SEC v. Randolph

• Citation: 564 F. Supp. 137
• Decision Date: 15 April 1983
• Docket Number: No. C-82-5343 WHO.,C-82-5343 WHO.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. James H. RANDOLPH, Jr., and Charles Blackard, Defendants.
• Court: U.S. District Court — Northern District of California

564 F. Supp. 137

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. James H. RANDOLPH, Jr., and Charles Blackard, Defendants.

No. C-82-5343 WHO.

United States District Court, N.D. California.

April 15, 1983.

John H. Sturc, U.S. S.E.C., Div. of Enforcement, Washington, D.C., Bobby C. Lawyer, Associate Regional Admin., U.S. S.E.C., San Francisco, Cal., for plaintiff.

Robert F. Watson, Law, Snakard & Gambill, Fort Worth, Tex., David J. Romanski, Steinhart & Falconer, San Francisco, Cal., for defendants.

OPINION

ORRICK, District Judge.

"Insider trading" is the term commonly used to describe the act of purchasing or selling securities while in the possession of material nonpublic information about an issue or the trading market for an issuer's securities. Chief Justice Burger has described this misappropriation of valuable, nonpublic information entrusted to a person in confidence as simply "stealing." See Chiarella v. United States, 445 U.S. 222, 245, 100 S.Ct. 1108, 1123, 63 L.Ed.2d 348 (1980) (Burger, C.J., dissenting).

Regardless of what economic benefit it may confer on some people or how it may be justified for the economy as a whole, the fact remains that it is against the law. It is proscribed by Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC") pursuant to the 1934 Act.

This insider trading case came before the Court when an SEC lawyer filed documents entitled Complaint for a Permanent Injunction and Other Equitable Relief, Consent and Undertaking of James H. Randolph, Jr., duly signed by James H. Randolph, Jr., Consent and Undertaking of Charles Blackard, duly signed by Charles Blackard, and lodged with the Court a Final Judgment of Permanent Injunction and Other Equitable Relief as to James H. Randolph, Jr., and Final Judgment of Permanent Injunction and Other Equitable Relief as to Charles Blackard.

The SEC lawyer then requested the Court to sign ex parte the Final Judgments and, upon its refusal to do so, noticed a motion for Entry of Proposed Final Judgments of Permanent Injunction and Consent and Undertaking of the defendants. For the reasons following, the Court denies the motions and declines to sign the two documents denominated "Proposed Final Judgment of Permanent Injunction and Other Equitable Relief, and dismisses the action."

I

A

This case is one of four brought to date by the SEC following the merger between Santa Fe International Corporation ("Santa Fe") and the Kuwait Petroleum Company ("Kuwait Petroleum"), announced October 5, 1981.¹ Shortly after the announcement, the SEC began an investigation of allegations of insider trading in Santa Fe securities and options. Defendant James R. Randolph is a vice-president of Santa Fe Minerals, Inc., a wholly-owned subsidiary of Santa Fe. Defendant Charles Blackard is a vice-president of Santa Fe-Windsor, a wholly-owned subsidiary of Santa Fe Minerals. George Willard Minor, who is not charged in the complaint, is Randolph's father-in-law. The complaint alleges that, by virtue of their employment status, Randolph and Blackard learned that Kuwait Petroleum was planning to make a tender offer to Santa Fe shareholders at very advantageous terms. Kuwait Petroleum agreed to offer upwards of $50 a share for Santa Fe common stock at a time when shares were selling for approximately $28 a share. Around mid-September, 1981, Randolph told Minor that Santa Fe was an excellent target for a takeover attempt in the near future. Minor accordingly purchased 30 October 30 call options at a total cost of $816.30. Blackard in turn purchased a total of 20 January 30 options at a total cost of $1,940. Minor subsequently purchased 35 more October 30 options at a cost of $243.23. Following the announcement of the merger agreement, the price of Santa Fe stock and options rose dramatically. Minor sold all of his 65 October 30 options on October 8, 1981, realizing total profits of $76,647.74. On January 4, 1982, Blackard exercised his 20 January 30 options into 2,000 shares of Santa Fe common stock, which he then tendered to Santa Fe for $51 a share; his total profit was $40,060.

