U.S. S.E.C. v. Blackwell

• Decision Date: 20 March 2007
• Docket Number: No. 03-CV-63.,03-CV-63.
• Citation: 477 F.Supp.2d 891
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Roger D. BLACKWELL, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

477 F.Supp.2d 891

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Roger D. BLACKWELL, et al., Defendants.

No. 03-CV-63.

United States District Court, S.D. Ohio, Eastern Division.

March 20, 2007.

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Mark Thomas D'Alessandro, United States Attorney's Office, Columbus, OH, Adolph J. Dean, Jr., Sunil R. Harjani, Attorney at Law, Chicago, IL, for Plaintiff.

William Chester Wilkinson, O. Judson Scheaf, III, Scott A. Campbell, Thompson Hine LLP, Daniel William Costello, Porter Wright Morris & Arthur, John Stephen Teetor, Maribeth Deavers, Isaac Brant Ledman & Teetor, Christopher Craig Woods, Squire Sanders & Dempsey, Scott J. Stitt, James Edward Arnold, Robert Gregory Smith, Clark Prdue Arnold & Scott, Columbus, OH, P. Brian See, Chicago, IL, for Defendants.

Arnold L. Jack, Jack & Snyder, Columbus, OH, Pro se.

OPINION AND ORDER

MARBLEY, District Judge.

I. INTRODUCTION

This enforcement action filed by the United States Securities and Exchange Commission (the "SEC" or the "Commission") involves alleged insider trading in the stock of Worthington Foods, Inc. ("Worthington"). The SEC alleges that Defendant, Roger D. Blackwell ("Blackwell"), a director of Worthington, provided illegal tips to close friends and family members prior to the October 1, 1999 announcement that the Kellogg Company ("Kellogg") had entered into an agreement to acquire Worthington. The SEC contends that these tips allowed the other named Defendants to profit in violation of federal securities laws. Jurisdiction is proper under Sections 21 and 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78u and 78aa. In Count I of its complaint (the "Complaint"), the SEC alleges that Blackwell tipped his co-defendants in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. In Count II, the SEC alleges that Blackwell failed to file reports of ownership and change in beneficial ownership as required by Section 16(a) of the Exchange Act, 15 U.S.C. § 78(p)(a), and Rules 16a-2, 17 C.F.R. § 240.16a-2, 16a-3, 17 C.F.R. § 240.16a-3, and 16a-8, 17 C.F.R. § 240.16a-8, thereunder.

This matter is currently before the Court on the SEC's Motion for Partial Summary Judgment. The Commission is seeking to use the doctrine of collateral estoppel against Defendants Blackwell, Kelly Hughes ("Hughes"), and Kevin Stacy ("Stacy") to prevent them from relitigating their alleged liability for violating Section 10(b), which the SEC contends has already been decided in a related criminal action. The Commission also asks this Court to impute Blackwell's and Hughes' illegal conduct to their co-defendant, the Blackwell Pension Plan Trust (the "Trust")¹, and grant summary judgment with respect to Count I against the Trust on this basis. Additionally, the SEC asks this Court to grant summary judgment against Blackwell on Count II because the Commission alleges that there are no material facts left in dispute regarding whether Blackwell failed to file the appropriate forms as required by Rule 16(a). Finally, the SEC requests that this Court grant permanent injunctions against Defendants² and order that they disgorge their profits and pay prejudgment interest. For the reasons stated herein, the Court GRANTS in part and DENIES in part the SEC's Motion for Partial Summary Judgment.

II. BACKGROUND

A. Facts

Some of the following facts are taken from the SEC's Complaint.

Defendant Roger Blackwell is a nationally recognized expert in consumer behavior and marketing. He is a high-profile marketing professor at The Ohio State University and is a member of the boards of directors of several public and private companies. From 1992 to November 29, 1999, Blackwell was a member of the board of directors of Worthington (the "Board"), which, at the time, was a publicly traded corporation based in Worthington, Ohio, that produced meat alternative food products made from soy and wheat proteins. Worthington's securities were registered under Section 12(g) of the Exchange Act. Its common stock was traded on the Nasdaq National Market, and its options were traded on the Philadelphia Stock Exchange.³ Blackwell was also, at all relevant times, the president and sole owner of Blackwell & Associates, a consulting firm; the trustee of the Trust; and a general partner and 50% owner, along with Defendant Jack, of Defendant Black-Jack, an investment partnership.

