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97 F.3d 663, Fed. Sec. L. Rep. P 99,326
(Cite as: 97 F.3d 663)
United States Court of Appeals,
Second Circuit. UNITED STATES of America, Appellee, v. William MYLETT, Robert Allen, Robert Flanagan, Thomas Flanagan and Albert Brody, Defendants, Joseph Cusimano, Defendant-Appellant.
Under misappropriation theory of Rule 10b-5,
insider trading occurs whenever a person trades while in knowing possession of misappropriated and material nonpublic information. Securities Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b-5. [2] Securities Regulation 349B
No. 2313, Docket 96-1309.
Argued Aug. 8, 1996. Decided Oct. 4, 1996.
60.28(12)
349B Securities Regulation
349BI Federal Regulation 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation Defendant was convicted of insider trading, in 349Bk60.17 Manipulative, Deceptive or violation of Rule 10b-5, and his sentence was enhanced Fraudulent Conduct for perjury, in the United States District Court for the 349Bk60.28 Nondisclosure; Insider Southern District of New York, John S. Martin, Jr., J.Trading Defendant appealed. The Court of Appeals, Calabresi, 349Bk60.28(10) Matters to Be Circuit Judge, held that: (1) defendant had received Disclosed nonpublic information from source within acquiring 349Bk60.28(12) k. Inside or corporation, as to impending merger, even though thereNonpublic Market Information. Most Cited Cases had been rumors regarding merger and an article concerning merger prospects in financial journal; (2) To constitute nonpublic information, upon which information was material, despite defendant's claim that insider trading claim can be brought under Rule 10b-5, at time he traded probability of merger was not great information in question must be specific and more and magnitude of event if it occurred was notprivate than general rumor. Securities Exchange Act of significant; (3) circumstantial evidence indicated that 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. defendant knew information had been imparted in 240.10b-5. violation of fiduciary duty owed by tipper by virtue of tipper's position as corporate officer; and (4) evidence 60.29 supported determination that defendant had obstructed [3] Securities Regulation 349B justice through commission of perjury. 349B Securities Regulation 349BI Federal Regulation Affirmed. 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation Meskill, Circuit Judge, concurred in part and 349Bk60.17 Manipulative, Deceptive or dissented in part and filed opinion. Fraudulent Conduct 349Bk60.29 k. Release of Inside or West Headnotes Nonpublic Market Information; Tipping. Most Cited Cases [1] Securities Regulation 349B 60.28(2.1) Officer of acquiring corporation (tipper) imparted nonpublic information to friend (tippee) when he stated 349B Securities Regulation his belief that acquiring corporation would buy target 349BI Federal Regulation corporation, even though there were rumors of 349BI(C) Trading and Markets impending acquisition and an article about acquisition 349BI(C)7 Fraud and Manipulation 349Bk60.17 Manipulative, Deceptive orprospects in financial journal; tipper's information was substantially more specific than rumor, as tipper also Fraudulent Conduct 349Bk60.28 Nondisclosure; Insiderstated that he had been asked to conduct study regarding feasibility of integrating acquiring Trading 349Bk60.28(2) Duty to Disclose orcorporation's work force with that of unidentified corporation having same vital statistics as target, and Refrain from Trading 349Bk60.28(2.1) k. In General.that his supervisor had asked him not to comment on financial journal article. Securities Exchange Act of Most Cited Cases
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(Cite as: 97 F.3d 663) 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. [6] Securities Regulation 349B 60.28(2.1) 240.10b-5. 349B Securities Regulation [4] Securities Regulation 349B 60.28(11) 349BI Federal Regulation 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation 349B Securities Regulation 349Bk60.17 Manipulative, Deceptive or 349BI Federal Regulation Fraudulent Conduct 349BI(C) Trading and Markets 349Bk60.28 Nondisclosure; Insider 349BI(C)7 Fraud and Manipulation 349Bk60.17 Manipulative, Deceptive orTrading 349Bk60.28(2) Duty to Disclose or Fraudulent Conduct 349Bk60.28 Nondisclosure; InsiderRefrain from Trading 349Bk60.28(2.1) k. In General. Trading Most Cited Cases 349Bk60.28(10) Matters to Be Disclosed 349Bk60.28(11) k. Materiality. For purposes of insider trading liability under Rule Most Cited Cases 10b-5, misappropriation of information occurs when person acquires material nonpublic information in When an event is contingent and speculative, the breach of fiduciary duty or similar relationship of trust materiality of information regarding that event, for and confidence and uses that information in securities purposes of insider trading liability under Rule 10-5, transaction. Securities Exchange Act of 1934, 10(b), depends upon balancing of both indicated probability15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b-5. that event will occur and anticipated magnitude of event in light of totality of issuing corporation's activity. [7] Securities Regulation 349B 60.29 Securities Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b-5. 