S.E.C. v. Kornman
| Citation | 391 F.Supp.2d 477 |
| Decision Date | 29 September 2005 |
| Docket Number | No. 3:04CV1803-L.,3:04CV1803-L. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Gary M. KORNMAN, Defendant. |
| Court | U.S. District Court — Northern District of Texas |
Toby M. Galloway, US Securities & Exchange Commission, Fort Worth, TX, for Plaintiff.
Alice W. Yao, Gregory L. Poe, Lawrence S. Robbins, Robbins Russell Englert Orseck & Untereiner, Washington, DC, Jeffrey M. Tillotson, Lynn Tillotson & Pinker, Dallas, TX, Frank W. Hill, Hill Gilstrap, Arlington, TX, Ralph S. Janvey, Krage & Janvey, Dallas, TX, for Defendant.
Before the court is Defendant Gary M. Kornman's Motion to Dismiss Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), filed November 8, 2004 and Plaintiff Securities and Exchange Commission's Motion to Strike, filed January 18, 2005. After careful consideration of the motions, responses, replies and applicable authority, the court denies Defendant's Motion to Dismiss Complaint and denies as moot Plaintiff's Motion to Strike.
For purposes of Defendant's motion to dismiss, the court assumes all facts alleged in the complaint to be true. The complaint alleges that Defendant Gary M. Kornman ("Defendant" or "Kornman") traded in securities for personal profit using material, nonpublic information that he learned during confidential tax- planning discussions with senior executives of publicly-traded companies, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. Compl. at 1, ¶ 1 and at 3, ¶ 5.
Kornman is a licensed attorney who resides in Dallas, Texas. Id. at 4, ¶ 10. In 1994, Kornman formed The Heritage Organization L.L.C. ("Heritage"), a company with as many as 120 Dallas-based employees or associates, offering tax and estate-planning advice primarily to wealthy individuals. Id. ¶ 13. Heritage's services included offering tax-shelter investments involving the use of partnerships to shelter capital-gains income. Id. at 5, ¶ 15. In telephone calls and in written correspondence with clients and prospective clients, Heritage touted its experienced lawyers and accountants. Id. ¶ 16. In 2004, Heritage filed for Chapter 11 bankruptcy protection. Id. at 4, ¶ 13.
In addition to Heritage, Kornman also owned Heritage Securities Corporation, a securities broker-dealer registered with the Securities and Exchange Commission, and individually held various securities licenses. Id. ¶ 11. Kornman also personally directed the investments of two hedge funds, Heritage Capital Partners I LP and Heritage Capital Opportunities Fund I LP, which were managed by a Kornman-controlled management company, and operated for the benefit of Kornman, several entities he controlled and a few third-party investors. Id. ¶ 14. Kornman discontinued and liquidated the hedge funds in 2003. Id.
Recognizing the need to protect confidential information received from clients and prospective clients, including detailed financial information, information about family relationships, work history information, information about political contributions, along with written and recorded summaries of telephone conversations and face-to-face meetings, Heritage had in place certain confidentiality safeguards. Id. at 5-6, ¶¶ 16-19. For example, at the conclusion of each meeting with clients and prospective clients, Heritage personnel were required to prepare a memorandum summarizing the meeting and which contained the following confidentiality provision:
This document and the information contained in it are Confidential Information owned by [Heritage]. The removal, copying or disclosure of this document and the information contained in it by anyone, other than an authorized employee of [Heritage] only in the normal course of their [sic] duties as an employee of [Heritage] without the express written approval of the Chief Executive of [Heritage] is strictly prohibited by law and by contract and will be enforced according to any contract and prosecuted to the limits of the law.
Id. at 5, ¶ 18 (hereinafter, the "Confidentiality Provision"). Employees who failed to prepare the requisite memoranda were subject to fines. Id. at 5-6, ¶ 19. Heritage also required its employees to sign a fifty-page employment agreement that strictly prohibited the disclosure or use of confidential information, which was defined to include information from prospective clients. Id. ¶ 19.
At all relevant times, MiniMed Inc. ("MiniMed") was a NASDAQ-listed medical-equipment company. Id. at 1-2, ¶ 2. The complaint alleges that between October 2000 and June 2001, Heritage personnel had telephone conferences and met with the founder and then-chief executive officer of MiniMed (the "MiniMed executive"), who was considering retaining Heritage as a personal tax adviser in anticipation of selling his controlling interest in MiniMed. Id. at 1-2, ¶ 2 and at 6, ¶ 20. During this period, a Heritage employee told the MiniMed executive that all information discussed with Heritage would be kept confidential. Id. at 6, ¶ 21. In addition, Heritage provided the MiniMed executive with a copy of its standard engagement agreement, which contained a confidentiality clause, requiring Heritage "to keep confidential... all documents received from the [client][.]" Id. ¶¶ 20-21; Def.App. at 5.
