Sec. & Exch. Comm'n v. Steffes

• Decision Date: 03 August 2011
• Docket Number: Case No. 10–CV–6266.
• Citation: 805 F.Supp.2d 601
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Rex C. STEFFES, Cliff M. Steffes, Rex R. Steffes, Bret W. Steffes, Robert J. Steffes, and W. Gary Griffiths, Defendants.
• Court: U.S. District Court — Northern District of Illinois

805 F.Supp.2d 601

SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.Rex C. STEFFES, Cliff M. Steffes, Rex R. Steffes, Bret W. Steffes, Robert J. Steffes, and W. Gary Griffiths, Defendants.

Case No. 10–CV–6266.

United States District Court,N.D. Illinois,Eastern Division.

Aug. 3, 2011.

Robert MacDonald Moye, Scott B. Tandy, Steven C. Seeger, U.S. Securities & Exchange Commission, Chicago, IL, for Plaintiff.

Constantine John Gekas, John Constantine Gekas, Gekas Law LLP, Simon B. Auerbach, Steffanie N. Garrett, Thomas R. Woodrow, Holland and Knight, LLP, Chicago, IL, David Dawson Burns, Gilbert Lee Feltel, Thomas Edward Bishop, Tanner Bishop, Jacksonville, FL, for Defendants.

MEMORANDUM OPINION AND ORDER

ROBERT M. DOW, JR., District Judge.

Before the Court are motions [29, 36] filed by Defendants W. Gary Griffiths (“Gary Griffiths”) and the Steffes Family Defendants to dismiss the complaint [1] brought by the Securities Exchange Commission (“SEC”) pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, Defendants' motions to dismiss are respectfully denied.

I. Background ¹

This case involves alleged insider trading in the securities of Florida East Coast Industries, Inc. (“FECI”) in the period around that company's acquisition by Fortress Investment Group, LLC. The SEC alleges that Defendants Gary Griffiths and Cliff Steffes, who were employed by an FECI subsidiary, learned of FECI's pending acquisition in the weeks before it was announced, and that they disseminated this information to members of their family (who in turn shared it among themselves and with three business associates of Defendant Rex C. Steffes). In the weeks preceding the announcement of the acquisition, Defendants Rex C. Steffes, Cliff Steffes, Bret Steffes, Rex R. Steffes, Robert Steffes, as well as William Griffiths and the three business associates purchased more than $1.6 million of FECI securities. When the sale was announced, the investors collectively cleared more than $1 million in allegedly illegal profits.

Before its acquisition, FECI was a publicly traded company headquartered in Jacksonville, Florida. ¶ 17. FECI conducted business through two wholly-owned subsidiaries. Id. One subsidiary, Florida East Coast Railway, LLC (“FECR”), operated a regional freight railroad between Jacksonville and Miami. Id.

During the relevant time period, Griffiths and his nephew-in-law, Defendant Cliff Steffes, were employed by FECR. Griffiths was the Vice President and Chief Mechanical Officer of FECR. ¶ 11. Working out of FECR headquarters in Jacksonville, Griffiths was responsible for supervising and managing the leasing, maintenance and repair of freight cars and locomotives, and reported directly to FECR's President and Chief Operating Officer. ¶ 30. Defendant Cliff Steffes worked as a trainman at FECR's Bowden Rail Yard in Jacksonville. ¶ 13. Griffiths' sister is married to Defendant Rex C. Steffes, and Griffiths and Rex C. Steffes were high school classmates and have been good friends since the 1970s. ¶ 11. Rex C. Steffes is the father of Defendants Cliff Steffes, Bret Steffes, and Rex R. Steffes, and is the brother of Defendant Robert Steffes. Cliff Steffes obtained his position as a trainman with FECR with the help of his uncle, Griffiths. ¶ 31.

In connection with their employment, Griffiths and Cliff Steffes were both subject to FECI's Code of Conduct which prohibited them from trading in FECI securities, or recommending that others purchase FECI securities, if they had knowledge of material information about the company that had not been disclosed publicly. ¶ 32. FECI's Code of Conduct specifically provided that information regarding a merger or acquisition may constitute material information. Id. Griffiths and Cliff Steffes both signed acknowledgements that they would comply with FECI's Code of Conduct. ¶ 33.

On December 4, 2006, FECI's Board of Directors engaged Morgan Stanley & Co., Inc. (“Morgan Stanley”), to sell the company. ¶ 19. That FECI was being offered for sale was confidential. ¶ 20. Between February 15 and 27, 2007, Morgan Stanley contacted a group of prospective bidders, fifteen of whom executed confidentiality agreements, received a confidential information memorandum and were given access to an electronic data room. ¶ 22. Morgan Stanley requested that the prospective bidders submit their acquisition proposals by April 12, 2007. Id. Between March 15 and April 3, 2007, at least ten prospective bidders attended separate meetings with FECI management in South Florida and took tours of certain FECI properties. ¶ 23. These tours occurred on most business days between March 15 and April 3, 2007.