On July 8, 1999, representatives from Kellogg approached Worthington's Chairman, President, and Chief Executive Officer, Dale Twomley ("Twomley"), to discuss the possibility of a business combination. On July 16, 1999, top Kellogg officials met with Twomley and other Worthington officials to execute a confidentiality agreement. On July 20, 1999, during a regularly scheduled Board meeting, Twomley informed the Board of the ongoing discussions with Kellogg. At that meeting, the Board authorized management to engage an investment banker. Blackwell attended this and all other Board meetings in July, August, and September 1999, appearing either in person or by telephone.

On August 10, 1999, Twomley and Worthington officials discussed pricing the deal at $26.08 per Worthington share. In August and September 1999, Worthington's stock was trading in the $11 15/16 to $14 3/8 range. On August 11, 1999, during a special telephonic meeting, the Board authorized the negotiation of a definitive merger agreement. Soon thereafter, Worthington formally engaged an investment banker and began its due diligence process.

On August 26, 1999, during a special telephonic meeting, the Board authorized management to pursue an all cash transaction. On August 30, 1999, Kellogg delivered to Worthington an initial draft of the merger agreement. On September 8, 1999, the Board met with legal counsel to review the merger agreement. On September 23, 1999, Twomley and Kellogg officials agreed to a pride of $24 per share for Worthington stock. The next day, on September 24, 1999, the Board held a special meeting during which the directors authorized management to complete the definitive agreement. Copies of the merger agreement were sent to the Worthington directors on September 27, 1999. On September 29, 1999, the Board, met and approved the merger agreement. The parties executed the merger agreement by the end of the day on September 30, 1999. On the morning of October 1, 1999, the parties issued a press release announcing the merger agreement in which Kellogg would pay $24 for each share of Worthington stock. On that day, Worthington's stock price closed at $23 1/16, up $8.75 or 61.4%, from the previous day's closing price.

The SEC alleges that Blackwell illegally provided material non-public information regarding Worthington's merger with Kellogg to family members and friends who, in turn, profited by illegally trading on this information.

Defendant Hughes has worked for Blackwell & Associates for ten years and is allegedly a close confidant of Blackwell. She typically makes investment decisions jointly with her husband, Defendant Stacy. In the six month period prior to September 1999, Hughes and Stacy had not placed any trades in the stock market. While they had previously invested in Worthington stock, they had only made three small purchases, the most recent in February 1999 for 250 shares. On August 31, 1999, Blackwell allegedly met with Hughes as part of Hughes's year-end performance review. During this and additional conversations in September 1999, Blackwell allegedly disclosed to Hughes material non-public information concerning Kellogg's proposed acquisition of Worthington. Shortly after the August 31, 1999, conversation and at various points in September, Hughes allegedly disclosed to Stacy material non-public information concerning Kellogg's proposed acquisition of Worthington.

On September 1, 1999, Hughes and Stacy purchased 180 shares of Worthington stock. They purchased an additional 10,106 shares over a period dating from September 20 to September 30, 1999. They spent a total of $129,655.33 on the Worthington stock. When they sold these shares, on October 4 and 5, 1999, their proceeds totaled $234,609.80. Hughes and Stacy's investment in Worthington stock was their largest investment ever in a single stock. The amount of the investment equaled 150% of their combined annual income. The investment utilized substantially all of Hughes and Stacy's liquid assets.

Defendant Roger Blackwell is sole trustee of the Trust, of which both his now ex-wife Kristina and Defendant Hughes are direct beneficiaries. Kristina Blackwell and Defendant Hughes each had authority to make trades on behalf of the Pension Plan Trust. To the extent the pension plan funded by the Trust might be overfunded, Blackwell & Associates owns the excess funds; to the extent it might be underfunded, Blackwell & Associates is responsible for providing the remainder. On September 27 and 29, 1999, Defendant Hughes caused the Trust to purchase 5,300 shares of Worthington stock for a total cost of $61,028.95. These were the first trades Hughes had ever placed on behalf of the Trust. On October 4, 1999, the Trust sold the Worthington stock for a profit of $57,023.29. There is no evidence that Blackwell disclosed these purchases or sales to the SEC pursuant to Rule 16(a).

Blackwell and Defendant Jack have been business associates and friends for 30 years. Jack, a lawyer, has represented Blackwell in the past. The two men have jointly owned real estate and are partners in Defendant Black-Jack. On September 7, 1999, at 1:43 p.m., Defendant Jack made a seven-minute phone call to Blackwell's office at Blackwell & Associates. Blackwell allegedly disclosed material non-public information concerning Kellogg's proposed acquisition of Worthington to Jack during this call. Immediately following the call, at 1:50 p.m., Jack placed a five-minute call to...