S.E.C. v. Mayhew

• Citation: 121 F.3d 44
• Decision Date: 29 July 1997
• Docket Number: Nos. 220,D,221,s. 220
• Parties: Fed. Sec. L. Rep. P 99,496 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant, v. Jonathan MAYHEW, Defendant-Appellant-Cross-Appellee. ockets 96-6022,96-6092. Second Circuit
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 44

121 F.3d 44

Fed. Sec. L. Rep. P 99,496

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant, v. Jonathan MAYHEW, Defendant-Appellant-Cross-Appellee.

Nos. 220, 221, Dockets 96-6022,96-6092.

United States Court of Appeals,Second Circuit.

Argued Sept. 25, 1996.

Decided July 29, 1997.

Victor L. Zimmermann, Jr., New Canaan, CT (Edward V. O'Hanlan, Elizabeth T. Grove, O'Rourke O'Hanlan & Zimmermann, New Canaan, CT, on the brief), for Defendant-Appellant-Cross-Appellee.

Susan Ferris Wyderko, Senior Litigation Counsel, Securities and Exchange Commission, Washington, DC (Paul Gonson, Solicitor, of counsel, Richard H. Walker, General Counsel, Jacob H. Stillman, Associate General Counsel, Washington, DC, on the brief), for Plaintiff-Appellee-Cross-Appellant.

Before: WALKER, JACOBS, Circuit Judges, and CARMAN, Judge. ^*

WALKER, Circuit Judge:

Jonathan Mayhew appeals from a final judgment of the United States District Court for the District of Connecticut (Janet Bond Arterton, District Judge ) holding him liable, in a civil enforcement proceeding, for violating § 14(e) of the Securities and Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78n(e), and Rule 14e-3, 17 C.F.R. § 240.14e-3, promulgated thereunder. SEC v. Mayhew, 916 F.Supp. 123 (D.Conn.1995).

The issue raised by this appeal is whether a person, who does not have a fiduciary duty to a corporation, is liable under § 14(e) and Rule 14e-3 when he trades in the corporation's securities based on information disclosed to him indirectly by a corporate insider to the effect that a merger is imminent and probable by confirming rumors, widely circulated in the financial press, that the corporation is engaged in serious negotiations with one or more merger candidates. On appeal, Mayhew contends the district court erred in finding him liable for insider trading that violates § 14(e), claiming that the information which he received was neither nonpublic and material nor "in connection with" a tender offer. In its cross-appeal, the Securities and Exchange Commission (the "Commission") contends that the district court erred by overlooking its prayer for an assessment of civil penalties under the Insider Trading Sanctions Act ("ITSA"), 15 U.S.C. § 78u-1(a). We reject each contention and affirm the district court in all respects.

BACKGROUND

In 1988, defendant Jonathan Mayhew, formerly a corporate pilot, turned to securities trading as a full-time occupation. His strategy was to invest in the stock of companies he believed to be takeover candidates. In 1989, Mayhew and his Darien, Connecticut neighbor, Dr. Edmund Piccolino, saw each other two or three times a week, typically on exercise walks. On these walks, Mayhew and Piccolino, whom Mayhew knew to be a partner at the consulting firm of Personnel Corporation of America ("PCA"), often discussed securities investment strategies. One such discussion, sometime after November 15, 1989, led to this enforcement action by the Commission.

From July 1989 through January 1990, representatives of Rorer Group, Inc. ("Rorer") and Rhone-Poulenc S.A. ("RPSA") held a series of confidential discussions which culminated in RPSA's tender offer for Rorer's pharmaceuticals business. To preserve the confidentiality of these discussions, Rorer and RPSA signed a confidentiality agreement in August 1989, restricted knowledge of the impending tender offer to a few executives, and used code words to refer to the two companies in documents relating to the merger. In October 1989, Rorer and RPSA retained McKinsey & Company, Inc., a management consulting firm, to assist in compiling and presenting financial projections for each company separately and to help construct a joint strategy for the combination.

In early November 1989, Ralph Thurman, president of Rorer's pharmaceuticals business, and other top Rorer executives met in Paris, France, with representatives of RPSA and consultants from McKinsey to discuss the structure of the contemplated merger and present business projections for Rorer's pharmaceuticals business. After this meeting, Thurman believed that the merger was "highly likely" to proceed.

During the course of the negotiations, Robert Cawthorn, Rorer's Chief Executive Officer ("CEO"), asked Thurman to recommend a consultant to work on Cawthorn's employment contract in light of the anticipated combination with RPSA. Thurman suggested Piccolino, who previously had been a consultant for Rorer and with whom Thurman had a prior independent business relationship.

