SEC v. Peters

• Decision Date: 19 April 1990
• Docket Number: No. 88-1720-K.,88-1720-K.
• Citation: 735 F. Supp. 1505
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Don S. PETERS; Bernard Lounsbury; Jimmie Lee Pfeffer; and Bonaventure A. Kreutzer, Jr., Defendants.
• Court: U.S. District Court — District of Kansas

735 F. Supp. 1505

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Don S. PETERS; Bernard Lounsbury; Jimmie Lee Pfeffer; and Bonaventure A. Kreutzer, Jr., Defendants.

No. 88-1720-K.

United States District Court, D. Kansas.

April 19, 1990.

Stephen J. Crimmins, Eric S. Seltzer, S.E.C., Washington, D.C., for plaintiff.

Mark F. Anderson, Joseph, Robison & Anderson, Wichita, Kan., for Don S. Peters.

Robert J. Roth, Hershberger, Patterson, Jones & Roth, Wichita, Kan., for Bernard Lounsbury.

Ronald L. Nieto, Arst, Loyd & Nieto Wichita, Kan., Lee I. Levinson, Gasaway, Levinson & Bennett, Tulsa, Okl., for Bonaventure A. Kreutzer, Jr.

MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

The present case involves a civil action brought by the Securities and Exchange Commission (SEC) under the Securities Exchange Act. The matter is now before the court on the motions for summary judgment of defendants Peters and Lounsbury. In addition, defendant Lounsbury has filed a motion seeking a separate trial.

These motions were argued before the court in a hearing held April 4, 1990, at which time the court expressed its views on the merits of defendants' motions. Consistent with the statements of the court at that time, and for the reasons discussed herein, the motions of the defendants Peters and Lounsbury for summary judgment are hereby denied. Defendant Lounsbury's motion for a separate trial is also denied.

Defendant Peters' Summary Judgment Motion

The motion for summary judgment by defendant Peters contains two main arguments. First, he contends that there is insufficient evidence that he engaged in any insider trading or had access to any inside information. Second, he argues that even if he had inside information, he owed no duty to disclose this knowledge or refrain from trading. Peters contends that the misappropriation doctrine, which imposes such a duty, should not be applied in the present case.

1. Sufficiency of the Evidence

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir.1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir.1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir.1987).

In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (quoting Fed.R. Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

The standard of evidence controlling in the present case is that of a preponderance of the evidence. In Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983), the Supreme Court held that a civil suit under § 10(b) of the Securities Exchange Act requires proof by a preponderance of the evidence. The Court reversed the decision of the Fifth Circuit which, analogizing the matter to common law fraud, had required proof by clear and convincing evidence. Considerations applying to common law fraud were not controlling

since the historical considerations underlying the imposition of a higher standard of proof have questionable pertinence here. Moreover, the antifraud provisions of the securities laws are not coextensive with common-law doctrines of fraud. Indeed, an important purpose of the federal securities statutes was to rectify perceived deficiencies in the available common-law protections by establishing higher standards of conduct in the securities industries.

459 U.S. at 388-89, 103 S.Ct. at 690-91 (citations and footnotes omitted). The Court then concluded that proof by a preponderance of the evidence satisfied the need to fairly allocate the risk of error and to identify the relative interests of the parties in the outcome of the matter. Id., at 389-90, 103 S.Ct. at 691-92. The Court stated that while the defendants in a case under § 10(b) face

the risk of opprobrium that may result from a finding of fraudulent conduct, such interests in a securities case do not differ qualitatively from the interests of other defendants sued for violations of other federal statutes such as the antitrust or civil rights laws, for which proof by a preponderance of the evidence suffices.

Id., at 390, 103 S.Ct. at 691.

Based upon the memoranda advanced by the parties and the record presented to the court in the present case, the following facts may be taken as uncontroverted. As required under the rules relating to summary judgment, any necessary inferences or disputes of fact are resolved in favor of the nonmovant SEC.

In October, 1982, Ivan West and Wayne Swearingen entered into a written contract with Energy Resources Group, Inc. (ERG), in which they agreed to provide consulting services to assist in finding an investor willing to purchase $100 million of ERG convertible, callable, voting stock. The following year, West, Gary Gamm, and defendant Peters formed a partnership known as Investment Management Group (IMG). According to the terms of the partnership, West's consulting work for ERG was excluded from the work of the IMG partnership, and there was to be no relationship, business or otherwise, between West and the other partners relating to the ERG consulting work. A relationship of trust and confidence existed between the IMG partners relating to all of the partners' work, including West's consultation work for ERG.

On Sunday, October 28, 1984, West received a telephone call informing him that Broken Hill Proprietary Company, an Australian company, had commenced work directed at acquiring ERG. West immediately phoned Swearingen. West and Swearingen proposed to meet with ERG officials over dinner Monday or breakfast Tuesday to discuss their finder's fee and discuss their role in pricing the transaction. In his deposition, West denies learning the proposed price Broken Hill intended to pay for outstanding ERG stock on October 30. Swearingen's notes, however, indicate that he and West learned on or about October 30 from the chairman of ERG that Broken Hill intend to pay $6.00 or more for ERG stock during the acquisition.

Broken Hill and ERG officials met in San Francisco over the weekend of November 3 and 4. On Monday, November 5, 1984, trading in ERG stock was temporarily suspended on the NASDAQ system pending an announcement. Later the same day, ERG and Utah International, Inc., a wholly-owned subsidiary of Broken Hill, jointly announced a merger agreement. Under the agreement, Broken Hill Proprietary Holdings (USA), another wholly-owned subsidiary of Broken Hill, would make a tender offer of ERG's stock. The tender offer was commenced on November 8, with the Broken Hill holding company extending a public offer for ERG shares at $6.10 per share. The tender offer was finally completed in March, 1985.

The present action arises out of the conduct of Ken Mick, a stockbroker and business associate of Peters. In late October of 1984, immediately prior to the announcement of the ERG-Broken Hill merger, Mick encouraged several of his clients to purchase ERG stock. These clients have testified that Mick told them he had inside information that ERG would soon be bought by another company. Mick indicated that the source of the inside information was Peters.

During the six months prior to October, 1984, Mick had sold no ERG stock. Mick had no underwriting or other special distribution agreement relating to ERG stock which required special emphasis or selling efforts on his part. Nor did he or any of the favored customers of his firm have a substantial long position in ERG which needed to be liquidated. Mick would thus earn the same commission whether he sold ERG or another over-the-counter stock, and should have had no special interest in pushing ERG stock.

John Nickelson was one of the clients approached by Mick about the ERG stock. Mick told Nickelson that he had inside information that ERG's stock was going up. Mick told Nickelson that he would double his money within a week, but that to gain the "inside scoop," he would have to share half his profits with Mick. He also told Nickelson that the ultimate source of the information was a man named West. Nickelson, however, refused to go along with the proposed deal.

Q. He said — what did he say he knew definitely?

A. Yeah. He said he definitely knew `cause he had some inside information that it was gonna go, you

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