S.E.C. v. Talbot

• Decision Date: 30 June 2008
• Docket Number: No. 06-55561.,06-55561.
• Citation: 530 F.3d 1085
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. J. Thomas TALBOT, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

530 F.3d 1085

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. J. Thomas TALBOT, Defendant-Appellee.

No. 06-55561.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 4, 2007.

Filed June 30, 2008.

Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel, Michael L. Post, Senior Counsel, Washington, DC, for plaintiff-appellant Securities and Exchange Commission.

Richard Marmaro, Lance A. Etcheverry, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA; Preeta D. Bansal, Timothy G. Nelson, Sarah E. McCallum, Of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for defendant-appellee J. Thomas Talbot.

Appeal from the United States District Court for the Central District of California; Margaret M. Morrow, District Judge, Presiding. D.C. No. CV-04-04556-MMM.

Before: DAVID R. THOMPSON, KIM McLANE WARDLAW, and SANDRA S. IKUTA, Circuit Judges.

WARDLAW, Circuit Judge:

J. Thomas Talbot, a member of the board of directors of Fidelity National Financial, Inc., a Delaware corporation, traded on confidential information about the impending acquisition of LendingTree, Inc., which he received in his capacity as a Fidelity director. We must decide whether Talbot can be held liable under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, for misappropriating information from Fidelity, in the absence of a fiduciary duty of confidentiality owed to LendingTree by Fidelity or Talbot when he executed the trades. We hold that Talbot can be held liable, under the circumstances here, but that a genuine issue of material fact exists as to the issue of materiality. We therefore reverse and remand the district court's grant of summary judgment in favor of Talbot.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Facts

J. Thomas Talbot is a businessman and attorney who, for the past thirty years, has served as a director on the boards of several companies. In April 2003, Talbot sat on the Board of Directors (the "Board") of Fidelity National Financial, Inc. ("Fidelity"), a publicly traded Delaware corporation and national title insurance company. Fidelity owned approximately a 10 percent interest in LendingTree, Inc. ("LendingTree"), an online lending and realty services exchange, which is publicly traded on the NASDAQ National Market System.

On April 18 or 19, 2003, LendingTree's CEO, Douglas Lebda, informed Brent Bickett, Fidelity's Vice President, that negotiations were proceeding for a third party to acquire LendingTree. Lebda informed Bickett because, "as a significant shareholder of [LendingTree], we knew that [Fidelity] would need to ultimately consent to a transaction, if it happened." Although Lebda did not state the name of the potential acquirer, Lebda indicated that the "majority of the [LendingTree] Board was in favor of the transaction," that the acquirer "was not a competitor of Fidelit[y's]," and that Bickett "would need to keep this information confidential." Lebda explained that "the net share price was in the $14 to $15 range" but did not recall discussing "whether Fidelity would make a profit as a result of the acquisition." Bickett testified during his deposition that Lebda did not inform him that the information was confidential, but that Bickett "had an understanding that [the] information was confidential information." Bickett then relayed this information to William Foley, Fidelity's CEO.

On April 22, 2003, Fidelity held its quarterly board meeting, which Talbot attended. Toward the end of the four- or five-hour meeting, Foley presented to the Board the information from Bickett for a Board discussion as to whether Fidelity should agree to refrain from selling its LendingTree stock during the pendency of the transaction and also "agree to [vote Fidelity's] shares in favor of the transaction." Foley told the Board the "exciting information" that "Lending Tree was going to be acquired." Foley also informed the Board that "[w]e didn't know who the acquirer was at that time because [LendingTree] would not disclose it to us," but that Fidelity "would make about $50 million on the transaction." According to Terry Christensen, another Board member, Foley informed the Board that Fidelity's stock in LendingTree "would be acquired at a very attractive price," between $16 and $18, which represented a 23-39 percent increase over LendingTree's closing price of $12.97 per share on April 22, 2003. Talbot remembered the meeting differently, declaring that, although he could "not recall the exact words spoken ... some person or company might be interested in acquiring LendingTree, Inc .... and [Fidelity] would benefit if the transaction occurred." The response from the Board at the meeting was positive. According to Foley, "everyone said ... it sounds like a great idea.... No one disagreed with it."

