SEC v. Foundation Hai

• Decision Date: 01 March 1990
• Docket Number: No. 90 CIV. 0277 (SWK).,90 CIV. 0277 (SWK).
• Citation: 736 F. Supp. 465
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FOUNDATION HAI, Holding Protection, Ltd., Robert Rossi, Unifund SAL, Tamanaco Saudi & Gulf Investment Group, and Certain Purchasers of the Common Stock of And Options to Purchase the Common Stock of Rorer Group, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

736 F. Supp. 465

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FOUNDATION HAI, Holding Protection, Ltd., Robert Rossi, Unifund SAL, Tamanaco Saudi & Gulf Investment Group, and Certain Purchasers of the Common Stock of And Options to Purchase the Common Stock of Rorer Group, Inc., Defendants.

No. 90 CIV. 0277 (SWK).

United States District Court, S.D. New York.

March 1, 1990.

S.E.C. by Thomas C. Newkirk, Barry R. Goldsmith and Mark Kreitman, Washington, D.C., for plaintiff.

Willkie, Farr & Gallagher by Philippe M. Salomon, New York City, for defendant Unifund SAL.

Samuel Burstyn, Miami, Fla., for defendant Tamanaco Saudi & Gulf Inv. Group.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

This is an insider trading action brought by the Securities and Exchange Commission ("SEC") for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. This Court granted a temporary restraining order and expedited discovery. Presently before this Court is the motion of the Securities and Exchange Commission for a preliminary injunction against defendants Unifund SAL ("Unifund") and Tamanaco Saudi & Gulf Investment Group ("Tamanaco"), as well as these defendants' motions to dismiss the complaint on various grounds.

BACKGROUND

These allegations of insider trading stem largely from circumstantial evidence against Tamanaco and Unifund suggesting that they purchased certain speculative options, and common shares as well, in knowing reliance upon material, non-public information regarding the possible merger of Rorer Group Inc. ("Rorer") and Rhone-Poulenc, S.A. ("Rhone"). According to Rorer's Chairman and Chief Executive Officer, it is a U.S. pharmaceutical company that entered preliminary, confidential merger discussions with Rhone as early as the summer of 1989. Declaration of Robert E. Cawthorn at ¶¶ 2, 3. The understanding of confidentiality was formalized in a confidentiality agreement entered into by Rorer and Rhone in August 1989. Talks progressed with the exchange of financial information in September and further discussion through December, at which time the parties had engaged transactional advisors, including investment bankers and attorneys. Id. at ¶ 4. Detailed discussions took place in December and January concerning the price Rhone would pay for Rorer stock and how the merger might be structured. Id. at ¶ 6. Rorer's Chief Executive further stated that the Rorer personnel with knowledge of these discussions understood that information concerning the transaction was confidential. Id. at ¶ 7.

After providing the French government with a report of the proposed merger on December 22, 1989, Rhone learned from the French government on January 4 that it would formulate a position on the transaction by January 17. Declaration of Yves Brissy at ¶ 6. Rorer publicly disclosed that it was engaged in merger discussions in a January 15, 1990 press release. On January 18, Rorer and Rhone executed a nonbinding Agreement in Principle and issued a joint press release identifying the companies and their merger intentions. Brissy Dec. at ¶ 8.

Defendant Tamanaco is a Panamanian corporation that purchased 500 Rorer option contracts through Campagnie Espirito Santo ("Espirito") on January 10, 1990. On January 12, Tamanaco purchased 100 call options in the same series through Espirito's account at the Lausanne, Switzerland branch of Dean Witter Reynolds Inc. ("Dean Witter"). On January 10, Espirito also purchased 3000 shares of Rorer Group Inc. common stock at an account with the firm of Raymond James & Associates, Inc. Third Declaration of Thomas B. Lawson at ¶ 2 ("Lawson III"). On January 18, Tamanaco sold the six hundred options it acquired on January 10 and 12 for $167,500, realizing a gross profit of $666,250.

Defendant Unifund was incorporated under Lebanese law in April, 1988 for the purpose of investing in securities and currencies. Affidavit of Ralph Audi, dated February 21, 1990, at ¶ 2. At about this time, Unifund opened a cash management account with the Lebanon subsidiary of Merrill Lynch, which account is carried on the books of Merrill Lynch in New York. Affidavit of Philippe M. Salomon, dated February 12, 1990, at ¶ 15; Affidavit of Antoine J. Merheb, dated February 9, 1990, at ¶ 7. Over the past two years Unifund invested in the securities of firms that were subject to takeover rumors such as United Air Lines, Pillsbury Company, Time Warner Inc., and Polaroid Corp. Merheb Affidavit at ¶ 12. On January 4, 1990, Unifund began acquiring Rorer options and common stock. It spent $1,905,437 to acquire forty thousand Rorer common shares at $47.63 on January 4, and sold these shares on January 16 at $62.25 for a profit of $464,313. SEC Memorandum in Support at 11. During this period, Unifund purchased April options for $306,987, selling some of these options on January 15 and 16 for a profit of $114,012.50. On these January 1990 transactions in Rorer securities, Unifund realized a profit thus far of approximately $420,000. See SEC Memorandum in Support of Preliminary Injunction at 11.

