Opinion ID: 76521
Heading Depth: 3
Heading Rank: 2

Heading: Alternative Grounds to Affirm

Text: 30 Ginsburg argues that even if sufficient evidence was presented that he tipped Mark and Jordan, the district court's decision to grant judgment as a matter of law can be affirmed on two independent grounds. Though not reached by the district court, these arguments were presented in Ginsburg's renewed Rule 50 motion, and they raise legal issues over which we would exercise de novo review, so we may decide them in the first instance.
31 Ginsburg contends that the SEC did not provide sufficient evidence to permit a reasonable jury to find that the information tipped was material and nonpublic, as required by Rule 10b-5. An omitted fact is material if there is a substantial likelihood a reasonable shareholder would consider it important in deciding how to vote. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). Materiality is proved by showing 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. 32 The insider information in this case meets the materiality standard. In Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 987, 99 L.Ed.2d 194 (1988), the Supreme Court held that preliminary merger talks can be material well before any agreement is reached. The materiality of an uncertain prospective event depend[s] 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. Id. The Court explained that a factfinder will need to look to indicia of interest in the transaction at the highest corporate levels, and consider factors such as board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries. Id. at 239, 108 S.Ct. at 987. The determination of materiality requires delicate assessments of the inferences a `reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. TSC Indus., Inc., 426 U.S. at 450, 96 S.Ct. at 2133. In an analogous context, the jury's unique competence in applying the `reasonable man' standard is thought ordinarily to preclude summary judgment in negligence cases. Id. at 450 n. 12, 96 S.Ct. at 2133 n. 12. 33 Alan Box, EZ's CEO, and Ginsburg discussed a specific share price, and Ginsburg knew both that Evergreen was interested in acquiring EZ and that EZ was talking to other companies. The jury was free to find that a reasonable investor would view Evergreen executives talking to EZ executives about a possible acquisition at the specific price of $50 a share as altering the total mix of information available. A merger is an event of considerable magnitude to an investor, and preliminary merger negotiations constitute concrete steps indicating an increasing possibility of a merger occurring. As for the nonpublic nature of the evidence, the jury heard testimony from Ron Peale, EZ's CFO, that the talks were confidential. The jury could recognize as material the difference between public information that EZ was having conversations about a possible sale and about potential sale prices, see supra n. 4, and nonpublic information about a private meeting between executives and the specific share price they discussed confidentially. 34 As to Katz, Ginsburg was clearly privy to information gleaned under a confidentiality agreement. The jury had before it sufficient evidence to conclude that Ginsburg's June 16 meeting with Olds indicated to Ginsburg that a deal had to happen fast. The jury could reasonably infer that the information was material and nonpublic.
35 Ginsburg also argues that there was not enough evidence to permit an inference that, at the time of his alleged Katz tip on June 16: (1) substantial steps had been taken to commence a tender offer, as required by Rule 14e-3; and (2) Ginsburg knew of the tender offer, as Ginsburg claims is required by Rule 14e-3. Rule 14e-3 prohibits purchase or sale of a company's stock by any person who is in possession of material information relating to [a] tender offer if an offering person has taken a substantial step or steps to commence, or has commenced, a tender offer. 17 C.F.R. § 240.14e-3(a). Rule 14e-3(d) prevents any insider of the target or acquiring company, or any person in possession of material information relating to a tender offer, from communicating that information to another likely to trade on it, after substantial steps have been taken. The SEC release accompanying Rule 14e-3 states: 36 [S]ubstantial step or steps to commence a tender offer include, but are not limited to, voting on a resolution by the offering person's board of directors relating to the tender offer; the formulation of a plan or proposal to make a tender offer by the offering person or the person(s) acting on behalf of the offering person; or activities which substantially facilitate the tender offer such as: arranging financing for a tender offer; preparing or directing or authorizing the preparation of tender offer materials; or authorizing negotiations, negotiating or entering into agreements with any person to act as a dealer manager, soliciting dealer, forwarding agent or depository in connection with the tender offer. 37 Tender Offers, Exchange Act Release No. 17,120, 20 SEC Docket 1350 n. 33 (Sept. 4, 1980). 38 In this case, Katz CEO Tom Olson had sent a letter to Tom Hicks, CEO of the majority shareholder of Chancellor, on February 24, 1997, asking whether Chancellor was interested in acquiring Katz. On March 20, Olson, Hicks, Olds, Ginsburg, and others met to discuss the possible acquisition. Hicks was interested in Chancellor acquiring Katz. He appointed a due diligence team, and a confidentiality agreement was signed on April 7. Ginsburg met with Olds on June 16, and Olds told him that Katz was in discussions with other companies and Chancellor needed to act quickly. Testimony at trial indicated that the parties had not settled on a tender offer as the form of the transaction until the last few days before the deal was announced on July 14. 39 These activities do not fall into the specifically enumerated examples of activities described as substantial steps in the SEC release. However, the release makes it clear that the examples listed are only that; they are not a complete list of substantial steps. Neither this Court nor the Supreme Court has defined substantial steps, but other circuits have confronted the issue. In SEC v. Maio, 51 F.3d 623 (7th Cir.1995), the Seventh Circuit concluded that a meeting between officers of the target and acquiring companies, held after the target had solicited an offer from the acquiring company, which was much more serious than any previous discussion between the parties, and which was followed the next day by the onset of the due diligence process, constituted substantial steps. Id. at 636. A confidentiality agreement had not yet been entered at the time of the alleged tip in that case. Id. In SEC v. Mayhew, 121 F.3d 44 (2d Cir. 1997), where the merging companies had retained a consulting firm, signed confidentiality agreements, and held meetings between top officials, the Second Circuit concluded that the substantial steps requirement was satisfied, despite the fact that the companies had not settled on a tender offer as the form of the merger. Id. at 53. 40 In this case there was a meeting between executives, which was followed by due diligence procedures, a confidentiality agreement, and by a meeting between Ginsburg and Olds — from which Ginsburg realized that the deal had to go down fast. These activities, which did result in a tender offer, were substantial steps for purposes of Rule 14e-3. Were it otherwise, liability could be avoided by taking care to tip only before the formal steps finalizing the acquisition are completed, leaving a substantial gap between the acquisition of inside information and the regulation of its disbursement. 41 Rule 14e-3, by its terms, does not require that the offender know or have reason to know that the information relates to a tender offer, so long as the information in fact does relate to a tender offer and the offender knows or has reason to know the information is nonpublic and was acquired by a person with the required status. The accompanying SEC release explicitly states that there is no knows or has reason to know standard attached to the Rule's requirement that the information relate to a tender offer. Tender Offers, Exchange Act Release No. 17,120, 20 SEC Docket 1350 (Sept. 4, 1980). We agree with the First Circuit that we should defer to the SEC's interpretation of its Rule. See SEC v. Sargent, 229 F.3d 68, 78-79 (1st Cir.2000). Under United States v. O'Hagan, 521 U.S. 642, 673, 117 S.Ct. 2199, 2217, 138 L.Ed.2d 724 (1997), we owe the judgment of the SEC expressed in its release more than mere deference or weight. It follows that Ginsburg's substantial steps argument fails.