B

On these facts, the SEC followed its customary practice of entering into consent judgments with defendants wherein defendants, without conceding liability, agreed, on penalty of being held in contempt of court, to disgorge the profits of their transactions in Santa Fe options and not to disobey the law in the future. The Court declines to sign the Final Judgments because, first, the Court questions the adequacy of the so-called penalty sought by the SEC, which seems to the Court to be no more than telling a person caught stealing cookies that he must return them to the cookie jar, and agrees never to do it again; and, second, because the Court questions the necessity for, and propriety of, court intervention in this process in this case.

II

A

The Court recognizes that the SEC shares its view that current penalties for insider trading are inadequate but nonetheless declines to endorse a consent judgment that does not appear to be in the public's best interest.

Preliminarily, it should be noted that case law offers little guidance as to a district court's role in approving SEC consent judgments. The only relevant case brought to the Court's attention is an unpublished opinion by Chief Judge Young in SEC v. Hermil, No. 71-141-Orl-Civ-Y (M.D.Fla. Feb. 14, 1978).² Acknowledging the absence of case law with respect to a court's role in considering an SEC consent decree, Judge Young drew on analogous areas, specifically antitrust and Title VII class settlements. He concluded that he "must" approve the consent decree if it was not "unlawful, unreasonable or inequitable" (slip op. at 13), and if it satisfied the objectives of the Securities Act (slip. op. at 18).

However, Judge Young's concern in Hermil was quite different from this Court's concern here. The Hermil case involved a 1933 Act action against promoters of a real estate scheme who had defrauded investors, and the court was concerned lest the settlement reached by the SEC and the defendants be considered unfair to the defrauded investors who were (basically) not getting back all the money they lost. Here, the Court is questioning the fairness of the consent judgment not with regard to individual sellers who lost potential profits because of defendants' insider trading; rather, the Court is concerned with the overall fairness of the settlement to the public, which is as much a beneficiary of the securities laws as are individual investors. See United States v. Naftalin, 441 U.S. 768, 775, 99 S.Ct. 2077, 2082, 60 L.Ed.2d 624 (1979); United States v. Newman, 664 F.2d 12, 18-19 (2d Cir.1981) (purpose of 1933 Act not only investor protection but also achievement of high standard of business ethics).

Moreover, the antitrust analogy does not suggest that courts should approve settlements that strike them as fair, with no further review. The Antitrust Procedures and Penalties Act requires that the Department of Justice file for industry and public consideration and comment a copy of the proposed decree and a public impact statement that explains the proposal and predicts the effects of the decree. The court is then required to hold a hearing on the decree and make findings as to the expected effects of the decree and whether it is in the public interest. 15 U.S.C. § 16 (1982 Supp.). The antitrust analogy suggests that courts should not be required to approve a consent judgment merely because the agency assures the court it is "not inequitable." It is true that in this case defrauded sellers will recover their money via the settlement. But the Court must also consider the public interest, which is not specifically represented in this ex parte proceeding.

B

The Court is thus obliged to look closely at the proposed consent judgment to see if it provides a remedy that fully effectuates Congress' purpose in enacting the securities laws. It is clear that a major purpose was to insure the integrity of the market, to which end public confidence therein had to be established:

"The purpose of this bill is to protect the investing public and honest business. ... The aim is to prevent further exploitation of the public by the sale of unsound, fraudulent, and worthless securities through misrepresentation; to place adequate and true information before the investor; to protect honest enterprise, seeking capital by honest presentation, against the competition afforded by dishonest securities offered to the public through crooked promotion; to restore the confidence of the prospective investor in his ability to select sound securities; to bring into productive channels of industry and development capital which has grown timid to the point of hoarding; and to aid in providing employment and restoring buying and consuming power."

S.Rep. No. 47, 73d Cong., 1st Sess. 1 (1933), quoted in United States v. Naftalin, 441 U.S. 768, 775-76, 99 S.Ct. 2077, 2082-2083, 60 L.Ed.2d 624 (1979). Insider trading was a particular problem addressed by the Exchange Act. The 1934 report of the Senate Banking and Currency Committee stated:

"Among the most vicious practices unearthed at the hearings before the subcommittee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities."

S.Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934), quoted in 2 L. Loss, Securities Regulation 1037 (1961).

Despite Congress' outrage, the number of insider trading actions brought by the SEC has been small. From 1966 to 1980, there were only 37 reported actions based on 35 separate incidents of insider trading. Dooley, Enforcement of Insider Trading Restrictions, 66 Va.L.Rev. 1, 8-9 (1980). Moreover, according to Professor Dooley: "The...