Opinion ID: 333764
Heading Depth: 1
Heading Rank: 3

Heading: Neuwirth--Tipper Liability

Text: 21 Neuwirth's appellate contentions are of two sorts: he argues that there was no evidence that he disclosed any non-public information to Rauch and that the disclosures to Roy Alpert were not material. 9 22 The SEC was unable to provide direct evidence of disclosures by Neuwirth to Rauch; Rauch asserted the privilege against self-incrimination and Neuwirth claimed inability to recall the subject-matter of most of their numerous talks. However, inability to reproduce the precise content of conversations under these circumstances cannot be an absolute bar to liability; the circumstantial evidence sufficed to justify the court's inference that Rauch was getting from Neuwirth something that was not available to the public. 23 Neuwirth did testify he knew that Rauch was actively engaged in selling the company's shares; that Rauch pursued him assiduously, and indeed was the only broker who was calling him; and that he did not tell Rauch to stop the calls until sometime in January, 1974. In addition, he lunched with Rauch alone, something he did with no other broker, accepted two bottles of liquor Rauch sent him following this lunch, and honored one of Rauch's telephone messages by a return call from home. This testimony goes a long way toward supporting the finding that Neuwirth was disclosing nonpublic information; certainly Rauch was interested in something other than the color of Neuwirth's hair or in getting information available to everyone. The inference that these efforts met with some success is supported by Rauch's placing five purchase orders, totaling 1,100 shares, within a few days after his talk with Neuwirth in mid-October; by his frequent purchases between November 2 and December 3 when the telephoning was going on and the luncheon occurred; and by the near cessation of purchases in January after Neuwirth finally put an end to the telephone calls. Beyond that there is the evidence of Neuwirth's talking too freely to others--his conversation with Roy Alpert before going to England, and his telling Alpert, his two brothers-in-law who were 'very substantial stockholders' and perhaps one or two analysts of the upcoming meeting of the directors on February 21 to 'rubber stamp' the Burmah deal. Evidently Neuwirth either had not been properly instructed concerning the duty of the chief executive officer of a publicly held company to avoid private disclosure in the brave new world of Cady, Roberts & Co., 40 S.E.C. 907 (1961), and SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2 Cir. 1968), cert. denied sub nom., Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), or chose to disregard his instructions. While the inference that Neuwirth communicated inside information to Rauch may not be compelled, it surely was not clear error, F.R.Civ.P. 52(a), for the district judge to have drawn it. 24 Turning to the issue of materiality, Neuwirth contends with some vigor that the disclosures to Alpert in mid-October could not have been material because the merger with Burmah was in such a embryonic stage that no reasonable man would attach importance to Neuwirth's remarks in determining his choice of action--the language of List v. Fashion Park, Inc., 340 F.2d 457, 462 (2 Cir.), cert. denied sub nom., List v. Lerner, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), quoted with approval in SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 849. 25 That, however, is not the whole of TGS's discussion of materiality with respect to acts of insiders and certainly not the end of the doctrinal development on this subject. The TGS opinion also cited, 401 F.2d at 849, another passage from Fashion Park wherein this court quoted with approval a statement in Kohler v. Kohler Co., 319 F.2d 634, 642 (7 Cir. 1963), that a fact 'which in reasonable and objective contemplation might affect the value of the corporation's stock or securities' (emphasis supplied in TGS opinion) is material. 26 More importantly, TGS makes clear that not only the probability of an event but also the magnitude of its potential impact on a company's fortunes are relevant to the determination of materiality of inside information, 401 F.2d at 849: 27 In each case, then, whether facts are material within Rule 10b--5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. 28 As we said in SEC v. Shapiro, 494 F.2d 1301, 1306 (2 Cir. 1974), another insider case, the application of this test implies that there is '(no) specific rule as to when information respecting a merger becomes material,' but rather indicates that each case must be approached on its own facts. Since a merger in which it is bought out is the most important event that can occur in a small corporation's life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions--and this even though the mortality rate of mergers in such formative stages is doubtless high. In cases of the disclosure of inside information to a favored few, determination of materiality has a different aspect than when the issue is, for example, an inaccuracy in a publicly disseminated press release, see SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 862, or a proxy statement, see Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1301--02 (2 Cir. 1973), and cases there cited; the information takes on an added charge just because it is inside information. Without rehearsing the facts at length, we note that by the middle of October Bloom had more than once specially prepared and transmitted financial information to Burmah; that Burmah seemed to indicate a continuing interest in acquiring Geon; that Bloom recommended that he should accompany the Neuwirths to England; that both Rauch and Alpert demonstrated the importance they attached to the information by purchasing shares in mid-October, compare SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 851 and SEC v. Shapiro, supra, 494 F.2d at 1307; and that Alpert testified that Neuwirth's tip was one of the reasons for his purchase. We think the evidence, and the reasonable inferences that may be drawn from it, support the trial court's determination that the tip to Alpert violated Rule 10b-5. Whether such a violation would support relief more extended than that requested here--an injunction against future misconduct and a 'disgorgement' of profits--is a different question. 29 In holding that the proposed Burmah transaction was sufficiently material that Rule 10b--5 prohibited disclosure by an insider, we would not wish to be understood as saying that a company could be faulted for failing to include a transaction as uncertain as this one was in mid-October in a 10--K or other report to the SEC. Rule 12b--2 under the 1934 Act, like Rule 405 under the 1933 Act, instructs that use of the term 'material' to 'qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before buying or selling the security registered.' This properly recognizes that there are considerations against early disclosure as well as for it. Public disclosure of the Burmah prospect in mid-October would have built up hopes that might prove to be totally unjustified. But as Professor Bromberg has written, while there 'may be good reasons to delay disclosure, they do not justify insider trading'--or tipping--'during the waiting period.' 2 Securities Law: Fraud, § 7.4(4)(b) at 174 (1975); see also § 7.4(6)(a) at 178--79. Neither does our holding entail the consequence that 'the corporation and an insider are prohibited from purchasing stock unless everything that would be in an S--1 registration statement is disclosed to the seller.' Jennings and Marsh, Securities Regulation: Cases and Materials 1128 (3d ed. 1972). Our holding is limited to disclosure (or use) of inside knowledge of negotiations with respect to the type of merger which will result in a company's ceasing to exist as such, without implication what other transactions should invoke so severe a rule. In a matter of this sort, however little Neuwirth said to Alpert, and however, low its real value may have been in view of the pitfalls ahead, it was more than Rule10b--5 permits. For an insider in his position silence is indeed golden. 30 We see no basis for a similar ruling with respect to Neuwirth's mid-December telephone conversation with Alpert. Unfortunately even the majesty of the law cannot prevent the relentless annual recurrence of birthdays of the chief officers of corporations, and we do not see how Neuwirth could have said less than he did. However, we take a different view with respect to Neuwirth's telling Alpert that the Geon board would meet on February 21 to 'rubber stamp' the Burmah contract. A meeting of a board of directors to act upon a proposed merger is clearly material; arbitrageurs would regard this as a signal to narrow the price gap. The call for such a meeting should either be kept confidential (with a ban on insider trading or tipping in the meanwhile) or be publicly disclosed; there can be no justification for leaking the news to a privileged few. If Alpert had made use of the information to purchase additional Geon stock, liability would hardly be questioned. The result should not differ because he combined that information with the lack of a subsequent public (or private) announcement to reach a conclusion that he should sell. 31 We therefore affirm the district court's findings with respect to Neuwirth's violations. He has not questioned that if the finding of a violation was justified, he was properly subjected to an injunction in the form issued. 32