S.E.C. v. Aragon Capital Management, LLC
| Decision Date | 24 November 2009 |
| Docket Number | No. 07 Civ. 919(FM).,07 Civ. 919(FM). |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ARAGON CAPITAL MANAGEMENT, LLC, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Mark K. Schonfeld, Nancy A. Brown, Bohdan Stephan Ozaruk, Gwen A. Licardo, Securities and Exchange Commission Northeast Regional Office, New York, NY, for Plaintiff.
Zvi Rosenthal, pro se.
Amir Rosenthal, New York, NY, pro se.
Ayal Rosenthal, Tenafly, NJ, pro se.
Oren Rosenthal, Los Angeles, CA, pro se.
Sarah Elizabeth Havens, Allen & Overy, LLP, New York, NY, for Defendant.
Efrat Rosenthal, pro se.
Rivka Rosenthal, Tenafly, NJ, pro se.
This case arises out of an insider trading scheme involving the family of defendant Zvi Rosenthal ("Zvi"), a former senior executive of Taro Pharmaceutical Industries, Ltd. ("Taro" or the "Company"), an Israeli company whose shares are traded on the NASDAQ national market. In a related criminal case, three members of the Rosenthal family, and David Heyman ("Heyman"), a family friend, each pleaded guilty in connection with the insider trading scheme to a charge of conspiring to commit securities fraud.
The plaintiff Securities and Exchange Commission ("SEC" or the "Commission") has now moved for partial summary judgment with respect to four alleged instances of insider trading, seeking relief against Zvi, three of his sons, defendants Amir Rosenthal ("Amir"), Ayal Rosenthal ("Ayal"), and Oren Rosenthal ("Oren"), and two "relief" defendants, Zvi's daughter Efrat Rosenthal ("Efrat"), and his wife Rivka Rosenthal ("Rivka") (together, the "Relief Defendants"). Zvi, Amir, Ayal, Oren, and the Relief Defendants are hereinafter referred to collectively as the "Defendants."
In July 2007, the parties consented to my exercise of jurisdiction over this case for all purposes pursuant to 28 U.S.C. § 636(c). (See Docket Nos. 48-49). For the reasons set forth below, I now grant in part and deny in part the Commission's motion for partial summary judgment (Docket No. 129).
The following facts are either undisputed or set forth in the light most favorable to the Defendants.
Zvi is married to Rivka and is the father of Amir, Ayal, Oren, and Efrat. (Pl.'s 56.1 Stmt. 119; Defs.' 56.1 Stmt. ¶ 9).1 Between 2001 and 2005, Zvi was the Vice President of Materials Management at Taro. In that capacity, he had access to material nonpublic information concerning the Company. (Pl.'s 56.1 Stmt. ¶ 22; Defs.' 56.1 Stmt. ¶ 22). The Commission contends in its motion that he and others misused that nonpublic information on at least two occasions. The Commission further contends that Amir and Ayal, among others, also misused material nonpublic information concerning two other companies.
The first instance of insider trading related to Taro arises out of an announcement, on May 29, 2001, that the United States Food and Drug Administration ("FDA") had approved Taro's application to distribute a new generic drug, Clotrimazole/Betamethasone Diproprionate Cream USP ("CB Cream"). (Pl.'s 56.1 Stmt. ¶ 53; Defs.' 56.1 Stmt. ¶ 53). Several weeks earlier, Taro learned from the FDA that CB Cream was in "first generic drug review," a development which suggested that regulatory approval of the drug was imminent. (Pl.'s 56.1 Stmt. ¶ 54; Defs.' 56.1 Stmt. ¶ 54).2 Subsequently, in the course of asking Amir to transport "some equipment" to Israel which Taro allegedly needed to complete the approval process, Zvi disclosed material nonpublic information to him concerning the pending FDA approval. (Ex. 20). Amir then used that information to trade in Taro securities for his own account, generating profits of $118,798 between May 17 and June 1, 2001. (Ex. 6 at 21, 92; D'Avino Decl. ¶ 2 & Ex. 2).
In July 2004, Zvi disclosed to Amir that Taro would not meet its second-quarter sales projections. (Pl.'s 56.1 Stmt. ¶¶ 22-23; Defs.' 56.1 Stmt. ¶¶ 22-23). Knowing that Zvi's disclosure violated his fiduciary duties to Taro, Amir nevertheless traded Taro securities in the accounts of his wife Noga Delshad ("Noga"), Noga's father Bahram Delshad ("Bahram"), Zvi, and an entity known as Aragon Partners LLP ("Aragon"). (Ex. 20). Ayal, Oren, Efrat and Rivka were the limited partners of Aragon; Amir, in turn, controlled Aragon Capital LLC, Aragon's general partner. (Compl. ¶¶ 17-18; Pl.'s 56.1 ¶ 14; Defs.' 56.1 ¶ 14). After Amir tipped Heyman about the second-quarter Taro results, Heyman also traded Taro securities in his own account based on the insider information. (Pl.'s 56.1 Stmt. ¶¶ 49-50; Defs.' 56.1 Stmt. ¶ 49-50). In addition, in violation of Taro's written policies, Zvi himself sold 10,000 shares of Taro stock from his personal account in advance of Taro's public disclosure of its second-quarter sales. .
