In re Hutchinson, 85-53.

• Decision Date: 08 December 1986
• Docket Number: No. 85-53.,85-53.
• Citation: 518 A.2d 995
• Parties: In re James D. HUTCHINSON, Respondent.
• Court: D.C. Court of Appeals

518 A.2d 995

In re James D. HUTCHINSON, Respondent.

No. 85-53.

District of Columbia Court of Appeals.

Argued October 22, 1985.

Decided December 8, 1986.

John M. Bray, with whom Judah Best and Charles J. Landy, Washington, D.C., were on the brief, for respondent.

Michael S. Frisch, Asst. Bar Counsel, with whom Thomas H. Henderson, Jr., Bar Counsel, Washington, D.C., was on the brief, for petitioner, the Office of Bar Counsel.

Joan L. Goldfrank, Executive Atty., Washington, D.C., for the Bd. on Professional Responsibility.

Before PRYOR, Chief Judge, and TERRY and STEADMAN, Associate Judges.

TERRY, Associate Judge:

In this disciplinary case, the Board on Professional Responsibility ("the Board") found that respondent Hutchinson's untruthful testimony before the Securities and Exchange Commission (SEC) in February 1982 was conduct involving moral turpitude that adversely reflected on his fitness to practice law, in violation of Disciplinary Rule (DR) 1-102(A)(3); conduct involving dishonesty and misrepresentation, in violation of DR 1-102(A)(4); and conduct prejudicial to the administration of justice, in violation of DR 1-102(A)(5).¹ The Board also found that Hutchinson's disclosure of certain material non-public information relating to a tender offer, which resulted in a misdemeanor conviction under 15 U.S.C. § 78ff(a) (1982) and 17 C.F.R. § 240.14e-3(d) (1983), amounted to "statutory fraud" and was therefore a separate violation of DR 1-102(A)(4). The Board recommended that Hutchinson be suspended from the practice of law for one year.

Hutchinson argues that the Board erred in concluding that the conduct which served as the basis for his misdemeanor conviction amounted to "statutory fraud." He also contends that the Board's recommended sanction of a one-year suspension is too severe because there are mitigating factors established by the record, and because a suspension that long would foster a tendency toward inconsistent dispositions for comparable conduct.² We hold that Hutchinson's disclosure of inside information did not constitute "statutory fraud," notwithstanding his misdemeanor conviction, and that he therefore did not violate DR 1-102(A)(4) by making that disclosure. We also hold, principally on the authority of In re Reback, 513 A.2d 226 (D.C. 1986) (en banc), that the appropriate sanction in this case is a suspension for six months.³

I

Hutchinson was a partner in a large Washington law firm. Within that firm his specialty was pension law. Hutchinson's practice did not involve securities law, but he did trade extensively in securities for his own account.

On January 21, 1982, Hutchinson received a telephone call from a close friend, a California attorney named William Chadwick, who told Hutchinson that he believed a tender offer was about to be made for the Brunswick Corporation. Chadwick said that he had invested in Brunswick, recommended that Hutchinson invest in it also, and offered to split any profits or losses if Hutchinson decided to buy Brunswick stock. When Hutchinson pressed for details, Chadwick said that he believed he did not have inside information and that his broker had confirmed this. Chadwick told Hutchinson that his conclusions about Brunswick were based on cocktail-party conversations and on independent analysis by him and a friend, whose identity he did not then disclose.

Within five minutes after talking with Chadwick, Hutchinson purchased forty Brunswick call options. The next day he bought one hundred more options through the same broker and attempted (unsuccessfully) to buy yet another fifty through a second broker in Florida. He also decided to pass along the recommendation to invest in Brunswick to another friend, Robert Chaloupka. Hutchinson first tried to call Chaloupka on Friday, January 22, but he was unable to reach him until Monday morning, January 25. By then trading in Brunswick stock had been suspended, although Hutchinson did not know this at the time. Chaloupka never bought any Brunswick stock or options.

On Monday, January 25, the Whittaker Corporation publicly announced its takeover of Brunswick, and trading in Brunswick stock was temporarily suspended. On the same day, an SEC attorney called Hutchinson's office to ask whether his law firm represented either Brunswick or Whittaker. Hutchinson was out of the office, but through his secretary he sent word to the SEC attorney that his firm represented neither company. On January 26 Hutchinson himself called the SEC attorney and verified this. During that call he was asked to participate in an informal SEC inquiry and to answer questions about his personal trading in Brunswick options, and he agreed to do so.

