Sec. v. Rosenthal

Citation650 F.3d 156
Decision Date09 June 2011
Docket NumberDocket Nos. 10–1204–cv(L); 10–1253(con).
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellee,v.Zvi ROSENTHAL, Amir Rosenthal, Ayal Rosenthal, Oren Rosenthal, Efrat Rosenthal, Rivka Rosenthal, Defendants–Appellants,Aragon Capital Management, LLC, Aragon Partners, LP, Noga Delshad, Defendants.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

OPINION TEXT STARTS HERE

Amir Rosenthal, pro se (Zvi Rosenthal, Otisville, N.Y., Ayal Rosenthal, Tel Aviv–Yafo, Israel, on the brief), New York, N.Y., for DefendantsAppellants Zvi, Amir, and Ayal Rosenthal.Robert Knuts, Park & Jensen LLP, New York, N.Y., for DefendantsAppellants Oren, Efrat, and Rivka Rosenthal.Tracey A. Hardin, Senior Counsel (David M. Becker, General Counsel; Mark D. Cahn, Deputy General Counsel; Jacob H. Stillman, Solicitor; Randall W. Quinn, Assistant General Counsel, on the brief), Securities & Exchange Commission, Washington, D.C., for PlaintiffAppellee.Before: SACK, KATZMANN, and CHIN, Circuit Judges.KATZMANN, Circuit Judge:

DefendantsAppellants Amir and Ayal Rosenthal (“Amir” and “Ayal”; collectively defendants) appeal from the judgment of the United States District Court for the Southern District of New York (Maas, Mag. J.), entered on February 1, 2010, granting the motion of PlaintiffAppellee Securities and Exchange Commission (SEC) for partial summary judgment, ordering disgorgement, granting injunctive relief against Zvi and Amir Rosenthal, and imposing penalties on Zvi, Amir, and Ayal Rosenthal. In this opinion, we consider Amir and Ayal's challenge to the imposition of penalties on them pursuant to section 21(d)(3) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78u(d)(3), for their insider trading violations. 1 We hold that civil monetary penalties for insider trading are not available under section 21(d)(3) of the Exchange Act. For the reasons stated herein and in the accompanying summary order, the judgment of the district court is AFFIRMED in part and VACATED in part.

BACKGROUND

The following factual recitation, which is not in dispute, is limited to those facts that are necessary to the resolution of the issue addressed in this opinion.

Zvi and Rivka Rosenthal are the parents of Amir, Ayal, Oren, and Efrat Rosenthal. In June 2003, Amir formed Aragon Partners LP (Aragon), a limited partnership, to pool and trade funds on behalf of the Rosenthal family members. Amir contemporaneously founded Aragon Capital Management LLC, which he controlled and in the trading account of which he placed all Aragon trades.

In April 2005, in the course of his employment as an accountant at Ernst & Young, David Heyman, a Rosenthal family friend, learned of the proposed acquisition of a public company by a second company that was an Ernst & Young client. Heyman disclosed this proposed transaction to Amir, who sold the target company's “put” options through the Aragon account (“Project AA trades”). Amir, who was at that time an associate at a large law firm, also passed the tip on to his supervisor, who purchased “call” options. The acquisition ultimately did not occur, and Amir's Project AA trades did not result in any profits or permit him to avoid losses.

In May 2005, in the course of his employment as an accountant at PricewaterhouseCoopers (“PwC”), Ayal learned of a proposed merger involving a PwC client as the target. Ayal communicated this confidential information to Amir, who sold the target company's put options through the Aragon account (“Project Victor trades”) and tipped his supervisor, who again bought call options. Ayal later informed Amir that the merger would not occur, and Amir liquidated Aragon's position. Neither Ayal nor Amir generated profits or avoided losses from the Project Victor trades.

On February 8, 2007, Amir, Ayal, and Heyman pleaded guilty to a one-count criminal information alleging that they had conspired to commit securities fraud. Amir admitted to trading on material, nonpublic information and to tipping others. Heyman and Ayal also admitted to tipping Amir.

