S.E.C. v. Clark
| Decision Date | 24 September 1990 |
| Docket Number | No. 89-35486,89-35486 |
| Citation | 915 F.2d 439 |
| Parties | , Fed. Sec. L. Rep. P 95,501 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. John Naylor CLARK, III, Defendant-Appellant, and Russell G. Van Moppes, Defendant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
David J. Hase, Foley & Lardner, Milwaukee, Wis., for defendant-appellant.
Paul Gonson, S.E.C., Washington, D.C., for plaintiff-appellee.
Appeal from the United States District Court for the Western District of Washington.
Before HALL, THOMPSON and LEAVY, Circuit Judges.
In an enforcement action brought by the Securities and Exchange Commission ("SEC"), a jury determined that John Naylor Clark, III ("Clark") violated Sec. 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 by misappropriating and using material nonpublic information regarding his employer's plans to acquire another company. The jury also found that Clark's stockbroker, Russell Van Moppes, who had executed Clark's trades and had traded upon Clark's information, had not violated federal securities laws. The district court ordered, inter alia, that Clark disgorge the profits he and Van Moppes realized. Clark appeals both the finding of liability and the disgorgement order.
We have jurisdiction under 28 U.S.C. Sec. 1291 and we affirm.
Until late 1983, Clark was president of Rolyan Manufacturing Company, Inc. ("Rolyan"), a Wisconsin corporation which produced and sold various medical supplies. In December of that year, Smith & Nephew, plc ("SN"), a London-based multinational corporation, acquired Rolyan and renamed it Smith & Nephew Rolyan ("SNR"). SN decided to keep Clark on as president of SNR.
SN's successful acquisition of Rolyan whetted its appetite for other medical supply manufacturers in North America. Consequently, it set up an acquisitions team to keep an eye out for appetizing takeover targets. Clark was a member of this team and attended regular meetings to discuss possible acquisition candidates. Team members were well aware that SN considered all information regarding takeovers as confidential and forbade the disclosure or personal use of such information.
Curtis Easter, SN's vice president of finance for North American operations, was also a member of the acquisitions team. Beginning in the middle of 1984, Easter become involved in the team's investigation of, and subsequent negotiations with, Affiliated Health Products, Inc. ("AHP"), a surgical glove manufacturer. Clark had no connection with the AHP project.
On December 12, Easter, who had just returned from a tour of AHP's midwestern manufacturing plants, dropped into Clark's office at SNR. Clark told Easter that he had heard that SN was planning to buy a surgical glove company. Easter, figuring that Clark knew all about the AHP project, told him that SN planned to acquire AHP in the near future. He added that SN planned to offer roughly $35 for each share of AHP's stock.
At that point, Clark made a quick telephone call to find out the market price for AHP stock. Upon learning that the current price was about $17, he and Easter "bantered back and forth" about how much money they could make by trading in AHP stock. After a few minutes of wishful thinking, Easter ended the conversation by saying that life was "too short" to try such a scheme.
That very day, Clark made a telephone call to Bellevue, Washington. He told one of his stockbrokers, Russell Van Moppes, that he wanted to buy 2,000 shares of AHP stock because he knew that AHP was the target of a takeover attempt. 1 He also told Van Moppes that he wanted to hide his trading from his employer. After discussing various options, they concluded that the best way would be to place the AHP shares in a new account bearing someone else's name. Clark decided to open an AHP account in his wife's maiden name, Teresa Ann Dale. Van Moppes' assistant misspelled Dale's last name as "Bale." 2 Van Moppes purchased the stock on December 13 and 14. Several days later Clark, in an effort to further "bury" his trading from SN's view, had Van Moppes' assistant change the address for the Bale account from his Wisconsin home to his in-laws' Minnesota address. He then placed another order for 1,000 shares of AHP stock. Altogether, Clark purchased 3,000 shares of AHP stock at prices ranging from $17.875 to $19.75 per share.