On November 15, upon his return from Paris, Thurman met with Piccolino to discuss the possibility of PCA negotiating Cawthorn's employment agreement in connection with a "pending business transaction," which he described, "giving [Piccolino] as little specifics as [he] needed to" explain to Piccolino why Cawthorn needed the work done. Thurman testified at trial that he "absolutely" expected Piccolino to keep the information confidential.

Piccolino testified that, during this meeting, Thurman revealed that Rorer "was being pursued and/or was actively pursuing companies to merge or integrate or acquire" and that "the company had been approached and was discussing alternatives as an active ongoing part of their life. [Thurman] was pretty circumspect about it, but, nonetheless, you got the impression that activity was under way." Thurman wanted to know "how do you know if you can trust someone when you are getting into a complex merger negotiation." Piccolino also testified as follows:

Q: But, nevertheless, it was Randy Thurm[an] who told you at the lunch that they are definitely involved in serious talks with a potential suitor or merger candidate.

A: Absolutely.

...

Q: We left the realm, as it was reported in magazine articles elsewhere, of a speculative nature of Rorer being one of the Potential [sic] candidates, plural, and moving into the area of [a] senior officer of Rorer saying to you we are in serious talks with a potential merger candidate or candidates?

A: Yes.

Piccolino concluded: "I walked away from that meeting with the knowledge that there was actually activity--they were actually in discussions with somebody or many players...."

Prior to November 15, 1989, the financial press had periodically published articles suggesting Following his November 15, 1989 meeting with Thurman, Piccolino "relayed the essence of that conversation [with Thurman]" to Mayhew and specifically "identif[ied] Randy Thurm[an] to Mayhew." He told Mayhew that Thurman, a Rorer insider, had confirmed Mayhew's theory that Rorer was ripe to be acquired and that Rorer was actively pursuing a partner. Mayhew has consistently denied any recollection of this conversation.

                that Rorer might be a takeover candidate.  During the summer of 1989, Mayhew "speculated [with Piccolino] on more than one occasion that Rorer was a company that was ripe to be acquired or merged with another company."   In September 1989, Mayhew began to trade in Rorer securities.  But his Rorer trading ended on November 8, 1989, when Mayhew sold the last of his Rorer securities, sustaining a loss on all his Rorer trades of $11,500
                

Piccolino testified that, after disclosing to Mayhew the information he had obtained from Thurman, he asked Mayhew to advise him on an appropriate investment strategy. Following this discussion, although he had never before purchased Rorer securities and was personally unfamiliar with option trading, Piccolino bought 25 call options in Rorer stock on November 16, 1989.

Also on November 16, 1989, eight days after liquidating his entire position in Rorer at a loss, Mayhew began to switch most of his investment portfolio, then valued at about $600,000, back into Rorer securities. By January 9, 1990, Mayhew had amassed more than $430,000 in Rorer stocks and options.

Mayhew testified that these purchases were motivated by the information he gathered from publicly disseminated articles and from closely following Rorer stock activity. Mayhew claimed that his November purchases were motivated by an "upside volume" in Rorer securities; however, market records show that both the price and the daily volume of Rorer shares traded fell during November.

On January 15, 1990, Rorer publicly announced that it was discussing a contemplated tender offer with an unnamed third party and disclosed the terms of the proposed combination. That same day, following the announcement, the price of Rorer stock rose from $49.75 to $63 per share, and the following day Mayhew sold his accumulated Rorer securities for a profit of $255,550.01.

On August 9, 1994, the Commission filed a civil enforcement proceeding against Mayhew claiming that his trades in Rorer securities between November 16, 1989 and January 15, 1990 violated §§ 10(b) and 14(e) of the 1934 Act, 15 U.S.C. §§ 78j(b) & 78n(e), and Rules 10b-5 and 14e-3, 17 C.F.R. §§ 240.10b-5 & 240.14e-3, promulgated thereunder. After a bench trial, the district court found that Mayhew's trades in Rorer securities during that period violated § 14(e) and Rule 14e-3, but not § 10(b) or Rule 10b-5. The district court ordered Mayhew to disgorge his wrongful gains of $255,550.01 from trading in Rorer securities between November 16, 1989 and January 15, 1990, plus prejudgment interest. The district court also entered a permanent injunction against Mayhew, but did not order sanctions under the ITSA.

DISCUSSION

The Supreme Court, in United States v. O'Hagan, --- U.S. ----, ---- - ----, 117 S.Ct. 2199, 2216-19, 138 L.Ed.2d 724 (1997), faced with a claim that Rule 14e-3 exceeded the Commission's authority under § 14(e) of the 1934 Act, recently upheld the validity of Rule 14e-3 which imposes liability on persons who trade on material, nonpublic information in connection with a tender offer without regard to whether the trader owes a fiduciary duty to respect the confidentiality of the information. See also United States v. Chestman, 947 F.2d 551, 557 (2d Cir.19...