349B Securities Regulation 349BI Federal Regulation [5] Securities Regulation 349B 60.29 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation 349Bk60.17 Manipulative, Deceptive or 349B Securities Regulation Fraudulent Conduct 349BI Federal Regulation 349Bk60.29 k. Release of Inside or 349BI(C) Trading and Markets Nonpublic Market Information; Tipping. Most Cited 349BI(C)7 Fraud and Manipulation 349Bk60.17 Manipulative, Deceptive orCases Fraudulent Conduct 349Bk60.29 k. Release of Inside or Tipper, who was officer of acquiring corporation, Nonpublic Market Information; Tipping. Most Citedhad acquired insider information that acquisition of Cases target was imminent, and his imparting of that information to tippee constituted misappropriation for Information imparted to tippee regardingpurposes of insider trading violation under Rule 10b-5, impending acquisition was material, for purposes of even though it was claimed that tipper concluded insider trading liability under Rule 10b-5, even though through his own ingenuity that acquisition would take tippee claimed that probability of acquisition was low at place, that he never was told about acquisition, and had time he received information and that magnitude ofdone no more than piece together evidence obtained acquisition was insufficient to make disclosure while working for acquiring corporation as an officer. material; at time of disclosure acquiring corporation Securities Exchange Act of 1934, 10(b), 15 U.S.C.A. had engaged outside counsel, investment bank and 78j(b); 17 C.F.R. 240.10b-5. accountants, had formulated employee integration plan and was preparing to submit bid for target, and[8] Securities Regulation 349B 60.45(1) magnitude was great, as there was outlay of six billion dollars and price of target's stock made sharp jump 349B Securities Regulation after acquisition was publicly announced. Securities 349BI Federal Regulation Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 349BI(C) Trading and Markets 17 C.F.R. 240.10b-5. 349BI(C)7 Fraud and Manipulation 349Bk60.43 Grounds of and Defenses to
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(Cite as: 97 F.3d 663) Liability
350HIV(C)2 Factors Increasing Offense
349Bk60.45 Scienter, Intent,Level Knowledge, Negligence or Recklessness 350Hk761 k. Obstruction of Justice. Most 349Bk60.45(1) k. In General. MostCited Cases Cited Cases (Formerly 110k1253) Scienter requirement for insider trading liability Enhancement of sentence for obstruction of justice under Rule 10b-5 was satisfied when tippee receivedthrough commission of perjury is mandatory once information from tipper that acquiring corporation wasfactual predicates for perjury have been established. about to merge with target corporation; as tippee knew that tipper was a vice president of acquiring[12] Sentencing and Punishment 350H 761 corporation, there was circumstantial evidence tending to show that tippee knew that tipper was disclosing 350H Sentencing and Punishment information in breach of fiduciary duty. Securities 350HIV Sentencing Guidelines Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 350HIV(C) Adjustments 17 C.F.R. 240.10b-5. 350HIV(C)2 Factors Increasing Offense Level [9] Sentencing and Punishment 350H 761 350Hk761 k. Obstruction of Justice. Most Cited Cases 350H Sentencing and Punishment (Formerly 110k1253) 350HIV Sentencing Guidelines 350HIV(C) Adjustments Trial court could enhance defendant's sentence, for 350HIV(C)2 Factors Increasing Offenseinsider trading in violation of Rule 10b-5, due to Level obstruction of justice by commission of perjury; court's 350Hk761 k. Obstruction of Justice. Mostdetermination that defendant had lied to cover up fact Cited Cases he had traded on inside information was supported by (Formerly 110k1253) uncontested findings of false testimony, such as claim that one set of trades was inspired by television show he Sentence enhancement for obstruction of justicehad watched at lunch time while record showed that through perjury is warranted when defendant testifyingtrades had begun early that morning, and lies were under oath gives false testimony concerning material material, since if they had been credited, it would have matter with willful intent to provide false testimony. provided alternative explanation for defendant's trades, casting doubts on whether he knowingly acted on insider information. [10] Sentencing and Punishment 350H 761 *665 Karen Patton Seymour, Asst. U.S. Atty., New 350H Sentencing and Punishment York City (Mary Jo White, U.S. Atty., Michael 350HIV Sentencing Guidelines Gertzman, Marian W. Payson, Asst. U.S. Attys., on the 350HIV(C) Adjustments 350HIV(C)2 Factors Increasing Offensebrief), for Appellee. Level 350Hk761 k. Obstruction of Justice. MostAnthony DiSarro Winston & Strawn, New York City (Daniel K. Webb, Matthias A. Lydon, on the brief), for Cited Cases Defendant-Appellant. (Formerly 110k1253) In determining whether to enhance sentence due to Before: MESKILL, CALABRESI, and PARKER, obstruction of justice by perjury, any ambiguityCircuit Judges. regarding testimony must be evaluated in light most favorable to defendant. CALABRESI, Circuit Judge: Joseph Cusimano appeals from a final judgment and sentence entered on May 16, 1996, in the United [11] Sentencing and Punishment 350H 761 States District Court for the Southern District of New York following his conviction for trading in violation of 350H Sentencing and Punishment Rule 10b-5 of the Securities Exchange Act of 1934. 15 350HIV Sentencing Guidelines U.S.C. 78n(e); 17 C.F.R. 240.10b-5 (1988). 350HIV(C) Adjustments
