SEC v. Musella

• Decision Date: 08 August 1989
• Docket Number: No. 83 CV 342 (KMW).,83 CV 342 (KMW).
• Citation: 748 F. Supp. 1028
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Dominick MUSELLA, Albert J. Deangelis, Anthony Brunetti, Thomas Dispigno, Richard I. Rosenkranz, John Musella, Vito Rossini, Edward O'Neill, and Richard B. Martin, Defendants.
• Court: U.S. District Court — Southern District of New York

748 F. Supp. 1028

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Dominick MUSELLA, Albert J. Deangelis, Anthony Brunetti, Thomas Dispigno, Richard I. Rosenkranz, John Musella, Vito Rossini, Edward O'Neill, and Richard B. Martin, Defendants.

No. 83 CV 342 (KMW).

United States District Court, S.D. New York.

August 8, 1989.

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Richard J. Sheehan, Delane Cox, Brad Bennett, U.S. S.E.C., Washington, D.C., for plaintiff.

William Lupo and Jane Falcon, Brooklyn, N.Y., for defendants.

KIMBA M. WOOD, District Judge.

This is an insider trading case brought by the Securities and Exchange Commission (the "SEC") against several individuals who allegedly purchased securities based on information stolen from the law firm of Sullivan & Cromwell. A former Sullivan & Cromwell employee and his stock broker, who participated in these illegal activities, pleaded guilty to criminal charges of insider trading and served time in prison; other participants either lost or settled civil claims resulting in disgorgement of profits and injunctions against future trading.¹ The SEC now complains that the sole defendant remaining in this case, Albert DeAngelis, knowingly purchased securities in three companies based on material, nonpublic information stolen from Sullivan & Cromwell. Following a three day bench trial, the Court finds that defendant violated the federal securities laws.

I. FINDINGS OF FACT

The following are the Court's findings of fact. The primary tipper in this insider trading scheme was Alan R. Ihne, formerly the manager of the office services department at Sullivan & Cromwell, a New York law firm. Stipulated Fact ("SF") 1. Between January 1, 1981 and December 31, 1982, the period in which the trades at issue in this suit occurred, Sullivan & Cromwell rendered confidential legal advice to certain clients concerning proposed and anticipated tender offers, mergers, and leveraged buyouts. Sullivan & Cromwell distributed to every employee, including Ihne, a series of memoranda concerning the importance of safeguarding confidential information, and Ihne was aware of the firm's policy. SF 2.

Ihne admits that he knowingly and willfully misappropriated confidential information from Sullivan & Cromwell about corporate mergers and acquisitions involving Sullivan & Cromwell clients. SF 3; Trial Transcript ("Tr.") at 36. Moreover, Ihne testified that he knew what he was doing was wrong but that he nonetheless made a "conscious decision" to steal the information. Tr. at 36; SF 3.

Ihne supplied the misappropriated information both to a friend, Joseph Palomba, and to Palomba's stockbroker, James Stivaletti. SF 4. Ihne, Palomba and Stivaletti subsequently formed a three man scheme to profit from the confidential information that Ihne misappropriated from Sullivan & Cromwell. The group agreed that Ihne would steal information concerning possible tender offers, mergers, or leveraged buyouts from Sullivan & Cromwell and give the information to Stivaletti who would make their investment decisions. SF 5, 7. In furtherance of this scheme, Ihne, Palomba and Stivaletti purchased call options in Texasgulf, Inc. ("Texasgulf") shortly before a tender offer for Texasgulf shares was announced by Societe Nationale Elf Aquitaine, S.A., a client of Sullivan & Cromwell. SF 5, 6.

After the Texasgulf transaction, Palomba expressed concern over the use of his own account to purchase securities on behalf of the group. Ihne and Palomba asked Stivaletti to find someone to purchase securities on the group's behalf. SF 8. Stivaletti enlisted Dominick Musella, the brother of a college classmate, to purchase securities for the group. Musella and Stivaletti initially agreed that if Stivaletti found another "good opportunity like Texasgulf," Musella would buy the stock, and they would divide the profits evenly. Plaintiff's Exhibit ("PX") 11 Affidavit of James Stivaletti at ¶ 8; Tr. at 98-102. Stivaletti advised Musella to spread his trading among different accounts, and if possible, different names. Id. at ¶ 14. Stivaletti reported back to Ihne and Palomba that he had located someone willing to purchase stock for them. Stivaletti did not reveal Musella's identity to Ihne and Palomba, referring to him only as "Tom Jones." PX 11 at ¶ 10, 12; Tr. at 104-105.

