisition of LendingTree, Inc., which he received in his capacity as a Fidelity director. We must decide whether Talbot can be held liable under
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Facts
J. Thomas Talbot is a businеssman and attorney who, for the past thirty years, has served as a director on the boards of several companies. In April 2003, Talbot sat on the Board of Directors (the “Board”) of Fidelity National Financial, Inc. (“Fidelity”), a publicly traded Delaware corporation and national title insurance company. Fidelity owned approximately a 10 percent interest in LendingTree, Inc. (“LendingTree”), an online lending and realty services exchange, which is publicly traded on the NASDAQ National Market System.
On April 18 or 19, 2003, LendingTree‘s CEO, Douglas Lebda, informed Brent Bickett, Fidelity‘s Vice President, that negotiations were proceeding for a third party to acquire
On April 22, 2003, Fidelity held its quarterly board meeting, which Talbot attended. Toward the end of the four- or five-hour meeting, Foley presented to the Board the information from Bickett for a Board discussion as to whether Fidelity should agree to refrain from selling its LendingTree stock during the pendency of the transaction and also “agree to [vote Fidelity‘s] shares in favor of the transaction.” Foley told the Board the “exciting information” that “Lending Tree was going to be acquired.” Foley also informed the Board that “[w]e didn‘t know who the acquirer was at that time because [LendingTree] would not disclose it to us,” but that Fidelity “would make about $50 million on the transaction.” According to Terry Christensen, another Board member, Foley informed the Board that Fidelity‘s stock in LendingTree “would be acquired at a very attractive price,” between $16 and $18, which represented a 23-39 percent increase over LendingTree‘s closing price of $12.97 per share on April 22, 2003. Talbot remembered the meeting differently, declaring that, although he could “not recall the exact words spoken . . . some person or company might be interested in acquiring LendingTree, Inc. . . . and [Fidelity] would benefit if the
Although Foley did not tell the Board that the information was confidential, one Board member, Cary Thompson, said “something to the effect that this is inside information, nо one trade in the stock. Make sure you don‘t do anything with the stock.” Thompson said this “plenty loud. It was loud enough to hear him.” All Board members present at the meeting, except for Talbot, considered the LendingTree information to be confidential.
Various directors testified at depositions to their understanding of how far along the negotiations had proceeded between LendingTree and the unnamed acquirer, as conveyed by Foley: “far along, and it would be announced as a deal shortly thereafter” (Thompson); “advanced discussions” (Bickett); and that “it looked like there was going to be a transaction” (Christensen). Talbot interpreted Foley‘s words as far less definite, understanding the information about LendingTree to be a “rumor,” not a “factual statement.” Talbot wrote “LENDING TREE” at the top of his copy of the meeting agenda; those were the only notes he took during the meeting.
On April 24, 2003, two days after the meeting, Talbot purchased on margin 5000 shares of LendingTree at approximately $13.50 per share for a total of $67,500. Talbot testified that Foley‘s comments at the April 22, 2003 regarding LendingTree “triggered [his] conduct on April 23rd to look into [LendingTree] more carefully.” A number of factors influenced his decision to purchase the stock: Fidelity had invested in it; it was a real estate company, which he considered to be a good buy; interest rates would likely remain low; the high-tech market was experiencing a resurgence; and, based on the “rumor” at the April 22 meeting, other pеople were clearly
On April 25, 2003, LendingTree sent Fidelity a written letter agreement restricting the manner in which Fidelity could use any confidential information it received from LendingTree in connection with the proposed tender offer. The agreement stated:
FNF [Fidelity] may disclose Confidential Information to its directors, officers, employees, partners, affiliates, agents, advisors or representatives . . . to the extent necessary to permit such Representatives to assist FNF in evaluating and analyzing a Possible Transaction, provided, however, that FNF shall instruct each such Representative to be bound by the terms of this Agreement to the same extent as if they were рarties hereto and FNF shall be responsible for any breach of this Agreement by any of its Representatives . . . .
The directors were not advised of the confidentiality agreement.
Talbot continued to monitor LendingTree‘s stock closely, and, after being satisfied that “the price was moving up . . . [a]nd the volume was solid,” on April 30, 2003, he purchased on margin an additional 5000 shares at $14.50 per share for $72,500.