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(Cite as: 97 F.3d 663) Cusimano contends that there was insufficient evidence to support a finding of insider trading, and that the II. DISCUSSION district court erred as a matter of law in finding that he A. Insider Trading committed perjury. We reject both contentions and [1] Cusimano's first contention is that the district affirm the district court. court erred in finding that his trades on November 9 and November 12 constituted insider trading. Under the I. BACKGROUND misappropriation theory of Rule 10b-5, insider trading On November 8, 1990, The Wall Street Journaloccurs whenever a person trades while in knowing stated in an article that, according to unnamed sources, possession of misappropriated and material non-public AT & T and NCR Corporation were discussing ways to information. See United States v. Chestman, 947 F.2d integrate their businesses. The article indicated that the551, 566, 570 (2d Cir.1991), cert. denied, 503 U.S. form that this combination might take was unclear, but 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992). it gave an acquisition of NCR by AT & T, and a spinoff Cusimano maintains that the district court erred in of AT & T's computer business to NCR, as possible finding (1) that the information was non-public; (2) that examples. The article also noted that the Journal 'sthe information was material; (3) that the information sources had cautioned that the talks between the two was misappropriated; and (4) that he acted with companies might well come to nothing, since AT & T scienter. had repeatedly shown interest in acquiring various computer makers over the past years to no effect. 1. Non-public Nature of the Information [2][3] The district court did not err in its holding *666 On the same day, Charles Brumfield, a Vice that the information imparted by Brumfield to President of Labor Relations at AT & T, called his Cusimano was non-public. To constitute non-public friend Joseph Cusimano. Brumfield had come to believe information under the act, information must be specific that AT & T was going to acquire NCR based on and more private than general rumor. See SEC v. information he obtained through the course of hisMonarch Fund, 608 F.2d 938, 942-43 (2d Cir.1979). employment. (Brumfield had conducted a feasibilityWhile the district court acknowledged that papers such study relating to the merger of AT & T with an unnamedas The Wall Street Journal had speculated, on or before company that had the same vital statistics as NCR. November 8, 1990, that AT & T might acquire NCR, it Moreover, Brumfield's supervisor, William Ketchum, also noted that Brumfield imparted information that had brought the Journal article to his attention thatwas substantially more specific than that in the morning and, although he did not usually give such newspaper. The court pointed out that while the warnings, had expressly cautioned Brumfield not to newspaper reports listed an attempted acquisition as one discuss it.) Brumfield therefore told Cusimano that he possibility among many, Brumfield's statement to believed that the contents of the newspaper article were Cusimano that AT & T was going to attempt to acquire true, and that AT & T was going to be attempting to NCR was both more specific and more certain than acquire NCR. Cusimano thereafter made a series of any reports in the press. trades in NCR securities on November 9, November 12, and November 15-20, 1990. AT & T did not publicly The defendant contends that Brumfield's announce its friendly offer to acquire NCR until conclusion that an acquisition would occur was not December 2, 1990. On December 3, 1990, the stock of supported by the non-public facts at his disposal. These NCR increased $24.75 per share to a closing price of facts, he argues, could just as easily have supported $81.50 per share. other conclusions, including the one that nothing would happen. We disagree. Brumfield's conclusion On August 18, 1995, Cusimano pleaded guilty to was supported, for example, by the non-public facts (1) insider trading for the purchases he made between that he had been asked to do a study of the feasibility of November 15-20, but not for the trades he had made on integrating AT & T's workforce with that of a computer November 9 and November 12. On October 20, 1995, company with the same vital statistics as NCR, and (2) the district court issued an opinion and order holding, that Ketchum warned Brumfield not to speculate with inter alia, that the November 9 and November 12 trades others about a press report that discussed the possibility should be included in calculating Cusimano's offense that AT & T and NCR might combine (and Ketchum and fine level and that Cusimano's sentence should be was not wont to give Brumfield such warnings). At the further enhanced for perjury. Cusimano appeals. Since very least, these non-public facts would make a his appeal turns on factual findings, we review for clear reasonable investor less likely to believe that nothing error. See United States v. Rivera, 971 F.2d 876, 892 (2d would happen. *667 That by itself would be Cir.1992) (citation omitted). information with significant market value. Moreover, the facts might well have pointed more specifically