Although Foley did not tell the Board that the information was confidential, one Board member, Cary Thompson, said "something to the effect that this is inside information, no one trade in the stock. Make sure you don't do anything with the stock." Thompson said this "plenty loud. It was loud enough to hear him." All Board members present at the meeting, except for Talbot, considered the LendingTree information to be confidential.

Various directors testified at depositions to their understanding of how far along the negotiations had proceeded between LendingTree and the unnamed acquirer, as conveyed by Foley: "far along, and it would be announced as a deal shortly thereafter" (Thompson); "advanced discussions" (Bickett); and that "it looked like there was going to be a transaction" (Christensen). Talbot interpreted Foley's words as far less definite, understanding the information about LendingTree to be a "rumor," not a "factual statement." Talbot wrote "LENDING TREE" at the top of his copy of the meeting agenda; those were the only notes he took during the meeting.

On April 24, 2003, two days after the meeting, Talbot purchased on margin 5000 shares of LendingTree at approximately $13.50 per share for a total of $67,500. Talbot testified that Foley's comments at the April 22, 2003 regarding LendingTree "triggered [his] conduct on April 23rd to look into [LendingTree] more carefully." A number of factors influenced his decision to purchase the stock: Fidelity had invested in it; it was a real estate company, which he considered to be a good buy; interest rates would likely remain low; the high-tech market was experiencing a resurgence; and, based on the "rumor" at the April 22 meeting, other people were clearly interested in it, so he should be as well. Talbot "wanted to buy before anything happened."

On April 25, 2003, LendingTree sent Fidelity a written letter agreement restricting the manner in which Fidelity could use any confidential information it received from LendingTree in connection with the proposed tender offer. The agreement stated:

FNF [Fidelity] may disclose Confidential Information to its directors, officers, employees, partners, affiliates, agents, advisors or representatives ... to the extent necessary to permit such Representatives to assist FNF in evaluating and analyzing a Possible Transaction, provided, however, that FNF shall instruct each such Representative to be bound by the terms of this Agreement to the same extent as if they were parties hereto and FNF shall be responsible for any breach of this Agreement by any of its Representatives....

The directors were not advised of the confidentiality agreement.

Talbot continued to monitor LendingTree's stock closely, and, after being satisfied that "the price was moving up ... [a]nd the volume was solid," on April 30, 2003, he purchased on margin an additional 5000 shares at $14.50 per share for $72,500.

On May 5, 2003, three major events occurred, in the following sequence. First, Fidelity executed an agreement with USA Interactive Corporation (the acquiring company) and LendingTree to vote its shares in favor of the acquisition. Second, LendingTree and USA Interactive issued a press release announcing the acquisition. Third, LendingTree's stock rose roughly 41 percent on the news, immediately after which Talbot sold all of his LendingTree shares for a profit of $67,881.20. LendingTree stock closed on Monday, May 5 at $20.72, up $6.03 from its previous closing price of $14.69 on Friday, May 2. The Securities and Exchange Commission ("SEC") commenced an investigation into Talbot's trading activity. Talbot resigned from the Board on September 19, 2003.

B. District Court Proceedings

On June 23, 2004, the SEC brought a civil action against Talbot in the District Court for the Central District of California. The complaint alleged that Talbot had traded on material, nonpublic information in violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

Both parties moved for summary judgment. The district court granted Talbot's motion and denied the SEC's on February 14, 2006. Ruling on the SEC's "misappropriation theory" of liability, see generally United States v. O'Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997), the district court held that Talbot could be liable under such a theory only if Talbot or Fidelity owed a fiduciary duty of confidentiality to LendingTree, the "originating source" of the information on which Talbot traded. SEC v. Talbot, 430 F.Supp.2d 1029, 1049, 1064 (C.D.Cal.2006). Although the district court concluded that Fidelity was the "immediate `source'" of the information on which Talbot traded, id. at 1049, it held that because the SEC did not carry its burden of proving that Talbot, Fidelity, and LendingTree were "linked through a continuous chain of fiduciary relationships," no liability could attach for Talbot's actions. Id. at...