SEC v. Moran
| Decision Date | 02 April 1996 |
| Docket Number | No. 95 Civ. 4472 (BN).,95 Civ. 4472 (BN). |
| Citation | 922 F. Supp. 867 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Frederick Augustus MORAN, Frederick Winston Moran, Moran Asset Management Inc., and Moran & Associates, Inc., Securities Brokerage, Defendants. |
| Court | U.S. District Court — Southern District of New York |
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United States Securities and Exchange Commission (of counsel: Richard E. Simpson, Mark Kreitman, Ann H. Sulzberg), Washington, DC, for Plaintiff.
Kelley Drye & Warren (of counsel: Robert A. Horowitz, Karen Y. Bitar), Stamford, CT, for Defendants Frederick Augustus Moran, Moran Asset Management, Inc., and Moran & Associates, Inc., Securities Brokerage.
Squadron, Ellenoff, Plesent & Sheinfeld, L.L.P. (of counsel: Joseph P. Armao, Philip S. Raible), New York City, for Defendant Frederick Winston Moran.
OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW
The United States Securities and Exchange Commission ("SEC"), brings this civil securities fraud enforcement action against Frederick Augustus Moran ("Moran Sr."), Frederick Winston Moran ("Moran Jr."), Moran Asset Management Inc. ("Moran Asset"), and Moran & Associates, Inc., Securities Brokerage ("Moran Brokerage"). Specifically, the SEC alleges that Moran Sr., Moran Jr., Moran Asset, and Moran Brokerage engaged in insider trading thereby violating Section 10(b) of the Securities Exchange Act of 1934 "the Exchange Act" and Rule 10(b)(5) thereunder; that Moran Sr. and Moran Asset defrauded their clients in violation of Sections 206(1) and (2) of the Investment Advisers Act of 1940 "the Advisers Act"; and that Moran Sr., Moran Asset, and Moran Brokerage made willful misstatements and omissions in violation of Sections 204 and 207 of the Investment Advisers Act of 1940, Rule 204-1(b)(1) thereunder, Section 15(b) of the Securities Exchange Act of 1934, and Rule 15b3-1 thereunder. The SEC seeks judgment permanently enjoining each of the defendants from violating the pertinent provisions of the Exchange Act and the Advisers Act, disgorgement of all illegal profits, prejudgment interest arising from the alleged insider trading, payment of three time civil penalties based on the insider trading, and civil money penalties for the violations of the Advisers Act alleged in the complaint. The defendants deny each of the allegations lodged against them and seek dismissal of the complaint.
The matter arises under the court's jurisdiction, pursuant to the Exchange Act 15 U.S.C. §§ 78u(d), 78u(e), 78u-1, and 78aa and the Advisers Act 15 U.S.C. §§ 80b-9(e) and 80b-14. With the consent of each party, the court bifurcated the liability phase of this case from any subsequent penalty phase. See Order dated October 30, 1995. Accordingly, the only issues presented to the court at this juncture are the liability of the defendants for the charges in the complaint. The case was tried to the court in a twelve day bench trial. In conformity with F.R.C.P.Rule 52(a), the following constitutes the court's findings of fact and conclusions of law.
In its direct case, the SEC presented eight witnesses: John Reddan, executive vice-president and security analyst for Moran & Associates Securities Brokerage from May 1985 until October 31, 1995; defendant Frederick Winston Moran, a vice-president at Salomon Brothers; defendant Frederick Augustus Moran, president of Moran Asset Management and Moran & Associates Brokerage2; Richard Scribner, chief compliance officer for Salomon Brothers, Inc.; Edward Meyercord, vice-president in investment banking for Salomon Brothers; Frank Poli, an attorney, who in 1993 was the head trader for Moran Asset Management; Peter D. Crawford, executive director of investor relations and share owner relations for Bell Atlantic Corporation; and Kevin Tarrant, manager of investor relations for Bell Atlantic Corporation. Defendants did not present any witnesses.3 On rebuttal plaintiff called Raymond Liguori, who was employed as the telecommunication analyst for Salomon Brothers in October 19934. Pursuant to agreement by counsel and F.R.C.P.Rule 32(a)(3)(E), the depositions of Susan Putnam, vice-president of Moran Asset and Moran Brokerage, Katherine Dietze Courage, a director at Salomon Brothers, Richard Holbein, the president of Pension Asset Consulting Associates Inc., and Jennifer Netterville, the investment officer of Louisiana Teacher's Retirement Fund, were admitted into evidence. The parties moved 213 exhibits into evidence.
