S.E.C. v. Warde

• Decision Date: 08 July 1998
• Docket Number: No. 97-6190,97-6190
• Parties: Fed. Sec. L. Rep. P 90,239 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Thomas WARDE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

Page 42

151 F.3d 42

Fed. Sec. L. Rep. P 90,239

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

No. 97-6190.

United States Court of Appeals Second Circuit.

Argued March 17, 1998.

Decided July 8, 1998.

Katharine B. Gresham, Washington, D.C. (Richard H. Walker, General Counsel, Jacob H. Stillman, Catherine A. Broderick and Rada L. Potts, Assistant General Counsels, and Paul Gonson, Solicitor, Securities and Exchange Commission, Washington, D.C., Of Counsel) for Plaintiff-Appellee.

Thomas P. Puccio, New York City (Paul F. Corcoran, Jennifer Tafet Klausner and Andrew D. Herz, Davis & Gilbert, New York City, Of Counsel), for Defendant-Appellant.

Before: JACOBS, LEVAL and GIBSON, ^* Circuit Judges.

LEVAL, Circuit Judge:

Thomas Warde appeals from a final judgment of the United States District Court for the Southern District of New York (Shira Scheindlin, District Judge) holding him liable, in a civil enforcement proceeding, for violating §§ 10(b) and 14(e) of the Securities and Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§ 78j(b) and 78n(e), and Rules 10b-5 and 14e-3 promulgated thereunder. Securities and Exchange Commission v. Downe, 969 F.Supp. 149 (S.D.N.Y.1997). Warde raises numerous objections to the conduct of the trial and the judgment below. We reject each contention and affirm the district court in all respects.

Background

The evidence showed that Warde was a good friend of Edward Downe. Both were active stock market investors. Downe in turn was a close friend of Fred Sullivan, Chairman of Kidde, Inc. ("Kidde"). Kidde is a conglomerate valued at over $1.5 billion. Downe and Sullivan both had houses in the Hamptons on Long Island, New York, and Sullivan was a frequent guest at Downe's house. At Sullivan's request, Downe had become a director of Kidde in 1986. Sullivan kept the Kidde directors regularly informed of developments at Kidde.

Throughout the spring of 1987, reports and rumors in the financial community suggested that Kidde's high break-up value relative to its share price made it a likely takeover target. On June 3, the Kidde board met. The next day, Sullivan retained the investment banking firm of Bear, Stearns & Co. to discuss restructuring options as a defense against a takeover. During the next two weeks, the price of Kidde shares rose from $34 to $41 on increasingly heavy volume. On June 17th, Bear, Stearns suggested in a confidential report that management could acquire Kidde by paying shareholders about $45 per share.

By Monday, June 22, Sullivan had learned that an undisclosed British buyer was accumulating Kidde shares. Press reports that week indicated that Kidde was "in play". On Sunday morning, June 28, Sullivan met with investment bankers at his house on Long Island to respond to takeover developments. Visibly depressed, Sullivan visited Downe at Downe's house later that afternoon.

On Monday, June 29, Sullivan learned from his lawyers that the accumulating buyer was Hanson Trust PLC ("Hanson"), a large British conglomerate. Hoping to expand Kidde's range of options in the face of Hanson's apparent takeover bid, Sullivan opened negotiations with several suitors during that week and began to contact the board of directors (including Downe) to organize an emergency meeting immediately following the July 4th weekend. On July 6, Sullivan met with the CEO of Hanson; the next day, the Kidde board convened to discuss the Hanson initiative as well as a buyout inquiry from Kohlberg Kravis Roberts ("KKR"), and the possibility of a leveraged buyout by management. Downe, who was in Sun Valley, Idaho, participated in the meeting by telephone. On July 7, Kidde issued a press release announcing that it had formally retained investment advisors and was actively engaged with two companies in discussions regarding a possible sale of all or a substantial portion of Kidde. On this news Kidde shares rose precipitously; the price of Kidde warrants jumped 55 percent from $14 to $21.63.

At the end of July, KKR and Hanson submitted competing offers to purchase Kidde. The Kidde board voted to accept the Hanson offer on August 3. The merger agreement was signed on August 4, and the companies announced the agreement--which included a tender offer for Kidde shares--in a joint press release issued on August 5. As the result of these events, Kidde stock rose from $34 at the beginning of June to about $66 on August 5. Warrants priced at $1 on June 5 and at $7.50-$9.25 on June 29 went to $26.50 on August 5.