On February 2, 2001, Medtronic, Inc. ("Medtronic")1 proposed a one-for-one stock exchange to acquire MiniMed and another company. Compl. at 6, ¶ 23. On February 7, 2001, Kornman and a Heritage associate traveled to California to meet with the MiniMed executive. Id. at 7, ¶ 24. As recorded by the Heritage associate in the requisite post-meeting memorandum, the MiniMed executive told Kornman that MiniMed "had a suitor who could potentially purchase Minimed and gave it a 70% chance of going through[,]" identified the suitor as a "Fortune 100 company" and told Kornman that the acquisition would probably take place "around June 2001." Id.; Def.App. at 42. Recognizing the highly confidential nature of the information received from the MiniMed executive, the memorandum contained the Confidentiality Provision. Compl. at 7, ¶ 24; Def.App. at 42. This February 7, 2001 meeting at which Kornman received allegedly material, nonpublic information was the third face-to-face meeting between the MiniMed executive and Heritage representatives. Compl. at 7-8, ¶ 29. On two earlier occasions — October 25 and November 30, 2000 — the MiniMed executive had disclosed confidences to Heritage associates regarding his personal financial condition and the potential acquisition of MiniMed. Id. at 8, ¶ 29. Kornman did not purchase MiniMed shares, however, until he received more definitive information about the acquisition at the February 7, 2001 meeting. Id.
On February 9, 2001, two days after the meeting, Kornman orally directed his trading assistant to purchase 6600 shares of MiniMed for the account of Heritage Capital Partners ILP, one of Kornman's hedge funds, at the market price of $38.76 per share. Id. ¶ 25. On May 30, 2001, Medtronic and MiniMed publicly announced that Medtronic had agreed to purchase all outstanding shares of MiniMed at $48 per share. Id. ¶ 27. On August 31, 2001, Kornman's hedge fund received cash for merged shares of MiniMed. Based on the $48 per share paid by Medtronic to acquire MiniMed, Kornman's hedge fund profited by approximately $67,000 on the MiniMed trades. Id. ¶ 28.
At all relevant times, Hollywood Casino Corporation ("Hollywood") was a publicly traded company that developed and owned casino entertainment facilities. Def.App. at 37. On November 12, 2001, Hollywood's board of directors internally expressed its intent to sell Hollywood to another gaming firm, which, if completed, would result in substantial capital gains for Hollywood executives. Compl. at 8, ¶ 31. On November 19, 2001, Kornman and a Heritage associate met with a former-chief executive officer, founder, board member and major shareholder of Hollywood (the "Hollywood executive") to discuss the possible retention of Heritage as a personal tax adviser. Id. at 2, ¶ 3 and at 8, ¶¶ 30, 32. As recorded by the Heritage associate in the requisite post-meeting memorandum, the Hollywood executive informed Kornman that Hollywood was "definitely" going to be sold in the "near future," probably in the "late summer of 2002." Id. at 8, ¶ 32; Def.App. at 29. The Hollywood executive also told Kornman that the purchase price "should be over $10 and possibly over $11 per share." Compl. at 8, ¶ 33. Recognizing the highly confidential nature of the information received from the Hollywood executive, the memorandum contained the Confidentiality Provision. Id. ¶ 34; Def.App. at 29.
Prior to the November 19, 2001 meeting, Heritage associates had prior dealings with the Hollywood executive as reflected in correspondence dated February 28, March 2 and March 14, 2001, all marked "PERSONAL & CONFIDENTIAL." Compl. at 10, ¶ 43. In addition, Heritage associates had face-to-face meetings with the Hollywood executive on March 23 and April 11, 2001, at which the Hollywood executive disclosed confidences about his personal financial condition and the potential acquisition of Hollywood. Id. Kornman did not purchase the Hollywood shares until obtaining more definitive information about the merger at the November 19 meeting. Id.
On the eve of the meeting, Hollywood's share price closed at $9.25. Id. at 8, ¶ 33. As of this meeting, although no agreement had been signed, the Hollywood executive had already held merger discussions with Penn National Gaming, Inc. ("PNG"). Id. at 9, ¶ 36. Within a week of the November 19 meeting, Kornman directed his trading assistant to begin acquiring Hollywood shares in the account of Heritage Capital Opportunities...
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