The SEC alleges that Moran Sr. and his companies acted upon inside information about two cable companies provided by Moran Jr, his son. According to the SEC, Moran Jr. "tipped" Moran Sr. with respect to a merger between Bell Atlantic and Telecommunications Incorporated ("TCI"). This circumstantial case revolves around the fact that Moran Jr., as an employee of Salomon Brothers, was in possession of material, nonpublic information with respect to the Bell Atlantic-TCI merger. Moran Sr. who had previously been reticent to trade cable stocks, after a series of phone conversations with Moran Jr., made large purchase of Liberty, TCI and other cable company stocks on October 11, 1993, two days before the October 13, 1993 official announcement of the merger. The SEC argues that because Moran Sr. and his companies had lost substantial money and clients as the result of a very unsuccessful prior investment in Chamber Development stock, Moran Sr. needed a "sure winner." Moreover, plaintiff contends that Moran Jr. had a history of violating Solomon Brothers' policies regarding confidential information in order to benefit Moran Sr.'s firms, thereby demonstrating an intent on the part of Moran Jr. to provide his father with confidential information. Finally, plaintiff alleges that because Moran Sr. had previously been bearish on cable, these October 11th stock purchases constituted an aberrant trading pattern for Moran Sr., there were several phone calls between Moran Sr. and Jr., including one for over forty minutes the week before Moran Sr. made the stock purchases, and Moran Sr. faxed to Moran Jr. the Moran "morning meeting notes" specifying the switch in cable policy on the morning of the stock purchases indicates that the defendants traded the cable securities as a result of material, non-public information in violation of the Exchange Act and Rules thereunder.
The SEC further states that Moran Sr. and Moran Asset violated sections 206(1) and (2) of the Advisers Act5. Specifically, it charges that Moran Sr. allocated shares of Liberty stock to his personal and family account at a lower price than paid by his clients, thereby placing his own interest above that of his clients. Additionally, the SEC claims that Moran Sr. and his companies violated Sections 204 and 207 of the Advisers Act, as well as, Section 15(b) of the Exchange Act. Although Moran Asset was required to promptly file amendments to its Form ADV when previous information became inaccurate, the SEC asserts that Moran Asset did not include the names of Moran Sr.'s wife and two of his children who were named as directors. The SEC points out that even when the Form ADV was amended to include Moran Sr.'s wife, no mention was made of his two children who had been elected directors. Further, the SEC charges that Moran Brokerage violated the Exchange Act in that an amendment to its Form BD was not timely filed when Moran Sr.'s wife and children became directors. Moran Sr., as a "control person" of the companies is charged with accomplice liability of these omissions which plaintiff maintains are willful and material.
Defendants deny each of the charges. Specifically, Moran Sr. and Moran Jr. respond that Moran Jr. in no way "tipped" any material non-public information with respect to the Bell Atlantic-TCI merger. Defendants maintain that Moran Sr.'s change of heart regarding the cable stocks came about as a result of the actions of Dr. John Malone, a "giant" in the cable industry. Moran Sr. claims that his return to purchasing cable stocks resulted from following Malone's lead. Indeed, defendants additionally point out that news of the impending merger was made public through newspaper articles in the New York Times and the Wall Street Journal. Moran Sr. argues that it was during the weekend of October 9-10, after reading a Wall Street Journal article about a merger between TCI and Liberty, that he made his final decision to begin investment in cable stocks.
Defendants Moran Sr. and Moran Asset also dispute the allegations regarding the Advisers Act. Moran Sr. asserts that while there was an error with regard to the amount of stock that was purchased as well as its allocation, the error was an honest mistake that did not involve any fraud or misrepresentation with respect to the dissemination of investment advice. Moreover, defendants contend that there was no "willful" omissions on either the Form ADV or Form BD. While Moran Sr. concedes that his wife and two sons were not listed on the forms as directors, he maintains that such omission was inadvertent and was ultimately corrected. In addition, defendants contend that the omitted information was not "material" and therefore its omission was not a violation of securities law.
Finally, the parties disagree as to the appropriate burden of proof for this case. The SEC argues that the proper burden of proof is preponderance of the evidence. Defendants counter that because the potential liability faced by the defendants would in effect constitute a loss of livelihood, the proper standard is proof by clear and convincing evidence.
Frederick Augustus Moran ("Moran Sr.") is the president and principal portfolio manager of Moran Asset Management Inc., as well as the president and director of research of Moran & Associates, Inc. Securities Brokerage. Frederick Winston Moran Jr. ("Moran Jr.") is Moran Sr.'s eldest son and...
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