The SEC instituted this civil enforcement action in February 2007 and filed an amended complaint on March 22, 2007, which alleged that, inter alia, Amir, Ayal, and Heyman violated section 10(b) of the Exchange Act and Rule 10b–5 promulgated thereunder and section 17(a) of the Securities Act of 1933 by engaging in insider trading. The parties consented to proceeding before Magistrate Judge Frank Maas. On October 1, 2008, the SEC moved for partial summary judgment on the basis of the guilty pleas in the criminal case. On November 24, 2009, the district court granted summary judgment against Amir and Ayal with respect to the Project Victor trades and against Amir with respect to the Project AA trades and imposed “third tier” civil penalties 2 in connection with those trades pursuant to section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). The court imposed the statutory maximum penalty of $600,000 on Amir for his five violations—trading on one tip from Heyman and two tips from Ayal and twice tipping his law firm supervisor—and imposed a penalty of $120,000 on Ayal for his two tips to Amir. See 15 U.S.C. § 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1002.

DISCUSSION

We review de novo the district court's interpretation of a federal statute. See, e.g., United States v. Fuller, 627 F.3d 499, 503 (2d Cir.2010).

Amir and Ayal challenge the district court's imposition of penalties pursuant to section 21(d)(3) of the Exchange Act, which provides in pertinent part:

Whenever it shall appear to the Commission that any person has violated any provision of this chapter, [or] the rules or regulations thereunder, ... other than by committing a violation subject to a penalty pursuant to section 78u–1 of this title, the Commission may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, upon a proper showing, a civil penalty to be paid by the person who committed such violation.

15 U.S.C. § 78u(d)(3)(A) (emphasis added).

The instant appeal centers on the meaning of the italicized language set forth above, which refers to a provision enacted as part of the Insider Trading and Securities Fraud Enforcement Act of 1988 (“ITSFEA”), Pub.L. No. 100–704, 102 Stat. 4677. The ITSFEA, inter alia, amended the Exchange Act to add section 21A, which was codified at section 78u–1 of Title 15. The parties dispute whether Amir and Ayal committed a violation that was “subject to a penalty pursuant to [section 21A].” To resolve this question, we first look to the text of section 21A and its role in the statutory scheme. See United States v. Farhane, 634 F.3d 127, 142 (2d Cir.2011).

Subsection (a)(1) of section 21A authorizes the SEC to seek, and the district court to impose, a civil penalty for insider trading— i.e., for “purchasing or selling a security ... while in possession of material, nonpublic information in, or ... communicating such information in connection with, a transaction....” 15 U.S.C. § 78u–1(a)(1). In a separate subsection, section 21A provides that the amount of such a penalty “shall be determined by the court in light of the facts and circumstances,” and “shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.” Id. § 78u–1(a)(2).

For the reasons discussed below, we conclude that the statutory language is ambiguous. After examining the textual context and legislative history of section 21(d)(3), we hold that a defendant is “subject to” a penalty under section 21A as soon as he engages in insider trading, regardless of whether this activity ultimately ripens into profits or permits the avoidance of losses.

Here, as noted, Ayal's and Amir's insider trading violations in connection with the Project Victor and Project AA trades did not result in a profit or avoid a loss. Therefore, they cannot be required to pay a financial penalty by the terms of section 21A(a)(2). For this reason, the SEC contends that the defendants' violations were not “subject to a penalty pursuant to section [21A],” thus permitting the district court to impose penalties pursuant to section 21(d)(3). The SEC contends that “subject to” in this context means that a defendant is only exempted from section 21(d)(3) penalties if he is “liable” for a penalty under section 21A—in other words, according to the SEC, a defendant is not “subject to” section 21A penalties unless he ultimately profits or avoids a loss as a result of his insider trading.3 Br. for the SEC at 27.

Although in some circumstances an agency's interpretation of a statute that it administers is entitled to substantial deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), the Chevron framework is inapplicable where, as here, the agency's interpretation is presented in the course of litigation and has not been “articulated before in a rule or regulation.” Conn. Office of Prot. & Advocacy for Persons with Disabilities v. Hartford Bd. of Educ., 464 F.3d 229, 239 (2d Cir.2006). While “a position adopted in the course of litigation lacks the indicia of expertise, regularity, rigorous consideration, and public scrutiny that justify Chevron deference,” such an interpretation should still “be followed to the extent persuasive.” Catskill Mountains Chapter of Trout Unlimited, Inc. v. City of New York, 273 F.3d 481, 491 (2d Cir.2001); see also Lockheed Martin Corp. v. Morganti, 412 F.3d 407, 411 (2d Cir.2005) ([A]gency interpretations presented in litigation may still be given deference so long as they are not post hoc rationalizations of past agency action or otherwise do not reflect the agency's fair and considered judgment.”).

In light of these principles, we decline to defer to the SEC's interpretation of section 21(d)(3) because the agency's interpretation does not...

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