The SEC alleges that “[b]y the end of the third week of March 2007, Gary Griffiths knew that FECI was in the process of being acquired by another company.” ¶ 34. To support this allegation, the SEC alleges that Griffiths was aware of the following:

(a) “[I]n early March 2007, FECI's Chief Financial Officer requested that Griffiths prepare a comprehensive list of all of the locomotives, freight cars, trailers and containers owned by FECR, along with their corresponding valuations.” ¶ 34(a). This was the first time that the Chief Financial Officer had ever requested this information from Griffiths. Id.

(b) “Gary Griffiths became aware of the unusual number of Hialeah yard tours [an FECR rail yard in Miami], which began on March 15, and he believed that the tours were being provided to investment bankers who were considering buying or investing in FECI.” ¶ 34(b).

(c) “[S]hortly after the tours began, yard employees began asking Gary Griffiths whether FECI was being sold and whether their jobs would be affected by any such sale.” ¶ 34(c).

The SEC further alleges that “[b]etween April 19 and April 27, 2007, in anticipation of FECI's pending acquisition by Fortress, Gary Griffiths arranged and monitored the rail trip from FECR's Bowden Rail Yard to the Hialeah Rail Yard for FECI and Fortress executives in a special railroad car reserved for visitors.” ¶ 35. Finally, the SEC alleges that Griffiths “had daily interactions with FECR's President and Chief Operating Officer, who knew about and was involved in the entire acquisition process.” ¶ 36.

The SEC makes the same allegation with regard to Defendant Cliff Steffes: that by the end of the third week of March 2007, Cliff Steffes also knew that FECI was in the process of being acquired. ¶ 37. For his part, Cliff Steffes allegedly knew by the end of the third week of March 2007 that “there were an unusual number of daytime tours of FECR's Hialeah Yard involving a tour bus and people dressed in business attire.” ¶ 37(a). Shortly after these tours began, rumors began to circulate that FECR was being sold. ¶ 37(c). The SEC alleges that “there were regular communications among FECR's yard employees at various locations, and many rail yard employees who had not personally witnessed the tours became aware they were occurring.” ¶ 37(b).

Additionally, Steffes worked at the Bowden Rail Yard, which was the location of a tour that occurred sometime between April 19 and 27. ¶ 38. The Bowden Rail Yard was also the departure point for the special railcar trip for FECI and Fortress executives. Id.

The SEC alleges that between March 28 and May 7, 2007, there developed a pattern of conversations among the Defendants (and others) followed by large securities purchases that differed significantly from Defendants' prior purchases.

For example, between March 23 and March 25, 2007, Griffiths visited Rex C. Steffes (the elder Rex Steffes), during a business trip to the Chicago area. ¶ 43. The SEC alleges that during this trip, Griffiths tipped Rex C. Steffes about the impending acquisition. On March 26, 2007, Rex C. Steffes spoke with his son Cliff on the phone. On March 28, 2007, Rex C. Steffes purchased 6,500 shares of FECI stock for $397,508. Before processing this purchase, the Steffes' broker required Rex C. Steffes and his wife to sign a document in which they acknowledged their intention to maintain a large position in FECI stock despite the broker's recommendation that they reduce the risk level of their portfolio through diversification. ¶ 44(a). On Saturday, March 31, 2007, Rex C. Steffes had a 13–minute telephone call with Griffiths. ¶ 44(b). The next business day, Rex C. Steffes purchased another 7,500 shares of FECI stock for $485,350. Rex C. Steffes' pattern of making relatively large purchases of stock and call option contracts shortly after speaking with Gary Griffiths and/or Cliff Steffes continued until the end of April. See ¶¶ 44(a)-(g). In total, during a 33 day period, Rex C. Steffes purchased 15,800 shares of FECI stock and 225 FECI call options for a total investment of approximately $1.14 million. ¶ 45. All of the call options were set to expire in June 2007. ¶ 45.

With respect to Robert Steffes (Rex C.'s brother), the SEC describes a similar pattern. Between April 2 and April 18, 2007, Robert Steffes purchased 5,000 shares of FECI stock for a total of $319,569. ¶¶ 49–50. Each of Robert Steffes' purchases was made shortly after a phone call between Rex C.'s and Robert's cell phones. Id.

On three different occasions in April and May 2007, Cliff Steffes purchased FECI call option contracts totaling $15,015 set to expire in June 2007. ¶ 39. These were the first stock option contracts that Cliff Steffes had ever purchased. ¶ 40. The SEC alleges that Cliff Steffes tipped his brothers, Bret and Rex R. Steffes. ¶ 55. Between March 29 and May 1, 2007, Bret Steffes purchased 60 shares of FECI stock and 112 FECI call options for a total investment of $30,775. ¶ 56. During this same period, Rex R. invested $31,018 in FECI securities. ¶ 58. Each of the brothers' purchases was made in temporal proximity to cell phone calls with Cliff. Bret and Rex R. were each provided with $10,000 from their father Rex C. to be used to purchase FECI securities; they each...