Clark was not the only one to trade upon the basis of SN's confidential plans to acquire AHP. On December 13, Dale, at her husband's urging, bought 100 shares of AHP stock at $17.65 per share. On December 26, Van Moppes bought himself 500 shares of AHP stock at $19.50 per share. 3
SN's designs on AHP soon reached the public. On January 4, 1985, AHP announced that it had begun preliminary discussions with a company interested in acquiring it. Ten days later, SN announced that it had agreed to purchase AHP. Specifically, SN stated that it had agreed to buy roughly three-quarters of AHP's stock from United Industrial Corporation, AHP's parent company. In addition, SN stated that it would purchase the remaining AHP stock from the public at $36 per share, payable in cash.
Shortly thereafter, Clark, Dale, and Van Moppes sold all of their holdings in AHP stock and realized profits of $47,466.32, $1,664.67, and $7,812, respectively.
On May 20, 1987, the SEC, acting pursuant to its authority under Sec. 21(d) of the Exchange Act, 15 U.S.C. Sec. 78u(d), 4 filed a complaint against Clark and Van Moppes which alleged that Clark's misappropriation and use of SN's material non-public information violated Rule 10b-5. It also alleged that Van Moppes had aided and abetted Clark's violation and was liable as a tippee.
After a five-day trial, the jury returned a special verdict finding that only Clark had violated Rule 10b-5. The remedy stage of the SEC's proceeding was left to the equitable discretion of the district court. The court entered an order (1) enjoining Clark from future Rule 10b-5 violations; (2) requiring Clark to disgorge profits which he, Dale, and Van Moppes realized from their AHP trades; and (3) imposing a $75,000 penalty on Clark pursuant to the Insider Trading Sanctions Act, 15 U.S.C. Sec. 78u(d)(2)(A). 5
Clark appeals his liability under the misappropriation theory. In the alternative, he appeals the order requiring him to disgorge the profits made by Van Moppes, who the jury found had not violated the federal securities laws.
Clark's central claim on appeal is that misappropriation and trading on SN's confidential information does not violate Sec. 10(b) and Rule 10b-5. Whether the misappropriation theory should apply to this case involves questions of law and thus calls for de novo review. See United States v. McConney, 728 F.2d 1195, 1202 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984). This is so even though the legal analysis becomes mixed with factual details. Id. at 1204.
Section 10(b) of the Exchange Act provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--
....
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. Sec. 78j(b).
Section 10(b) does not by its terms make any practice unlawful unless the SEC has adopted a rule prohibiting it. In 1942, acting under the authority of Sec. 10(b), the SEC promulgated Rule 10b-5, which provides in relevant part:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) [t]o employ any device, scheme, or artifice to defraud, [or]
....
(c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. Sec. 240.10b-5.
Our task is to determine whether Congress, in enacting Sec. 10(b), empowered the SEC to promulgate rules which would encompass the misappropriation theory. In addition, we must determine whether Rule 10b-5 was drafted such that the theory may legitimately be implied. See Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.1984) (analysis of Rule 10b-16); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213-14, 96 S.Ct. 1375, 1391, 47 L.Ed.2d 668 (1976) ().
Until recently, the bulk of trading cases involving Sec. 10(b) and Rule 10b-5 involved a defendant who had a fiduciary or similar relationship to the shareholders of the company in whose stock he traded. This common scenario gave rise to what may be called the "classical" theory of Rule 10b-5 liability. The classical theory, as refined by the Supreme Court in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), and Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), provides that
a person violates Rule 10b-5 by buying or selling securities on the basis of material nonpublic information if (1) he owes a fiduciary or similar duty to the other party to the transaction; (2) he is an insider of the corporation in whose shares he trades, and thus owes a fiduciary duty to the corporation's shareholders; or (3) he is a tippee who received his information from an insider of the corporation and knows, or should know, that the insider breached...
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