Opinion ID: 2651069
Heading Depth: 2
Heading Rank: 2

Heading: Insider Trading Claims

Text: Plaintiff’s insider trading claims are based on the alleged purchase of Xcelera securities by Xcelera insiders through the tender offer without disclosing to potential sellers any information about Xcelera’s financial state. Because the complaint was filed within two years of the 2010 tender offer (and the purchase of plaintiff’s shares in 2011), these claims are timely. See 28 U.S.C. § 1658.3 “Under the ‘traditional’ or ‘classical theory’ of insider trading liability, § 10(b) [15 U.S.C. § 78j(b)] and Rule 10b–5 [17 C.F.R. § 240.10b-5] are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic 3 An even longer statute of limitations applies to plaintiff’s insider trading claims under section 20A. See 15 U.S.C. § 78t-1(b)(4) (“No action may be brought under this section more than 5 years after the date of the last transaction that is the subject of the violation.”). 8 Nos. 13-1327-cv; 13-1892-cv information.” United States v. O’Hagan, 521 U.S. 642, 651-52 (1997).4 Thus, “a corporate insider must abstain from trading in the shares of his corporation unless he has first disclosed all material inside information known to him.” Chiarella v. United States, 445 U.S. 222, 227 (1980). “[I]f disclosure is impracticable or prohibited by business considerations or by law, the duty is to abstain from trading.” SEC v. Obus, 693 F.3d 276, 285 (2d Cir. 2012). To establish an insider trading claim, it is not necessary to show that corporate insiders used the nonpublic information; it is sufficient to prove that they traded their corporation’s securities “while knowingly in possession of the material nonpublic information.” United States v. Rajaratnam, 719 F.3d 139, 159 (2d Cir. 2013) (internal quotation mark omitted) (quoting United States v. Teicher, 987 F.2d 112, 119 (2d Cir. 1993)). Additionally, the Supreme Court has “dispensed with a requirement of positive proof of reliance, where a duty to disclose material information had been breached, concluding that the necessary nexus between the plaintiffs’ injury and the defendant’s wrongful conduct had been established.” Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988); see also Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008). In this case, plaintiff has pled that the defendants are officers, directors, or controlling shareholders, which plainly makes them Xcelera insiders.5 According to the complaint, Alexander Vik and Gustav Vik are directors and officers; Erik Vik’s corporation— 4 The alternative “misappropriation theory” of insider trading, which targets non-insiders, is not applicable here. See O’Hagan, 521 U.S. at 652. 5 Officers and directors are the “easiest category,” and controlling shareholders are insiders because they “have the same sort of access to information as a result of their position of power as the typical officer and director.” 18 Donald C. Langevoort, Insider Trading Regulation, Enforcement, and Prevention §§ 3:3-3:4 (2013); see O’Hagan, 521 U.S. at 652; Chiarella, 445 U.S. at 227. 9 Nos. 13-1327-cv; 13-1892-cv defendant VBI—is the majority shareholder; Hans Eirik Olav is a director; and the Vik defendants control shell corporation OFC. These insiders are alleged to have traded in Xcelera securities through their control of OFC, when the Vik defendants caused OFC to purchase plaintiff’s Xcelera stock through the tender offer, with Olav listed as the contact person. And it is not disputed that defendants (including OFC) failed to provide any information to plaintiff about Xcelera’s financial state at any time leading up to her sale to OFC. Plaintiff thus claims that defendants are liable for OFC’s actions either as primary violators under section 10(b) or as “control persons” subject to secondary liability under section 20(a).6 The district court held, however, that defendants had no duty to disclose any information before trading in Xcelera securities because the duty to disclose (1) does not apply to unregistered securities and (2) is defined by the law of the Cayman Islands, under which Xcelera was formed, and where no such duty exists. Both conclusions are in error: unregistered securities are not immune from the duty to disclose, and Cayman law is inapplicable. First, the duty of corporate insiders to abstain from trading or to disclose material inside information applies to unregistered securities. Section 10(b) explicitly applies to “any security registered on a national securities exchange or any security not so registered.” 15 U.S.C. § 78j(b) (emphasis added). We have explicitly stated that “closed corporations that purchase their own stock have a special obligation to disclose to sellers all material information.” Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001). Second, we hold that the fiduciary-like duty against insider trading under section 10(b) is imposed and defined by federal common law, not the law of the Cayman Islands. While we have not 6 Section 20(a) establishes secondary liability for “[e]very person who, directly or indirectly, controls any person” directly liable under the Securities Exchange Act. 15 U.S.C. § 78t(a); see SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). 