Opinion ID: 692992
Heading Depth: 3
Heading Rank: 2

Heading: Tippee liability of Maio and Ladavac for trading in Anacomp stock.

Text: 42 With respect to their trading in the Anacomp stock, the SEC argues that Maio and Ladavac had a derivative duty to Anacomp under Dirks v. Securities and Exchange Commission, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), and we agree. In that case, the Supreme Court explained that: 43 [A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material non-public information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. 44 Id. at 660, 103 S.Ct. at 3264. Put another way, a tippee has a derivative duty not to trade on material non-public information when the disclosure of information is improper and the tippee knows or should know that this is the case. Id. at 659-60, 103 S.Ct. at 3263-65. Absent a breach by the insider there is no derivative breach. Id. at 662, 103 S.Ct. at 3265. 45 Whether an insider's disclosure breaches his fiduciary duty to his corporation, and is therefore improper, depends largely upon the purpose for the disclosure. Id. at 662, 103 S.Ct. at 3265-66. An insider's disclosure is improper when corporate information, intended to be available only for corporate purposes, is used for personal advantage. Id. at 654, 662, 103 S.Ct. at 3261, 3265-66. Absent a legitimate purpose for a disclosure, the test is whether the disclosure will benefit the insider either directly or indirectly. Id. at 663, 664, 103 S.Ct. at 3266, 3266. This test reflects the purpose of insider trading rules, which is to prevent the use of inside information for personal advantage. Id. The theory is that by disclosing information selectively the insider is, in effect, selling the information to its recipient for things of value to himself. Id. at 664, 103 S.Ct. at 3266. (quotations and citations omitted). As the Court wrote: 46 There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of non-public information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of profits to the recipient. 47 Id. (emphasis supplied). Absent such improper disclosure by the tipper, a tippee is not liable, because the tippee's duty is derivative. Id. at 659-60, 103 S.Ct. at 3263-65. 48 Maio and Ladavac argue that Ferrero's disclosure was not improper because he did not receive any direct or indirect personal benefit as a result of his tip. Therefore, the argument goes, they did not have any derivative duty to Anacomp. But the district court found that Ferrero's disclosure was an improper gift of inside information to Maio, a trading friend, see Dirks, 463 U.S. at 665, 103 S.Ct. at 3267 and the evidence supports the district court's finding. Ferrero met with or phoned Maio on a number of occasions; shortly thereafter Maio and Ladavac began dumping Anacomp stock and buying Xidex stock. This pattern of meetings or phone calls and trading supports the district court's finding that Ferrero gifted material non-public information concerning Anacomp's tender offer to Maio. Indeed, the record shows that Ferrero's tipping was just one of many favors that he has done for Maio through the years by reason of their friendship. 49 Significantly, Ferrero admitted that he had a duty to keep this information confidential, and neither Ferrero, Maio nor Ladavac have ever offered a legitimate purpose for the disclosures at issue. Instead, they merely denied that any disclosure took place; but the district court rejected this defense for obvious reasons. Absent some legitimate reason for Ferrero's disclosure, however, the inference that Ferrero's disclosure was an improper gift of confidential corporate information is unassailable. After all, he did not have to make any disclosure, so why tell Maio anything? Cf. SEC v. Lund, 570 F.Supp. 1397 (C.D.Cal.1983) (Lund had no derivative duty where corporate insider disclosed material information while asking Lund, as chief executive officer, president and chairman of the board of Verit Industries, whether Verit Industries would provide $600,000 in venture capital); SEC v. Switzer, 590 F.Supp. 756 (W.D.Okl.1988) (corporate insider did not breach fiduciary duty to corporation when he disclosed material non-public information to wife while seated in grandstands of high school track field so she could arrange child care, and therefore, coach who overheard disclosure and traded on this information had no derivative duty to disclose or abstain before trading). After Dirks it is clear that Ferrero could not have made these trades and then gifted the profits to Maio. Id. at 664. By the same token, Ferrero cannot gift these profits indirectly by giving Maio the information so that Maio can make the trades. 50 Thus, Maio had a derivative duty not to trade Anacomp stock on the basis of the material non-public information provided by Ferrero, if he knew or should have known that Ferrero had provided this information in violation of his fiduciary duty to Anacomp. Dirks, 463 U.S. at 661. The district court found that Maio knew that Ferrero's disclosure was improper but traded in Anacomp stock just the same, and that finding is not clearly erroneous. 11 Maio knew Ferrero's privileged position at Anacomp--after all he had recommended Ferrero for the job. Ferrero met with or phoned Maio on a number of occasions; shortly thereafter Maio and Ladavac began selling Anacomp stock and buying Xidex stock. Maio knew that Ferrero had given him inside information and promptly moved to exploit his advantage. Maio's derivative duty--and his trading in breach of that duty--are beyond cavil. 51 So are Ladavac's. The district court found that Ladavac had received the material non-public information disclosed by Ferrero and knew that the disclosure was improper. That finding is also supported by substantial evidence and is certainly not clear error. Ladavac knew that Ferrero and Maio were friends, and she knew that Ferrero held an important position at Anacomp. And whatever speculation was present in the market, Ladavac did not begin buying Xidex until June 7, 1988, after speaking with Maio, who was in Las Vegas with Ferrero. Ladavac's trading further corroborates this inference: she spent some $155,000 to buy Xidex stock on margin when her 1988 income was only $11,000 and she had virtually no liquid assets. Clearly she regarded this tip as extraordinarily valuable and reliable. Ladavac mistakenly argues that she had no duty to Anacomp because she did not know that Maio had a fiduciary duty to Anacomp or that Maio's tip violated that duty. But Ladavac's duty derives from Ferrero, not Maio. See Dirks, 463 U.S. at 661, 103 S.Ct. at 3265 (Tippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose the information ...); U.S. v. Victor Teicher & Co., L.P., 785 F.Supp. 1137, 1150 (S.D.N.Y.1992) (second-tier tippee properly held liable where he knew disclosure was improper); SEC v. Musella, 748 F.Supp. 1028, 1038 (S.D.N.Y.1989) aff'd 898 F.2d 138 (2nd Cir.1990) (the issue is whether a tippee, wherever he stood in a chain of tippees, 'either knew or should have known that he was trading on improperly obtained non-public information.' ). 52