On May 5, 2003, three major events occurred, in the following sequence. First, Fidelity executed an agreement with USA Interactive Corporation (the acquiring company) and LendingTree to vote its shares in favor of the acquisition. Second, LendingTree and USA Interactive issued a press release announcing the acquisition. Third, LendingTree‘s stock rose roughly 41 percent on the news, immediately after which Talbot sold all of his LendingTree shares for a profit of
B. District Court Proceedings
On June 23, 2004, the SEC brought a civil action against Talbot in the District Court for the Central District of California. The complaint alleged that Talbot had traded on material, nonpublic information in violation of
Both parties moved for summary judgment. The district court granted Talbot‘s motion and denied the SEC‘s on February 14, 2006. Ruling on the SEC‘s “misappropriation theory” of liability, see generally United States v. O‘Hagan, 521 U.S. 642 (1997), the district court held that Talbot could be liable under such a theory only if Talbot or Fidelity owed a fiduciary duty of confidentiality to LendingTree, the “originating source” of the information on which Talbot traded. SEC v. Talbot, 430 F. Supp. 2d 1029, 1049, 1064 (C.D. Cal. 2006). Although the district court concluded that Fidelity was the “immediate ‘source’ ” of the information on which Talbot traded, id. at 1049, it held that because the SEC did not carry its burden of proving that Talbot, Fidelity, and LendingTree were “linked through a continuous chain of fiduciary relationships,” no liability could attach for Talbot‘s actions. Id. at 1049-50. The district court also found a genuine issue of material fact as to whether the information on which Talbot traded was material. Id. at 1039-42, 1051 n.65.
II. JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction pursuant to
We review a district court‘s grant of summary judgment de novo. Oak Harbor Freight Lines, Inc. v. Sears Roebuck, & Co., 513 F.3d 949, 954 (9th Cir. 2008). “Viewing the evidence in the light mоst favorable to the nonmoving party, we must determine whether there are genuine issues of material fact and whether the district court correctly applied the relevant substantive law.” Id. However, “[q]uestions of materiality, scienter, and reliance are mixed questions of law and fact, but ones involving assessments peculiarly within the province of the trier of fact. They are therefore reviewed under the ‘clearly erroneous’ standard.” Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976)).
III. DISCUSSION
A. The Misappropriation Theory
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engagе in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
[1] Traditionally,
Liability under the classical theory was not without limit, however, as it did not reach trading by an outsider who owed no fiduciary relationship to the corporation in whose shares he traded. For example, in Chiarella v. United States, the Supreme Court held that an employee of a financial printer who traded in securities of the targets of the printer‘s clients’ takeover bids could not be found guilty of insider trading. The printer, and derivatively, the employee, were not insiders of and had no duty to the targets, the entities in whose stock the employee traded. Chiarella, 445 U.S. at 231. The Court made clear that there is no “general duty between all participants in market transactions to forgo actions based on material, nonpublic information.” Id. at 233. Rather, a duty to disclose or abstain from trading “arises from a specific relationship between two parties.” Id.; see also Dirks v. SEC, 463 U.S. 646, 654 (1983) (“We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information ‘was not [the corporation‘s] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence.’ ” (quoting Chiarella, 445 U.S. at 232) (alterations in original)).
[2] In Chiarella, the United States had argued that the employee “breached a duty to the acquiring corporation when he acted upon information that he obtained by virtue of his position as an employee of a printer employed by the corporation,” but the majority did not address this question because it was not submitted to the jury. Chiarella, 445 U.S. at 235-36. In 1997, the Supreme Court gave its answer, recognizing a “complementary” theory of liability referred to as the “misappropriation” theory. O‘Hagan, 521 U.S. at 652. Under this theory, “a person commits fraud ‘in connection with’ a
B. Talbot‘s Liability Under the Misappropriation Theory
[3] Because Talbot traded in LendingTree securities—a corporation in which he was not an insider—liability can attach to his conduct only under the misappropriation theory. For a court to hold Talbot liable under the misappropriation theory, the SEC must demonstrate that Talbot knowingly misappropriated confidential, material, and nonpublic information for securities trading purposes, in breach of a duty arising from a relationship of trust and confidence owed to the source of thе information. See SEC v. Clark, 915 F.2d 439, 443 (9th Cir. 1990).