10 Nos. 13-1327-cv; 13-1892-cv previously made the source of this duty explicit, we agree with one district court in this Circuit which concluded that insider trading cases from this Court and the Supreme Court have implicitly assumed that the relevant duty springs from federal law, and that looking to idiosyncratic differences in state law would thwart the goal of promoting national uniformity in securities markets. See United States v. Whitman, 904 F. Supp. 2d 363, 369 (S.D.N.Y. 2012) (collecting cases); see also McClure v. Borne Chem. Co., 292 F.2d 824, 834 (3d Cir. 1961) (“[The Securities Exchange Act] creates many managerial duties and liabilities unknown to the common law.”); In re Cady, Roberts & Co., 40 S.E.C. 907, 910 (1961) (“[T]he securities acts may be said to have generated a wholly new and far-reaching body of Federal corporation law.”); 18 Langevoort, supra, § 3:2. Defendants erroneously suggest that holding them subject to the duty to disclose would impose an affirmative duty on small, unregistered corporations to disclose audited financial statements. Under the Securities Exchange Act, “any insider ‘in possession of material inside information must either disclose it to the investing public, or, if . . . he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.’” Castellano, 257 F.3d at 179 (emphasis added) (quoting SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968) (en banc)). Defendants had no general affirmative duty to disclose once Xcelera was deregistered by the SEC, but they could not trade in Xcelera shares based on undisclosed material inside information that they possessed. Because the district court erred in concluding that the duty to disclose or abstain from trading did not apply to defendants, we vacate the dismissal of both the direct liability claims under section 10(b) and Rule 10b–5 and the “control person” liability claims under section 20(a). Cf. Ganino v. Citizens Utilities Co., 228 F.3d 154, 170-71 (2d Cir. 2000) (vacating the dismissal of a section 20(a) claim upon concluding that the district court improperly dismissed claims based on primary Rule 10b–5 violations). 11 Nos. 13-1327-cv; 13-1892-cv Plaintiff also brought claims for insider trading under section 20A(a) of the Securities Exchange Act, which provides an express private right of action for those who trade contemporaneously with an inside trader. 15 U.S.C. § 78t-1; see generally Jackson Nat’l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 703 (2d Cir. 1994) (concluding that § 20A liability requires an independent Securities Exchange Act violation). Because the district court did not address these claims, we vacate their dismissal and remand for further consideration.7 However, we affirm the dismissal of plaintiff’s claims under section 14(e) of the Securities Exchange Act, 15 U.S.C. § 78n(e), for trading on material, nonpublic information in connection with a tender offer. SEC Rule 14e-3, which imposes liability under section 14(e), states that if “any person” has taken substantial steps toward a tender offer, then it is unlawful for “any other person who is in possession of material information relating to such tender offer . . . to purchase or sell or cause to be purchased and sold any of such securities.” 17 C.F.R. § 240.14e-3(a) (emphases added). In this case, the allegation is not that someone possessed material nonpublic information about the tender offer—it is that the tender offer itself was made by corporate insiders who possessed material nonpublic information. The section 14(e) claims were thus properly dismissed. 7 The availability of section 20A in a case such as this appears unsettled. Compare Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1337 (7th Cir. 1997) (holding that section 20A may not be used by a person in privity with the insider because “[t]his interpretation would amount to saying that Congress, in attempting to provide additional relief for victims of insider trading, had inadvertently enacted a five-year statute of limitations applicable in effect to a vast number of Rule 10b-5 cases”), with Johnson v. Aljian, 490 F.3d 778 (9th Cir. 2007) (holding that a 20A claim is actionable when the predicate 10b-5 claim is time-barred). However, it may be unnecessary to reach this question because plaintiff has adequately pled liability under section 10(b), and section 20A provides no additional remedy. Cf. O’Hagan, 521 U.S. 665 n.11 (finding it unnecessary to address section 20A(a) when liability exists under section 10(b)). 12 Nos. 13-1327-cv; 13-1892-cv III. Nonfederal Claims for Breach of Fiduciary Duty In addition to her claims under the Securities Exchange Act, plaintiff also alleged that Xcelera, Gustav Vik, Alexander Vik, and Olav breached their fiduciary duties under Cayman Island law to Xcelera’s minority shareholders, or aided and abetted the breach of such duties. After dismissing plaintiff’s federal claims, the district court declined to exercise supplemental jurisdiction over these pendent claims and dismissed them without prejudice to refiling in state court. Because we have reinstated plaintiff’s insider trading claims, we vacate the dismissal of these nonfederal claims.