On August 13, 1981, Musella made the first securities purchase of his life. Based on information Ihne had stolen from Sullivan & Cromwell, Ihne and Stivaletti concluded that there was going to be a tender offer for Garfinckel. SF 9. Stivaletti called Musella and gave him instructions to purchase shares of Garfinckel. Stivaletti Aff. at ¶ 12; Tr. at 99. Upon hearing from Stivaletti, Musella, who did not have a broker, called the Teamsters Union Office in Queens looking for his friend, defendant Albert DeAngelis. DeAngelis was not in, and Musella spoke instead to Richard Stolfi, an official at the union office whom he had met through DeAngelis. Musella asked Stolfi to recommend a broker. Stolfi recommended Gus Drakos at Merrill Lynch. That day, Musella opened through Drakos the first brokerage account he ever had and purchased 4,000 shares of Garfinckel stock for $136,791.37. SF 10. Musella financed the Garfinckel transaction by cashing a $20,000 certificate of deposit, at a penalty, and with $48,000 borrowed from his then 19 year old nephew, Frank Tumminia. Tumminia's funds represented life insurance proceeds that he had recently received from the death of his parents. Musella had never borrowed money from Tumminia before and did not sign any documents guaranteeing his repayment of the loan. SF 11.

The next day, August 14, 1981, a tender offer for Garfinckel was announced by Allied Stores Corporation, a client of Sullivan & Cromwell. Musella sold his shares that same day for $188,358.13, realizing a net profit of $51,566.76. SF 12. Shortly after the Garfinckel transaction, Stivaletti arranged to meet Musella in Musella's Cadillac in front of a diner in Bay Ridge, New York. During the meeting Musella handed Stivaletti an envelope containing approximately $18,000 in cash. Musella asked Stivaletti for the source of his information, but Stivaletti refused to tell him. PX 11 at ¶ 14; Tr. at 101, 107. As a result, Musella began to refer to Stivaletti's source as "The Goose that Laid the Golden Egg." PX 11 at ¶ 10, 11; Tr. at 104-105.

A. DeAngelis Purchases Marathon Oil Options

Stivaletti and Ihne next decided to purchase stock in the Marathon Oil Company ("Marathon") based on information Ihne misappropriated from Sullivan & Cromwell. SF 18, 19, 23. Stivaletti called Musella and told him to purchase Marathon options. Stivaletti gave Musella specific instructions to purchase call options of a certain series and strike price. PX 11 at ¶ 22; Tr. at 102. Although Musella told Stivaletti he was unable to purchase any Marathon options (PX 11 at ¶ 23, Tr. at 102), on October 29, 1981, Musella bought 200 December 70 and 100 December 80 call option contracts in Marathon Oil for a purchase price of $76,844.79. Musella sold his options on November 2, 11, and 19, 1981 for a total selling price of $649,339.89, realizing a net profit of $572,495.10. SF 20. Musella never told Stivaletti that he purchased the Marathon options, and he never shared any of the profits with Stivaletti, Palomba, or Ihne. Tr. at 103.

DeAngelis purchased Marathon call options on October 29, 1981, the same day that Musella purchased Marathon call options. DeAngelis called his broker, Lewis Siegel, at 3:45 p.m. on October 29, 1981 and directed him to purchase 120 December 70 Marathon options at the prevailing market price (these options had the same expiration date and strike price as one of the two types of Marathon options purchased by Musella). Siegel told DeAngelis the options would probably cost $30,000 to $40,000. In fact, the options cost over $64,000. Siegel testified that when he called DeAngelis back to confirm that he had placed the order, DeAngelis had no reaction upon learning that the options had cost nearly double Siegel's earlier estimate. Tr. at 157-159. DeAngelis called Musella at 4:24 p.m. on the day they both purchased the options. PX 12 (New York Telephone Company Records). DeAngelis sold these options on November 4, 6, and 9, 1981 at a net profit of $268,513.86. SF 21.

DeAngelis' purchase of Marathon options on October 29, 1981 was his first securities transaction since April of 1980. His account had been inactive for 19 months. Tr. at 146-147; PX 25 (Monthly Account Statements from Thomson McKinnon Securities). Prior to buying Marathon options, DeAngelis had purchased options on only two other occasions, both times in 1978. PX 25. In order to pay for the Marathon options, DeAngelis borrowed the money from DeAngelis Jewelers — a business in which he had no financial interest. A check from DeAngelis Jewelers was issued to Albert DeAngelis on October 30, 1981 in the amount of $62,801.18. SF 22; Tr. at 205.

DeAngelis testified that he bought Marathon because "I know he Musella was buying it, and two, I felt like taking a gamble." Tr. at 243. He testified that he thought he would make money on Marathon because "I had been hearing different conversations about oil stocks, and oil was the game in town at that time." Tr. at 244. DeAngelis further claimed that he was interested in Marathon because he read about the company in "foreign newspapers," and more specifically, in an "Australian publication." Id. at 261, 327. DeAngelis did not produce any of these articles at trial. Finally, DeAngelis testified at his deposition that he purchased Marathon because he made money on Penn Central and knew the government would take his profit in taxes if he did not make another purchase. Id. at 267.

Musella confirmed that he spoke with DeAngelis about Marathon. Musella testified that "Mr. DeAngelis expressed great interest in also purchasing Marathon options," and that he and DeAngelis...