Neither party challenges the district court‘s findings that (1) the SEC failed to carry its burden of showing that Fidelity
1. Breach of Duty
The SEC contends that because “Talbot had a duty to . . . Fidelity, to keep information about the LendingTree transaction confidential, and [because] he secretly breached that duty by trading securities for personal profit,” hе can be held liable under the misappropriation theory.1 We agree.2
In United States v. O‘Hagan, the leading Supreme Court decision addressing the misappropriation theory, the SEC brought an action against James O‘Hagan under, inter alia,
The district court interpreted the misappropriation theory as requiring that “the trader and the originating source of the nonpublic information [be] linked through a continuous chain of fiduciary relationships: The employee [must owe] a duty to his employer to refrain from exploiting the information, and the employer in turn [must owe] the same duty to the corporate client.” Talbot, 430 F. Supp. 2d at 1049-50. This interpretation is understandable, for many cases addressing the misappropriation theory involve a “continuous chain” of duties. See, e.g., SEC v. Cherif, 933 F.2d 403, 406, 410-11 (7th Cir. 1991) (holding that a bank‘s former employee breached his fiduciary duty to the bank by misаppropriating confidential information regarding the bank‘s clients’ prospective financial transactions); SEC v. Materia, 745 F.2d 197, 202 (2d Cir. 1984) (holding that the employee of a financial printing company misappropriated information about proposed tender offers from documents submitted by the printing company‘s clients in breach of a fiduciary duty to his employer); SEC v. Musella, 578 F. Supp. 425, 438-39 (S.D.N.Y. 1984) (holding that a law firm‘s employee breached his duty of confidentiality to the law firm and its clients by misappropriating material nonpublic information about the firm‘s clients).
[4] Although a continuous chain of duties existed in each of the cases relied upon by the district court, a continuous
[5] This interpretation of O‘Hagan is confirmed by United States v. Carpenter. In Carpenter, employees of the Wall Street Journal participated in a fraudulent scheme in which their tippees traded based on information to be included in the paper‘s influential “Heard on the Street” column. 791 F.2d 1024, 1026 (2d Cir. 1986), aff‘d by an evenly divided Court, 484 U.S. 19, 24 (1987). The Wall Street Journal did not trade in the securities and had not received the information from clients that intended to do so. The Seсond Circuit upheld their convictions under
[6] The Second Circuit thus found liability in Carpenter where the employee breached his duty to the Wall Street Journal, his employer and the immediate source of the information on which his tippees traded. Similarly, Talbot traded on information he received from Fidelity, the immediate source and rightful owner of the information on which he traded. The Carpenter decision squarely supports our conclusion that a continuous chain of duties is not required for liability under the misappropriation theory. Our reliance on the Carpenter decision is complicated only by the Supreme Court‘s affirmance without comment as to the misappropriation theory. The Court instead focused its discussion on the mail and wire fraud violations at issue there. Carpenter v. United States, 484 U.S. at 24-28 (“Thе Court is evenly divided with respect to the convictions under the securities laws and for that reason affirms the judgment below on those counts.”); see also Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221, 234 n.7 (1987) (“[A]n affirmance by an equally divided Court is not entitled to precedential weight.”). However, Justice Ginsburg breathed new life into Carpenter‘s application of the misappropriation theory in O‘Hagan, where she explained that Carpenter is “a particularly apt source of guidance” in securities cases. O‘Hagan, 521 U.S. at 654 (internal quotation
A company‘s confidential information, we recognized in Carpenter, qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information, in violation of a fiduciary duty, the Court said in Carpenter, constitutes fraud akin to embezzlement—the fraudulent appropriation to one‘s own use of the money or goods entrusted to one‘s care by anothеr.
Id. (citations and quotation marks omitted).
[7] The Court‘s adoption of Carpenter‘s reasoning in support of its holding on the misappropriation theory leads to the conclusion that Talbot‘s conduct is encompassed within the misappropriation theory of securities liability. As in Carpenter and O‘Hagan, Talbot, as a member of Fidelity‘s Board, owed a duty arising from a relationship of trust and confidence to Fidelity, the source of the information on which he traded. The information on which Talbot traded was confidential, as it was property “entrusted” to him by Fidelity in his capacity as a Fidelity director. This is textbook misappropriation.
[8] Talbot contends that “[n]o reasonable factfinder could conclude that Mr. Talbot was obligated to keep the LendingTree information confidential.” We disagree. Although the Court did not define the prеcise contours of the fiduciary duty captured by the misappropriation theory, it is clear that Talbot falls within O‘Hagan‘s ambit. In O‘Hagan, the Court found that a partner in a law firm is in a relationship of trust and confidence with his firm. It follows that Talbot, as a member of Fidelity‘s Board of Directors, was also in a relationship of trust and confidence with Fidelity. This conclusion is supported by nearly seven decades of Delaware law, and common sense: “Corporate officers and directors are not permitted
[9] Talbot further contends that the information on which he traded was not confidential. He relies on his belief that the LendingTree information was a “rumor,” and the fact that Foley did not indicate the information was confidential. We find these arguments to be unpеrsuasive. As a matter of law, the very nature of the information on which Talbot traded was confidential. See, e.g., Hollinger Int‘l, Inc. v. Black, 844 A.2d 1022, 1046 (Del. Ch. 2004) (holding that “not publicly avail
[10] Talbot‘s use of Fidelity‘s confidential information, in breach of his duty to disclose that he intended to use that information before doing so, was in direct contravention of the purposes of the Exchange Act. As the Court recognized in O‘Hagan,
an animating purpose of the Exchange Act . . . [is] to insure honest securities markets and thereby promote investor confidence. Although informational disparity is inevitable in the securities markets,
investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law. An investor‘s informational disadvantage vis-á-vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill.
