Heath v. S.E.C.

• Decision Date: 04 November 2009
• Docket Number: Docket No. 09-0825-ag.
• Citation: 586 F.3d 122
• Parties: Thomas W. HEATH III, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

586 F.3d 122

Thomas W. HEATH III, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Docket No. 09-0825-ag.

United States Court of Appeals, Second Circuit.

Argued: September 16, 2009.

Decided: November 4, 2009.

Gary P. Naftalis (on the brief, Michael S. Oberman, Alan R. Friedman, Joel M. Taylor, Michael B. Eisenkraft), Kramer Levin Naftalis & Frankel, LLP, New York, NY, for Petitioner.

Dominick V. Freda, Senior Counsel for the Securities and Exchange Commission (on the brief, David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel), Washington, D.C., for Respondent.

Before: STRAUB and WESLEY, Circuit Judges and GARDEPHE, District Judge.^*

STRAUB, Circuit Judge:

Petitioner Thomas W. Heath III appeals from the Opinion and Order of the Securities and Exchange Commission ("SEC"), affirming the New York Stock Exchange LLC's¹ ("NYSE") finding that Petitioner violated NYSE Rule 476(a)(6) by disclosing a client's confidential information to a third party.² Rule 476(a)(6) — the so-called "J & E Rule" — subjects registered members to disciplinary sanctions for engaging in "conduct or proceeding inconsistent with just and equitable principles of trade." The NYSE found that, although Petitioner did not act in bad faith, he engaged in unethical conduct in violation of the J & E Rule. On appeal to the SEC, Petitioner argued that bad faith is required to sustain a J & E Rule violation. The SEC held that a finding of mere unethical conduct was sufficient to sustain a J & E Rule violation for a breach of confidence and affirmed the NYSE's finding that he violated the Rule by making the disclosure. Petitioner now appeals the SEC's Opinion and Order, principally arguing that bad faith, and not mere unethical conduct, was required to sustain the J & E Rule violation. He argues alternatively that, if the J & E Rule does in fact prohibit mere unethical conduct in this case, it failed to provide adequate notice that his conduct was sanctionable. Finally, he argues that the NYSE improvidently granted summary judgment against him by failing to resolve questions of fact and draw reasonable inferences in his favor. Because we conclude that Petitioner's arguments lack merit, we deny the Petition.

BACKGROUND

I. Factual Background

Petitioner joined J.P. Morgan Securities as an investment banker in its Financial Institutions Group in 1992, where he advised financial institutions in connection with mergers and acquisitions. He ultimately became a Managing Director and remained with J.P. Morgan until 2005.

Hibernia Bank was a client of J.P. Morgan. Petitioner covered the account for nine years. Petitioner testified that he was close to the CEO of Hibernia, both professionally and personally. Through this relationship, he secured J.P. Morgan's engagement as Hibernia's financial advisor in connection with its merger with Capital One Corp. Hibernia "formally engaged" J.P. Morgan in this capacity on February 25, 2005.

In mid-January of that year, Antonio Ursano, Global Head of Bank of America's Financial Institutions Group, contacted Petitioner, unsolicited, and proposed that Petitioner join Bank of America as the sole head of its bank group. Petitioner met with him and initially indicated he was not interested. They met again, at Ursano's insistence, and Ursano offered Petitioner a job for two years at $3 million per year, with the understanding that he would be promoted within the year to succeed Ursano as head of Bank of America's Financial Institutions Group. Petitioner said that he would consider it, and, on February 13, 2005, he gave Ursano a verbal commitment to join Bank of America (pending a written agreement).

Ursano asked Petitioner to begin in one week, but Petitioner said "that he was working on a large transaction which he felt he needed to complete both in the interest of his client and of his current employer." He did not disclose any further details regarding the "transaction" at that time. While he did not say so explicitly to Ursano, Petitioner was referring to the Hibernia and Capital One merger. Petitioner believed that leaving J.P. Morgan without closing the Hibernia and Capital One deal would be disruptive to the transaction, and to Hibernia particularly.

On February 18, Petitioner informed Tim Main, his supervisor at J.P. Morgan, that he intended to join Bank of America, but that he would stay at J.P. Morgan to secure the Hibernia engagement and "get the deal across the finish line." Main agreed that it was the "honorable" thing to do. Petitioner emphasizes that he had no monetary interest in completing the acquisition at J.P. Morgan and he intended to forfeit any deal-based bonus by resigning prior to fiscal year end.