While these events were unfolding, Downe and Warde each made substantial purchases of warrants to buy Kidde stock and earned very large profits. ¹ On June 4, the day after the meeting of the Kidde board and simultaneously with Kidde's hiring of Bear, Stearns, Downe purchased 5,500 warrants for his son through an offshore account at a price of about $1 per warrant. Downe sold these warrants two weeks later (together with additional warrants he purchased for himself, family members and friends) for about $4 per warrant, realizing a profit of over 300 percent.

On Monday, June 29, after spending time with Sullivan the previous evening, Downe began to purchase warrants again in much larger quantities at prices of approximately $8 to $9. Downe rapidly invested $268,000. After talking with Downe by telephone, Warde invested $350,000 in Kidde warrants on June 29 and 30.

Downe and Warde spoke together the following weekend about Kidde. The following Monday, July 6, the day before Kidde's public announcement that made its stock soar, Downe (borrowing $1 million from his wife) invested an additional $2 million in warrants, and Warde added approximately $460,000 to his investment. Warde's investments appreciated by $866,000 that day, and Downe's by $3,012,000.

On July 20, after Downe had participated in meetings of Kidde's board discussing the evolving competition for Kidde stock, he spoke by telephone with Warde. That day Warde invested an additional $200,000 to purchase warrants at about $22. During the next three days, Downe invested another $1.8 million in warrants at similar prices. A. 815. Warde and Downe ultimately earned profits of about $33,000 and $349,000, respectively, on this final wave of purchases.

In 1992, the Securities and Exchange Commission ("SEC" or "the Commission") filed a complaint against Warde and Downe, among others, alleging insider trading in violation of §§ 10(b) and 14(e) of the 1934 Act and Rules 10b-5 and 14e-3 promulgated, respectively, thereunder. Downe settled with the Commission; the case against Warde reached trial in 1997.

The Commission contended that Warde's investments in Kidde warrants were made with the benefit of Kidde's non-public information about competing bids to acquire the company--information that Downe had obtained as a Kidde director and passed on to Warde. Warde denied possession of any non-public information. He and Downe (who was called as a witness in Warde's trial) each testified that their purchases were based on market savvy, rumor and public information alone. Warde denied having received any confidential information regarding Kidde from Downe.

At the close of evidence, Warde moved for judgment as a matter of law, claiming that the Commission's wholly circumstantial case failed to provide an evidentiary basis for liability. Judge Scheindlin denied the motion, and the jury found Warde liable. The final judgment permanently enjoined Warde from securities trading violations and ordered him to disgorge some $872,000 in profits, pay a civil penalty in the same amount, and disgorge $1.26 million in prejudgment interest.

Discussion

1. Sufficiency of the Evidence. Warde's principal challenge on appeal is to the sufficiency of the Commission's evidence. He contends the Commission's case was based entirely on guilt by association and "thin pieces of circumstantial evidence," which, in the aggregate, were insufficient to support the jury's finding of liability under §§ 10(b) and 14(e) of the 1934 Act. We will overturn a jury's verdict in favor of a plaintiff if the evidence supporting the verdict, viewed in the light most favorable to the plaintiff, is insufficient to support a reasonable finding in plaintiff's favor. The test is the same as it would be if the question were whether the case should have been permitted to go to the jury.

To affirm Warde's liability as a tippee under § 10(b), we must find sufficient evidence to permit a reasonable finding that (1) Downe possessed material, nonpublic information regarding Kidde; (2) Downe disclosed this information to Warde; (3) Warde traded in Kidde warrants while in possession of that non-public information provided by Downe; (4) Warde knew or should have known that Downe violated a relationship of trust by relaying Kidde information; and (5) Downe benefitted by the disclosure to Warde. See Dirks v. SEC, 463 U.S. 646, 654-64, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). To uphold the jury's finding of § 14(e) liability, we must also find evidence that a "substantial step" had been taken toward a tender offer at the time of the inside trading, but there is no requirement to show that Downe breached a fiduciary duty. See United States v. Chestman, 947 F.2d 551, 557, 563 (2d Cir.1991) (in banc). We conclude that the SEC presented evidence sufficient to support each of these elements.

a. Downe's Possession of Nonpublic Information. There was ample evidence that Downe possessed nonpublic information regarding the threat of a takeover of Kidde. Downe was a director of Kidde. His friend Sullivan, the CEO of Kidde, kept the directors informed on the takeover developments, and Downe attended meetings of the board in which the developing situation and Kidde's strategy were discussed.

The inference that Downe traded on inside information was reinforced by the manner in which Downe made his purchases. Downe did not make any of the purchases in his own name. The...