According to the Declaration of SEC attorney James Bennett, Candid Peyer, who was Espirito Santo's broker at Raymond James, admitted in a telephone interview that he had received "inside information" relating to this takeover from an unnamed friend. Declaration of James B. Bennett at ¶ 6. According to Bennett, Peyer admitted that

at some point between December 11 and December 21, 1989, a close friend of his told him that `if you want a Christmas gift, buy February 60 calls in Rorer.' Mr. Peyer said that in his opinion his friend had "inside information" concerning a takeover of Rorer.

Bennett Declaration at ¶ 6. Although Peyer would not identify his friend, he did add that this friend "said the information came from `the direction' of one of the entities mentioned in connection with the Commission's litigation." Id. at ¶ 14.

Unifund's principal holder and bearer of shares, Ralph Audi, has borrowed money from Banque Audi, which is a Lebanese bank located in Beirut and which is managed by distant cousins of Ralph Audi. Letter of Philippe Salomon to the Court dated February 26, 1990, at 4; Translation of C.O.B. Hearing at 5. According to Ralph Audi's statement to the C.O.B., his cousins also "hold interests in Banque Audi France SA, located at 73 Avenue des Champs Elysees, Paris, Banque Audi Suisse, with head office in Zurich and a branch in Geneva, and Banque Audi Inc., with head office in New York." American Stock Exchange records further indicate that the same Banque Audi Suisse also traded in Rorer call options in the week before the announcement. Second Declaration of Mark Kreitman, dated February 27, at ¶ 7. It is noteworthy that Banque Audi Suisse made these trades through the brokerage firm of Raymond James, the firm used by defendant Tamanaco and also the firm which employs Candid Peyer, the broker who admitted knowledge of certain "inside information." Id.

The parties appeared before this Court on January 30, 1990 and again on February 13, 1990, at which time this Court orally granted the preliminary injunction with regard to Tamanaco, later signing a written order.¹ After determining that this Court's prior order of expedited discovery had not been complied with by the defendants, this Court appointed Alvin K. Hellerstein, Esq., as Special Master "to assist the parties in formulating a discovery plan and to mediate any discovery disputes." See Order Appointing Special Master, dated January 31, 1990, at 2. Under the direction of the Special Master, the SEC took depositions in London on February 9. There were, however, no depositions of Tamanaco and Unifund, as neither defendant produced someone with personal knowledge of the Rorer transaction. The SEC contends that Unifund has systematically avoided its discovery obligations, in the face of expedited discovery, while pressing forward for the preliminary injunction hearing. See Declaration of Barry R. Goldsmith, dated February 21, 1990. Thus, plaintiff argues that it has been squeezed by Unifund's obstructive discovery tactics. Unifund objects to this characterization, arguing that civil war in the Christian sector of Beruit, Lebanon made it impossible to contact Unifund's principal and provide a witness with personal knowledge for deposition in London on February 9.

Through the mediation of the Special Master all the defendants but Unifund and Tamanaco consented to a sixty day extension of the temporary restraining order for the purpose of consolidating the trial with the preliminary injunction hearing under Fed.R.Civ.P. 65. At that time, Unifund's counsel stated that he could not contact his client to discuss this proposal, and agreed to put the hearing over to February 22 to consider such an extension. Declaration of Barry Goldsmith at ¶ 10. On February 15, counsel for Unifund contacted the SEC and requested that they take the deposition of Ralph Audi, a witness with personal knowledge, prior to the February 22 hearing. The SEC refused to take the deposition in France because it allegedly would take at least one month for it to obtain French government approval. Id. at 13. In response, the SEC offered to take the deposition in a mutually agreeable place in North America, such as Montreal or Bermuda, where foreign government approval would not be an obstacle. This offer was rejected. Unifund's counsel suggested a telephone deposition, but this was rejected by the SEC as inadequate and also because it created similar foreign government approval problems. The Special Master ruled at that time that it would be unreasonable to require the deposition before the hearing either in Europe or the United States under the circumstances. See Letter of Alvin Hellerstein to the Court, dated February 16, 1990.

On February 22, this Court heard oral argument on the motion for a preliminary injunction against Unifund. At that time Unifund agreed to...