O‘Hagan, 521 U.S. at 658-59 (citing Victor Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 HARV. L.REV. 322, 356 (1979) (“If the market is thought to be systematically populated with . . . transactors [trading on the basis of misappropriated information] some investors will refrain from dealing altogether, and others will incur costs to avoid dealing with such transactors or corruptly to overcome their unerodable informational advantages.”)).
Barbara Aldave, Professor of Business Law at the University of Oregon School of Law, whose work was relied upon extensivеly by the Court in O‘Hagan and our court in SEC v. Clark, provides key insights into the misappropriation theory:
Properly understood, the misappropriation theory only bars trading on the basis of information that the wrongdoer converted to his own use in violation of some fiduciary, contractual, or similar obligation to the owner or rightful possessor of the information.
The misappropriation theory, so understood, comports well with our intuition about what is wrong with trading on nonpublic information. Most of us would not perceive such trading to be unfair merely because one trading party knows more than another. . . . On the other hand, no one likes to play a game with an opponent who has loaded the dice. We think that those who have special access to information,
because of employment or other relatiоnships, should be barred from using that information to gain an advantage over the rest of us.
Barbara Bader Aldave, Misappropriation: A General Theory of Liability for Trading on Nonpublic Information, 13 HOFSTRA L.REV. 101, 12-23 (1984).
The legislative intent and academic commentary relied on by the Court in O‘Hagan support our conclusion that Talbot‘s conduct is encompassed within the misappropriation theory. Talbot traded on the LendingTree information in violation of his fiduciary duty to Fidelity to maintain that information in trust and confidence. Talbot contends that, even so, the SEC cannot prevail because it cannot demonstrate that Fidelity was harmed by his conduct. We cannot determine from the record before us whether Talbot‘s trading injured Fidelity, but it most certainly injured the trading public. The Court in O‘Hagan stated thаt “[a] misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public.” O‘Hagan, 521 U.S. at 656 (citing Aldave, 13 HOFSTRA L.REV. at 120-21 (“[O]ne who misappropriates confidential information and uses it in his securities trading deceives the rightful owner or possessor of the information, but causes economic harm to other investors.”)). The failure to hold a person in Talbot‘s trusted position who traded on information acquired by him in that capacity would diminish the public perception of the markets as “honest,” as investors would understand that board members—those who have superior access to information about the businesses in which their companies invest—are free to profit off the informational advantages they possess by virtue of their rank.
[11] As Professor Aldave astutely recognizes, investors do not expect the playing field to be level, but they do expect that
2. Materiality
The SEC also contends that the LendingTree information on which Talbot traded was material as a matter of law. The district court found that a genuine issue of material fact exists regarding materiality. Talbot, 430 F. Supp. 2d at 1042. We agree with the district court.
An omitted fact is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy or sell securities. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). “[T]o fulfill the materiality requirement ‘there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.’ ” Id. (citation omitted). “Questions of materiality . . . involv[e] assessments peculiarly within the province of the trier of fact.” Arrington, 651 F.2d at 619 (citing TSC Indus., 426 U.S. at 450).
Courts look to a variety of factors to determine whether information is “material” under
The district court did not clearly err in determining that a genuine issue of material fact exists as to the materiality of the information on which Talbot traded. On the one hand, much of the deposition testimony would support a finding of materiality. Foley informed the Board that Fidelity stood to make a $50 million profit on the acquisition. Thompson and Bickett testified that, based on Foley‘s representations to the Board, they perceived the acquisition to be in the very advanced stages. Talbot purchased LendingTree stock just two days after hearing the information, and again six days later. The stock rose roughly 41 percent upon announcement of the acquisition, immediately after which Talbot sold all of his LendingTree stock. And, perhaps most tellingly, Talbot testified that he purchased the stock on margin because he “wanted to buy before anything happened.”
On the other hand, there is аlso evidence to support a finding that the information was immaterial. Most notably, Talbot
IV. CONCLUSION
[12] For the foregoing reasons, we REVERSE the district court and hold that Talbot can be held liable under the misappropriation theory because he traded on confidential information received in his capacity as a member of Fidelity‘s Board, but that a genuine issue of material fact as to the materiality of the information precludes judgment as a matter of law.
REVERSED and REMANDED.