SEC v. Mayhew, Civ. No. 3:94cv1322(JBA).

• Citation: 916 F. Supp. 123
• Decision Date: 27 December 1995
• Docket Number: Civ. No. 3:94cv1322(JBA).
• Court: U.S. District Court — District of Connecticut
• Parties: SECURITIES AND EXCHANGE COMMISSION v. Jonathan MAYHEW.

916 F. Supp. 123

SECURITIES AND EXCHANGE COMMISSION v. Jonathan MAYHEW.

Civ. No. 3:94cv1322(JBA).

United States District Court, D. Connecticut.

December 27, 1995.

Robert Wilson, Thomas Sjoblom, Christian Mixter, Securities & Exchange Commission, Washington, DC, and John Hughes, Office of the U.S. Attorney, New Haven, CT, for plaintiff.

Elizabeth Grove and Victor Zimmermann, O'Rourke & O'Hanlan, New Canaan, CT, for defendant.

OPINION AND ORDER

ARTERTON, District Judge.

I. Introduction

The Plaintiff Securities and Exchange Commission ("SEC") brought this action against Jonathan Mayhew, alleging that Defendant Mayhew's trading in stock of Rorer Group, Inc. between November 16, 1989 and January 15, 1990 constituted insider trading in violation of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78n(e), and Rules 10b-5 and 14e-3 promulgated under the Exchange Act, 17 C.F.R. §§ 240.10b-5 and 240.14e-3.

This case was tried to the court on August 24, 25, and 28, 1995. The Court, after considering the evidence and the legal positions in the parties' pre- and post-trial briefing, makes the following findings of facts and conclusions of law.

II. Findings of Fact

1. The defendant, Jonathan Mayhew, is a resident of Darien, Connecticut. Following his employment as a corporate pilot, during 1989 and until 1991, defendant Mayhew traded securities full time for his own account, and maintained securities brokerage accounts with Oppenheimer & Co. and with Smith Barney, Inc.

2. In the course of his social life in Darien, and his employment as a corporate pilot and in real estate, defendant Mayhew met and came to know business consultants and chief executive officers of large corporations. Defendant Mayhew claims to have educated himself in stock markets and stock trading, and focused on the stock of companies which were potential takeover targets.

3. Rorer Group, Inc. was a Pennsylvania corporation, headquartered in Fort Washington, Pennsylvania, which developed, manufactured and marketed over-the-counter and prescription pharmaceuticals.

4. Rhône-Poulenc S.A. ("RPSA") is a French corporation engaged in the chemical, pharmaceutical, agricultural, and fiber industries.

5. Prior to its merger with a subsidiary of RPSA, Rorer common stock was traded on the New York Stock Exchange, a national securities exchange. Standardized call options contracts of Rorer common stock were traded on the American Stock Exchange.

6. Beginning in July of 1989 and continuing in the Fall of 1989, representatives of Rorer and RPSA conducted a series of confidential discussions aimed at a potential combination between Rorer's and RPSA's pharmaceutical businesses. In August 1989, Rorer and RPSA signed a confidentiality agreement relating to these merger discussions.

7. In October 1989, Rorer and RPSA jointly retained McKinsey & Co., a business consulting firm, to assist the two companies in compiling business forecasts, estimating potential cost savings resulting from a combination of Rorer and RPSA, outlining organization, governance and operational issues, and planning the details of a combination. By November 15, 1989, Rorer and RPSA had exchanged confidential information relating to business plans and projections, and had each retained investment bankers and lawyers for advice relative to the merger under contemplation.

8. The senior managers of Rorer kept knowledge of the merger discussions confidential by restricting knowledge of the discussions to a select few persons on the Rorer corporate staff and by other means, such as using code words to refer to the two companies in planning documents.

9. On January 15, 1990, Rorer publicly announced that it was in discussions regarding a business combination with an unnamed third party, providing for the contemplated acquisition of 68 percent of the outstanding stock of Rorer for a price of $73 per share. Following this announcement, the price of Rorer common stock on the New York Stock Exchange rose by 13¼ points, from $49¾ to $63 per share.

10. On January 18, 1990, Rorer announced that the identity of the third party was RPSA. On March 12, 1990 the tender offer terms were announced. The Rorer and RPSA merger was consummated in July 1990.

11. Witness Ralph ("Randy") Thurman was President of Rorer Pharmaceuticals in the Fall of 1989, reporting directly to Rorer's Chief Executive Officer, Robert Cawthorn. As one of the top officers of Rorer, Mr. Thurman was involved in the discussions with RPSA almost from their inception.