The next day, January 27, Hutchinson called Chadwick to tell him that he had agreed to testify before the SEC about his Brunswick trading. Chadwick then told Hutchinson, for the first time, that his information about Brunswick had come not from his own analysis or that of his broker but from Martin Cooper, an officer of a Los Angeles bank in charge of the Whittaker account (the unidentified "friend" mentioned in the first telephone call). Chadwick said that both he and Cooper would be "sunk" if Hutchinson revealed their January 21 conversation to the SEC because the information from Cooper would undoubtedly be regarded as inside information, and trading on it would constitute insider trading, which is illegal. After some discussion, Hutchinson agreed to lie to the SEC about the nature and source of his information about Brunswick if he was asked about it.

Hutchinson was deposed under oath by the SEC staff on February 2, February 16, March 29, April 1, and April 30, 1982. At the first two meetings, at which he was not represented by counsel, Hutchinson denied that he had discussed his purchase of Brunswick options with Chadwick or with anyone other than his own broker and denied that he had recommended the purchase of Brunswick stock to anyone else. He also said that he had first learned of the tender offer for Brunswick from his broker on January 25, the date of the public announcement by Whittaker of the takeover bid. He denied having had any information before January 25 that a tender offer might be made for Brunswick. He told the SEC investigators that his sudden interest in Brunswick had resulted from his own research in the financial press and his personal strategy of purchasing low-priced options on stock which had recently traded at or below the option price.

Sometime between February 2 and February 16, Hutchinson unsuccessfully tried to convince Chadwick to agree to let him tell the truth to the SEC. Finally, on March 12, Hutchinson met with Chadwick and Chadwick's attorneys, and all of them agreed that Hutchinson and Chadwick would both contact the SEC and tell the whole truth. After that meeting, Hutchinson for the first time retained his own counsel, who contacted the SEC and made arrangements for Hutchinson to correct and supplement his earlier statements.

At the depositions in March and April, Hutchinson recanted his prior testimony and testified truthfully about his conversations with Chadwick, his agreement with Chadwick to lie to the SEC, and his efforts to relay the advice about Brunswick to Robert Chaloupka. In addition, on April 29, 1982, he voluntarily deposited all the profits he had made from trading in Brunswick options into an escrow account.

The SEC then brought a civil enforcement action against Hutchinson, Chadwick, and Cooper in the United States District Court for the Central District of California. In that proceeding, without admitting or denying the allegations in the SEC's complaint, Hutchinson agreed in a consent order to surrender the profits he had made (approximately $72,000) from his trading in Brunswick securities. This money was eventually distributed to other sellers of Brunswick options. The consent order, which was entered on July 15, 1982, also provided for certain injunctive relief against Hutchinson.

About a year later,⁴ in the United States District Court for the District of Columbia, Hutchinson was convicted of a criminal violation of the federal securities laws. An information filed by the United States Attorney charged him with a misdemeanor under 15 U.S.C. § 78ff(a) (1982), the penalty section of the Securities Exchange Act of 1934 ("the 1934 Act"), and 17 C.F.R. § 240.14e-3(d) (1983), which, broadly speaking, prohibits the communication of inside information about tender offers. On July 28, 1983, Hutchinson pleaded guilty and was fined $10,000.

The subsection of the regulation which Hutchinson was charged with violating, subsection (d), does not prohibit the purchase or sale of securities. Rather, it makes unlawful the communication of "material non-public information relating to a tender offer to any other person under circumstances in which it is reasonably foreseeable" that the other person will purchase or sell securities in the company which is the subject of the tender offer. Thus the criminal case against Hutchinson was based not on his personal trading in Brunswick options (as was the civil action in the Central District of California) but on his communication to Chaloupka of the impending tender offer for Brunswick. Furthermore, Hutchinson was convicted and sentenced under that portion of 15 U.S.C. § 78ff(a) which permits only a fine as punishment when the defendant proves that he had no knowledge of the regulation he was violating.⁵

II

On November 28, 1983, Bar Counsel filed a petition instituting formal disciplinary proceedings against Hutchinson. Some time before that, when a copy of the misdemeanor conviction was filed with this court, we ordered the immediate suspension of Hutchinson from the practice of law, concluding that he had been convicted of a "serious crime" within the meaning of Rule XI, section 15 of our Rules Governing the Bar.⁶ Hutchinson moved for reconsideration, and after full briefing and oral argument,...