Ursano asked Petitioner to meet Eric Corrigan, the then-head of Bank of America's Depository Institutions Group, who would have reported to Petitioner upon his arrival. They met on February 23. The purpose of their meeting was to get acquainted with each other and to begin developing a working relationship. They did not discuss Hibernia at this meeting. Petitioner testified that Corrigan seemed to think that they were going to be co-heads of the bank group and not that Petitioner was coming on as the sole head.

Two days later, on February 25, Petitioner received an offer letter from Bank of America, which stated that he would join as a Managing Director and head of banks for the Financial Institutions Group (reporting to Ursano, who was the head of the Financial Institutions Group) with compensation of approximately $6 million over two years.

On March 1, Ursano asked Petitioner to discuss with Corrigan how they were going to work out coverage on their joint accounts, and to assure Corrigan that he was a "decent guy" and a "good partner" who was "not going to stomp all over him" on those accounts. Petitioner and Corrigan had a phone conversation that day during which Petitioner made suggestions about how Corrigan could get involved in Petitioner's accounts and invited Corrigan to meet with a number of his clients. Petitioner testified that his objective was to "build [Corrigan] up" and to let him know that he had heard "nice things" about him from clients, and that he would be "there to help out" if Corrigan needed it.

Near the end of this conversation, Corrigan asked about Petitioner's pending transaction, stating that "there are a lot of rumors out in the marketplace. And [we] ... know you have a bank deal somewhere down in the south." Petitioner testified that he initially refused to divulge any information regarding the Hibernia acquisition, but eventually responded: "if you really want to know, I will tell you exactly what it is, but you have to understand, you know, I've got a week to go. This is obviously confidential information. The deal is done, bankers have been hired, nothing is going to change. And you just have to understand and respect that." Corrigan replied, "well, are you comfortable telling me?" Petitioner responded, "the real question is, are you comfortable with me telling you because you're the one that can't act on this in any way." Corrigan replied, "I can understand that, I can keep a secret." At that point, Petitioner disclosed that Capital One was acquiring Hibernia; J.P. Morgan was representing Hibernia in the deal; forty-five percent of the deal was being funded with cash; the deal had been in motion before January; and Hibernia believed that Capital One's price-to-earnings ratio was sufficiently low that it gave Hibernia a "degree of comfort with the stock."

Petitioner testified that he disclosed this information to Corrigan for "a couple of reasons":

I think that you have to understand that I was talking to someone who, as the gray area merged, was increasingly more of a colleague. And I realize that that is technically not what was going on, but the whole gist of the conversation was business going forward. The — the — you know, the conversation itself, I had mentioned that, you know — I said, well, there's a good marketing piece that we'll talk about going forward.... I'm dealing with someone who's going to be a colleague. I'm dealing with someone who the whole purpose of this thing is to build trust and — and build a collegiality with. I'm — the conversation has gone more towards marketing and this deal had direct relevance. The final thing that I will tell you is when he says they are hearing rumors and they know I've got something in the south, I mean, my forehead just beaded up with sweat, I'm terrified. And my view was — that I basically put a firewall around the problem and I sincerely believe that. And I know in hindsight that is incredibly stupid particularly given what happened. But understand, I knew with 100 percent certainty there was zero role for — for B of A in that deal, zero.

Throughout his testimony, Petitioner emphasized that he was attempting to prevent Corrigan and others at Bank of America from "snooping" around the deal. As he put it, he was attempting to "put a firewall around the problem."

Corrigan confirmed to Petitioner that he understood that he could not act on the information in any way, and Petitioner believed that Corrigan, an experienced industry professional and future colleague, would keep the information confidential as he had promised. That same day, however, Corrigan disclosed the information to Thomas Chen, the head of Bank of America's Diversified Financial Services Group. Chen in turn left a voicemail message for the head of Capital One's mergers and acquisitions group, inquiring whether there was a role for Bank of America on the deal.

On March 3, while Petitioner was in a meeting at Bank of America, Corrigan invited Petitioner to stop by his office. During their conversation, Corrigan asked Petitioner how the Hibernia deal was going and whether there was room for another advisor on the merger. Petitioner...