By trading ahead of Taro's quarterly earnings announcement, Amir generated total profits of $962,906 in Aragon's account, $214,946 in Noga's account, $243,288 in Bahram's account, and $31,143 in Zvi's account. Zvi similarly avoided losses in the amount of $238,699 through his sales of Taro stock. Finally, by trading based on Amir's tip, Heyman earned profits and avoided losses in the amount of $83,817. (D'Avino Decl. Ex. 2).
In April 2005, Heyman was employed at Ernst & Young ("E & Y"), where he was assigned to work on the proposed acquisition of a public company by another public company that was an E & Y client ("Project AA"), (Pl.'s 56.1 Stmt. ¶ 72; Defs.' 56.1 Stmt. ¶ 72). In violation of his fiduciary duties to E & Y, Heyman disclosed the proposed transaction to Amir, who then sold the target company's put options through the Aragon account. . At the time, Amir was a young associate at the law firm Thacher, Proffitt & Wood. Amir passed the tip about Project AA to his law firm supervisor, who also bet on a rise in the target company's stock by purchasing call options. (Pl.'s 56.1 Stmt. ¶ 75). Ultimately, the transaction that Heyman improperly disclosed did not occur. (Id. ¶ 77; Defs.' 56.1 Stmt. ¶ 77). Amir nevertheless generated proceeds in the amount of $78,220 through his sale of the target company's puts. (D'Avino Decl. Ex. 2).
Ayal is Amir's younger brother. He completed a bachelor's degree in management in 2001, a master's degree in accounting in 2002, and all of the course work for a masters of business administration degree in January 2007. (Pl.'s 56.1 Stmt. ¶ 12; Defs.' 56.1 Stmt. ¶ 12). New York University subsequently declined to grant Ayal the masters degree, however, after learning that he had pleaded guilty to the conspiracy charge. A suit brought by Ayal to challenge that decision is pending in this Court. See Rosenthal v. New York University, No. 08 Civ. 5338(LAK) (S.D.N.Y. filed June 12, 2008).
In May 2005, Ayal was employed as an accountant by PriceWaterhouse Coopers ("PwC") which assigned him to work on a proposed corporate merger involving PwC's client as the target ("Project Victor"). During his guilty plea in the criminal case, Ayal admitted that he had provided nonpublic information concerning the proposed merger to Amir, "consciously turn[ing] a blind eye" to the likelihood that Amir would use that information to trade. . In fact, after learning of the merger, Amir sold the target company's put options through the Aragon account. Amir also tipped his law firm supervisor, who bought the target company's call options. Amir later liquidated Aragon's position after Ayal tipped him that the merger would not occur. (Compl. ¶¶ 109-11; Ex. 3 ¶ 53; Ex. 4 ¶ 26).
Neither Amir nor Ayal realized any profits in connection with the trades related to Projects AA and Victor. (D'Avino Decl. Ex. 2).
On February 8, 2007, in the United States District Court for the Eastern District of New York, Zvi, Amir, Ayal, and Heyman each pleaded guilty, before Judge John Gleeson, to a one-count criminal information, which charged that they had conspired, together and with others, to commit securities fraud, in violation of Title 18, United States Code, Section 371. (Ex. 6). During his guilty plea allocution, Amir conceded that he had traded on the basis of material nonpublic information furnished to him by Zvi, knowing that Zvi "was breaching his duty to Taro by giving [him] the information." (Id. at 21). Amir cited both his trading in advance of the FDA's announcement about CB Cream in 2001 and his trading before the public disclosure of Taro's second-quarter sales results in 2004 as examples of his deliberate violations of the securities law. Amir also admitted that he tipped others, including Heyman, who had reciprocated by providing him with nonpublic information acquired at E & Y. (Id. at 21-22).
Zvi was the second defendant to plead guilty. During his allocution, Zvi explained to Judge Gleeson that, "[b]etween 2001 and 2005," he had "disclosed material, non-public information concerning Taro to Amir ..., knowing that with this information he may trade in Taro securities." (Id. at 43). Zvi also acknowledged the correctness of an overt act in the information which alleged that he had provided Amir with material nonpublic information about Taro's second-quarter sales results in 2004. (Id.).
Next, as part of his plea, Heyman admitted that he had traded in Taro securities based on a tip from Amir, knowing that the information had been obtained from Zvi, who breached his fiduciary duty to Taro by disclosing the Company's material nonpublic information to others. (Id. at 61). Heyman further...
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