12. Mr. Thurman testified that while the discussions with RPSA were proceeding during the fall of 1989, Rorer CEO Cawthorn and Rorer's head of human resources, Steven Baumgartner, asked Mr. Thurman for his suggestion on who could work on Mr. Cawthorn's employment contract related to the combination with RPSA. He responded that he knew David Meredith, who had an outstanding reputation in the field of CEO level employment contracts, and the person he knew best at Mr. Meredith's firm, Personnel Corporation of America ("PCA"), was Dr. Edmund Piccolino. Dr. Piccolino and Mr. Thurman knew each other from their prior employment at Pepsi-Cola where Mr. Thurman had been Dr. Piccolino's subordinate.

13. In 1989 and 1990, PCA was a human resources consulting firm located in Norwalk, Connecticut and offered a broad range of human resources consulting services in such fields as compensation, benefits, and executive searches.

14. In 1989, Dr. Piccolino was an employee and partner of PCA, and was responsible for executive search and outplacement and client development. He was PCA's "Director of Client Relations" for the Rorer account.

15. Prior to the fall of 1989, PCA had performed search assignments and compensation consulting work for Rorer. PCA had also attempted to secure consulting work from Rorer on other occasions.

16. Mr. Thurman testified he contacted Dr. Piccolino and told him "that circumstances were such that Dave Meredith might be retained to help negotiate on Mr. Cawthorn's behalf or construct on Mr. Cawthorn's behalf an employment agreement related to a pending business transaction that we were contemplating." Mr. Thurman said he was "certain that the framework in which I would have put the need to engage Mr. Meredith would have described the pending transaction between the two companies without — with giving him as little specifics as possible." Mr. Thurman also said he would have, "put it the information given to Dr. Piccolino in the context of why Mr. Cawthorn needed the work done and the importance of it and the sense of urgency related to it."

17. Mr. Thurman never asked Dr. Piccolino to keep any information which he may have imparted to him confidential. However, Mr. Thurman testified that he "absolutely" expected Dr. Piccolino to keep confidential the information that he had given him. Dr. Piccolino testified that while PCA client information was treated with confidentiality, the context of the information imparted by Mr. Thurman "was not packaged as a confidential dialogue."

18. In 1989, PCA had an unwritten policy that the confidentiality of information provided to PCA by clients was important and was to be preserved.

19. Dr. Piccolino personally knew defendant Mayhew, and was formerly a neighbor of his in Darien. During 1989 Dr. Piccolino and defendant Mayhew would see each other several times per week, usually on exercise walks. On these walks, as well as on the telephone, Dr. Piccolino and defendant Mayhew would discuss, among other things, trading securities. Dr. Piccolino asked Defendant Mayhew for advice on investment strategy and the mechanics of options trading. Defendant Mayhew knew that Dr. Piccolino was employed at PCA and that PCA was a consulting firm that had various corporations as clients.

20. In the summer and fall of 1989, Dr. Piccolino and defendant Mayhew discussed drug company stocks, recent mergers in the drug industry, and Rorer specifically. At this time defendant Mayhew had formulated a theory that Rorer was a potential merger candidate. Defendant Mayhew advised Dr. Piccolino that he had read several press reports which discussed Rorer as a potential takeover candidate.

21. As evidenced by Dr. Piccolino's PCA time sheets, which were prepared contemporaneously, Dr. Piccolino and Mr. Thurman had lunch together in New York City on November 15, 1989. On his PCA time sheets Dr. Piccolino assigned the meeting an "X800" code, which referred to a potential outplacement client, but the code is not specific as to whether the outplacement refers to as few as one executive or to the many persons who would need outplacement advice in a large scale corporate reorganization.

22. Dr. Piccolino viewed the lunch with Mr. Thurman as having business potential but characterized it as a "lunch with a friend at his request." In contrast to Mr. Thurman's testimony, Dr. Piccolino testified that his lunch conversation with Mr. Thurman focused on Mr. Thurman's personal employment security in a time of organizational change at Rorer.

23. Dr. Piccolino testified that Mr. Thurman told him at this November 15, 1989 lunch that Rorer was definitely involved in serious talks with a potential suitor or merger candidate or candidates. Dr. Piccolino testified he had a specific recollection that Mr. Thurman told him that Rorer "was being pursued and was in fact discussing merger opportunities," and that Mr. Thurman wanted to know: "how do you know if you can trust someone if you are getting into a complex merger negotiation."

24. Although Dr. Piccolino was not given specific information concerning any pending deal, he testified that he walked away from the Thurman lunch with knowledge that there was "actually activity," that Rorer was "actually in discussions," whereas before the lunch he had only known of speculation about Rorer in the press.

25. Dr. Piccolino then told defendant Mayhew about...