Opinion ID: 2489851
Heading Depth: 2
Heading Rank: 4

Heading: Insider Trading

Text: Where the fiduciary duty allegedly breached involves insider trading, Delaware provides a state-law cause of action under the principles set forth in Brophy v. Cities Service Co., 70 A.2d 5 (Del.Ch.1949). [A] Brophy claim[] arises where `1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because [he or] she was motivated, in whole or in part, by the substance of that information.' In re American Int'l Group, Inc., 965 A.2d 763, 800 (Del.Ch. 2009) (quoting In re Oracle Corp., 867 A.2d 904, 934 (Del.Ch.2004), aff'd, 872 A.2d 960 (Del.2005) (footnote omitted)). The purpose of a Brophy claim is to remedy harm to the corporation. ... The Brophy claim thus belongs to the corporation, although it can be asserted derivatively by a stockholder. Pfeiffer v. Toll, 989 A.2d 683, 699 (Del.Ch.2010). The trial court's award under Brophy was based on stipulated facts evidencing two transactions (excluding the Buyback) in which Scrushy sold a total of 9,275,360 shares of HealthSouth stock for a profit of $147,450,000. Having found that the transactions were made with guilty insider knowledge of the Fraud that vastly overstated Net Income, cash, and other assets, it ordered the disgorgement of that profit, plus $126,321,000 in prejudgment interest. Scrushy does not challenge the sufficiency of the evidence of those findings or the computation of the award. In other words, Scrushy does not contend that the elements of a Brophy claim were not satisfied. Instead, he challenges the continuing validity of Brophy. More specifically, he contends that liability under Brophy is either (1) duplicative of that under the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, or (2) in conflict with, and thereby preempted by, the federal statutory scheme. Even if we were writing on a clean slate, we would be reluctant to disturb Brophy  a 61-year-old pillar of Delaware securities law. We need not belabor the issue, however, because the same arguments have recently been expressly rejected in Delaware. In Pfeiffer, supra, Vice Chancellor Laster rejected the arguments after a painstaking historical analysis focusing on the relationship between the common law underlying Brophy and its progeny, on the one hand, and the federal scheme, on the other. The vice chancellor observed that federal law does not establish a `comprehensive federal regime regulating insider trading,' but is, in fact, largely a product of common law adjudication built by interpreting Section 10(b) of the Securities Exchange Act of 1934 (the `Exchange Act') and Rule 10b-5, the principal regulation implementing Section 10(b). 989 A.2d at 701 (footnotes omitted). [5] Federal law does not give rise to or establish the fiduciary duties of directors or officers. 989 A.2d at 704. Instead, a claim under federal law depends on the existence of a fiduciary relationship or similar relationship of trust and confidence, which relationships are governed by state law. Id. Consequently, he reasoned, [i]f Delaware were to hold that the fiduciary duties of directors and officers did not limit their insider trading, the cornerstone of the federal system would be removed.  Id. (emphasis added). Similarly, in demonstrating that the jurisdictional provisions of the Exchange Act do not preempt state law remedies, he stated: Section 28(a) of the Exchange Act provides: `[T]he rights and remedies provided by [the Exchange Act] shall be in addition to any and all other rights and remedies that may exist at law or in equity....' 15 U.S.C. § 78bb. Section 28(a) establishes that `the express intention of Congress was that the federal securities law would not dilute any remedies allowed by the states, either in law or equity.' Rossdeutscher v. Viacom, Inc., 768 A.2d 8, 17 (Del.2001). The federal remedies available under the Exchange Act were thus `intended to coexist with claims based on state law and not preempt them.' Id. Since the original adoption of the Exchange Act, Congress has twice addressed insider trading without altering the current regime. In 1984, Congress increased the penalties for insider trading. Insider Trading Sanctions Act of 1984, Pub.L. No. 98-376, 98 Stat. 1264 (codified at 15 U.S.C. § 78t). In 1988, Congress increased the penalties again. Insider Trading and Securities Fraud Enforcement Act of 1988, Pub.L. No. 100-704, 102 Stat. 4677 (codified at 15 U.S.C. § 78u-1). Congress also added § 20A to the Exchange Act, creating an explicit private cause of action against any person who violates insider trading rules that can be brought by anyone who traded contemporaneously with the violator. Id. § 78t-1. Neither statute sought to preempt or eliminate a state law derivative remedy. In 1995, Congress adopted the Private Securities Litigation Reform Act of 1995 (the `PSLRA'). Pub.L. No. 104-67, 109 Stat. 737 (codified at 15 U.S.C. § 78u-4). In 1998, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (`SLUSA'). Pub.L. No. 105-353, 112 Stat. 3227 (codified at 15 U.S.C. § 77z-1). SLUSA amended the Exchange Act to prevent plaintiffs from avoiding the PSLRA by filing class actions in state court and to require generally that all class actions involving the purchase or sale of securities traded on a national exchange be brought exclusively in federal court under federal law. SLUSA preserved and did not preempt an `exclusively derivative action brought by one or more shareholders on behalf of a corporation.' 15 U.S.C. § 78bb(f)(5)(c). SLUSA also preserved and did not preempt state law class actions based on the fiduciary duty of disclosure owed by corporate directors to stockholders. 15 U.S.C. § 78bb(f)(3)(A). Pfeiffer, 989 A.2d at 703. The vice chancellor concluded, moreover, that the standards applied under Brophy do not conflict with the federal securities laws. 989 A.2d at 707-08. Causes of action under both federal law and Brophy require `proof that the selling defendants acted with scienter.' 989 A.2d at 708 (quoting Guttman v. Huang, 823 A.2d 492, 505 (Del.Ch.2003)). Indeed, he explained, [t]he elements of a Brophy claim ... `more or less track the key requirements to recover against an insider under federal law.' 989 A.2d at 708 (quoting In re Oracle Corp., 867 A.2d 904, 934 (Del.Ch.2004), aff'd, 872 A.2d 960 (Del. 2005)). Scrushy does not attempt to refute the reasoning of Pfeiffer. His response is merely to denigrate that opinion on the ground that it represents the judgment of [a] trial court. Reply brief, at 31. However, it bears repeating that opinions of the Delaware Chancery Courts, unlike those of trial courts of other states, are regarded as precedent. Wisdom Import Sales Co. v. Labatt Brewing Co., 339 F.3d at 115. It must also be remembered that Brophy itself was a chancery court opinion. Yet Brophy has been a part of the warp and woof of Delaware securities law for more than 60 years. It has often been cited with approval by the Delaware Supreme Court. See Oberly v. Kirby, 592 A.2d 445, 463 (Del.1991); Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del.1989); Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del.1983); Citron v. Merritt-Chapman & Scott Corp., 407 A.2d 1040, 1043 (Del.1979); Singer v. Magnavox Co., 380 A.2d 969, 977 (Del.1977), overruled on other grounds, Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del.1983); and Adams v. Jankouskas, 452 A.2d 148, 152 (Del.1982). It has also been cited with approval by the United States Supreme Court. See Chiarella v. United States, 445 U.S. 222, 228 n. 10, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). The judgment in this case was cited with approval in Pfeiffer, 989 A.2d at 700. In light of the thorough and thoughtful discussion in Pfeiffer, and the absence of persuasive counter authority, [6] we conclude that Brophy neither is an anachronism nor is preempted by federal securities law. We decline, therefore, Scrushy's invitation to hold that Brophy is no longer good law.