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(Cite as: 97 F.3d 663) toward an acquisition than did the general newspaper the magnitude of the event was not high. He does not article to a Vice President of the company, who would show, however, why a $6 billion acquisition should not know how to place them in their proper context. Cf. be considered an event of great magnitude. He contends Monarch Fund, 608 F.2d at 941 (Because of theirinstead that magnitude depends not only on the size of positions, insiders know when they have the kind of the deal but also on whether the market has already knowledge that is likely to affect the value of stock.) internalized the information with respect to the merger (citations omitted). at the time of the trade. But even under this measure, the sharp jump in NCR's stock price after a formal We do not today hold that any predictions made byacquisition announcement was made suffices to support an insider can constitute the basis for insider trading a finding that the event in this case was one of major simply because a tippee relies upon them and their magnitude. source, and they subsequently come true. It may well be that insider trading has not occurred, for example, in 3. Misappropriation situations in which an insider has made categorical [6] The district court correctly found that Cusimano statements that are completely without foundation and misappropriated information. Under Rule 10b-5, these are used successfully by a trader. We need go misappropriation occurs when a person acquires nowhere near such an extreme holding, for here the material non-public information in breach of a statement made by the insider was qualified, supported, fiduciary duty or similar relationship of trust and and credible. Brumfield did not state that AT & T wouldconfidence and uses that information in a securities acquire NCR. He had no real basis for such a statement. transaction. Chestman, 947 F.2d at 566. As shown He did say, on the basis of nonpublic data, that he above, the information in this case was both non-public believed that what he read in the paper was true, and and material. Therefore, the only additional showing that AT & T was going to be attempting to acquireneeded to establish misappropriation is that the NCR. He had private information that would supportinformation was acquired through a breach of a both of these remarks, and both of them were of great relationship of trust and confidence. value to a would-be trader. [7] Cusimano acquired his information precisely in 2. Materiality this way for he knew that his source, Brumfield, held a [4] The trial court did not err in finding that theposition of trust and confidence in AT & T. Defendant information imparted by Brumfield was material. When nevertheless contends that there was no an event is contingent and speculative, the materiality misappropriation because Brumfield concluded through of information regarding that event depends upon a his own ingenuity that AT & T *668 would acquire balancing of both the indicated probability that the NCR. He was never told about the acquisition and did event will occur and the anticipated magnitude of the no more than piece together evidence obtained while event in light of the totality of the company activity.working for AT & T. In SEC v. Materia, 745 F.2d 197, Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct.201 (2d Cir.1984), cert. denied, 471 U.S. 1053, 105 978, 987, 99 L.Ed.2d 194 (1988) (citation and internalS.Ct. 2112, 85 L.Ed.2d 477 (1985), however, we upheld quotation marks omitted). The district court held that a trial court's finding of misappropriation where the Brumfield conveyed information that indicated a much defendant traded on information that he pieced together higher level of probability than was publicly available through the course of his employment. The defendant's concerning an event of great magnitude in the corporate objection therefore must fail. life of NCR. 4. Scienter [5] The defendant maintains that the district court [8] Finally, the district court did not err in finding was wrong about both the probability and the that Cusimano acted with scienter. Rule 10b-5 requires magnitude of the event. He claims that the probability that the defendant subjectively believe that the of the merger before November 8 was low becauseinformation received was obtained in breach of a there is no evidence that, prior to November 12, seniorfiduciary duty. See Chestman, 947 F.2d at 570. Such management of AT & T was in favor of an acquisition belief may, however, be shown by circumstantial of NCR. This is belied by the record. Prior to evidence. Herman & MacLean v. Huddleston, 459 U.S. November 12, AT & T had hired an investment bank, 375, 390-91 n. 30, 103 S.Ct. 683, 691-92 n. 30, 74 outside counsel, and accountants to formulate an L.Ed.2d 548 (1983). Cusimano knew that he had acquisition plan; AT & T management had conducted obtained information from Brumfield. He argues that integration plans for an acquisition; and AT & T this does not show scienter because nothing about management teams were conducting discussionsBrumfield's position as a labor negotiator would relating to an NCR bid. The defendant also avers that logically give rise to the inference that he was
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(Cite as: 97 F.3d 663) disclosing inside information. Because Cusimano knewbreach of a fiduciary duty or similar relationship of trust that Brumfield was a Vice President of AT & T, this and confidence and uses that information in a securities contention is meritless. transaction. United States v. Teicher, 987 F.2d 112, 119 (2d Cir.1993) (quoting United States v. Chestman, 947 F.2d 551, 556 (2d Cir.) (in banc), cert. denied, 503 U.S. B. Obstruction of Justice Through Perjury [9][10][11][12] The defendant also appeals the trial 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992)), cert. court's sentencing enhancement for obstruction of *669 denied, 510 U.S. 976, 114 S.Ct. 467, 126 L.Ed.2d justice through perjury. A sentence enhancement for 419 (1993). Persons who trade while in knowing perjury is warranted when a defendant testifying under possession of such information similarly violate Rule oath gives false testimony concerning a material matter 10b-5. with the willful intent to provide false testimony.... United States v. Cawley, 48 F.3d 90, 94 (2d Cir.1995) It follows that if none of the information that is (citation and internal quotation marks omitted). Anyallegedly inside information meets all of the elements ambiguity regarding the testimony must be evaluated in (namely, material and nonpublic), there can be no the light most favorable to the defendant. See United violation. The flaw in the majority's reasoning on the States v. Cunavelis, 969 F.2d 1419, 1423 (2d Cir.1992).November 9 and 12 trades, is its attribution of But such an enhancement is mandatory once its factual materiality to Brumfield's predictions that were based predicates have been established. United States v. on false or thoroughly inconclusive information. Thus, I Friedman, 998 F.2d 53, 58 (2d Cir.1993). The trial courtbelieve, that even though some of the information found that Cusimano lied in order to cover up the fact relayed by Brumfield to Cusimano was material, and that he traded on inside information. This determination some was non-public, none was both. Therefore, I is supported by uncontested findings, such as the fact respectfully dissent as to those trades. that Cusimano stated that his November 12 trades were inspired by a TV show that he watched at lunchtime, The majority's first theory is that Brumfield added while the record shows that his trades began early that to the information already available in the Wall Street morning. Defendant contends that even if he lied, those Journal. However, the extra information-that the lies did not concern a material matter. That contention is transaction definitely was going to happen and that it without merit. If Cusimano's false testimony had been was going to be an acquisition-did not exist at the time credited, it would have provided an alternativeBrumfield tipped Cusimano. In other words, Brumfield explanation for his trades. This in turn would have cast could not state correctly that the acquisition attempt was doubt on whether he knowingly acted on inside going to happen at all, because according to Blaine information, which is a required element of insiderDavis, the head of AT & T's Strategic Development trading. Defendant's lies thus were clearly material. group, the only government witness on this event, AT & T had not yet made that decision. The exploratory steps III. CONCLUSION taken by AT & T prior to deciding whether to make a Because Cusimano traded on November 9 and 12 bid for NCR were just that, exploratory business while in knowing possession of misappropriated and inquiries before making an important business decision. material non-public information, the district court correctly found that he engaged in insider trading on The majority says: We do not today hold that any those two dates. Moreover, because Cusimano willfullypredictions made by an insider can constitute the basis gave false testimony about a material matter under oath, for insider trading simply because a tippee relies upon the court did not err in enhancing his sentence for them and their source, and they subsequently come obstruction of justice through perjury. true. I fear that, by implication, they may have done just that. We affirm the judgment of the district court. I would vacate the judgment of conviction as to MESKILL, Circuit Judge, concurring in part and Cusimano's sentence and remand for resentencing. dissenting in part: I concur in most of the majority's opinion.C.A.2 (N.Y.),1996. However, I cannot agree that Cusimano's trades on U.S. v. Mylett November 9 and 12 were criminal acts that should have97 F.3d 663, Fed. Sec. L. Rep. P 99,326 been included in calculating his offense and fine level. A person violates Rule 10b-5 when he or she misappropriates material nonpublic information in
END OF DOCUMENT
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