United States v. Reed
| Decision Date | 24 January 1985 |
| Docket Number | No. 84 Cr. 610 (RJW).,84 Cr. 610 (RJW). |
| Citation | 601 F. Supp. 685 |
| Parties | UNITED STATES of America v. Thomas C. REED, Defendant. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Rudolph W. Giuliani, U.S. Atty., S.D. N.Y., New York City, for the Government; Paul L. Shechtman, Asst. U.S. Atty., New York City, of counsel.
Stillman, Friedman & Shaw, P.C., New York City, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendant; Edward M. Shaw, New York City, of counsel. Daniel E. Casagrande and Mary C. Kennedy, New York City, and Michael J. Plishner and John E. Morris, San Francisco, Cal., on the brief.
Securities and Exchange Commission, Washington, D.C., for amicus curiae; Daniel L. Goelzer, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Rosalind C. Cohen, Asst. Gen. Counsel, Robert Mills, Sp. Counsel, Washington, D.C., Richard A. Levine, Atty., New York City, Paul Gonson, Sol., Washington, D.C., of counsel.
In a four count indictment (the "Indictment") filed on August 30, 1984, defendant Thomas C. Reed ("Reed") was charged by a grand jury in the Southern District of New York (the "Grand Jury") with criminal violations in connection with the purchase and sale of stock call options of Amax, Inc. ("Amax"), during the winter of 1981. Specifically, Reed is charged in Count One of the Indictment with securities fraud in violation of sections 10(b) and 32 of the Securities Exchange Act of 1934, (the "Exchange Act"), 15 U.S.C. ?? 78j, 78ff, and Rule 10b-5, 17 C.F.R. ? 240.10b-5.1 Based on the same allegations, Count Two charges that Reed's conduct constituted wire fraud in violation of 18 U.S.C. ?? 2, 1343.2 In Count Three of the Indictment it is alleged that Reed lied in a deposition in which he testified in connection with a civil action for securities fraud brought by persons who sold Amax options at the time that, inter alios, Reed traded. Reed is thus charged in Count Three with perjury, in violation of 18 U.S.C. ? 1623.3 Count Four of the Indictment charges that Reed created and used fraudulent documentation to obstruct justice in the civil proceeding, in violation of 18 U.S.C. ? 1503.4 Reed now moves, pursuant to Rule 12(b), Fed.R.Crim.P., to dismiss the Indictment, on the grounds that Counts One and Two fail to allege criminal offenses, and that venue for Counts Three and Four does not properly lie in the Southern District of New York. For the reasons hereinafter stated, Reed's motion is granted in part and denied in part, and Counts Three and Four of the Indictment are dismissed.
The Court assumes, as it must, the truth of the facts as alleged in the Indictment and may not consider defendant's contrary assertions of fact. See Boyce Motor Lines, Inc. v. United States, 342 U.S. 337, 343 n. 16, 72 S.Ct. 329, 332 n. 16, 96 L.Ed. 367 (1952); United States v. Pacione, 738 F.2d 567, 568 (2d Cir.1984); United States v. Von Barta, 635 F.2d 999, 1002 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703, 68 L.Ed.2d 199 (1981).
The gravamen of the Government's case against Reed, as charged in the Indictment, is the allegation that, from on or about January 26, 1981, up to and including March 18, 1981, Reed engaged in a fraudulent scheme designed to enrich himself, as well as his friends and associates, by trading in the securities of Amax while he was in possession of material, nonpublic, confidential information. Thereafter, it is alleged, Reed fraudulently and perjuriously attempted to disguise his transgressions. Specifically, it is asserted, that as part of this fraudulent scheme: (a) Reed obtained nonpublic, confidential information concerning the proposed merger of Amax into Standard Oil Company of California ("Socal") from his father, Gordon W. Reed; (b) Reed misappropriated this information and engaged in the purchase and sale of Amax stock call options without first disclosing the confidential information in his possession, in breach of a duty arising from a fiduciary and other relationship of trust and confidence owed by Reed directly to his father, to Amax and to the shareholders of Amax; and (c) Reed thereafter both gave perjurious testimony in a deposition and submitted fraudulent and misleading documentation during the course of discovery proceedings in connection with a civil action brought by options traders against Reed and others based on the sale of Amax call options during the period at issue herein.
At all times relevant to the Indictment, Reed was the president of Quaker Hill Development Corporation ("QHDC") in San Rafael, California. QHDC is a land development company wholly owned by Reed and his family. Reed's father was at this time a member of the Board of Directors of Amax, and chairman of the Amax Petroleum Corporation, a wholly owned subsidiary of Amax. At all times relevant to this action, Amax was a publicly-held corporation engaged in the exploration for and the mining and refining of ores and minerals. Amax stock is traded on the New York Stock Exchange and other exchanges.
During this time, Socal was a publicly-held corporation engaged in world-wide, integrated petroleum operations. Since 1975, Socal has owned approximately twenty percent (20%) of Amax common stock. From in or about September 1980 up to and including March 4, 1981, Amax was engaged in nonpublic, confidential discussions concerning a proposed merger of Amax into Socal. Specifically, on January 26, 1981, the chairman of the Board of Directors of Amax met with the chairman of the Socal Board of Directors to discuss the possibility of a merger of Amax into Socal. These discussions were secret and confidential. Four days later, Reed purchased one hundred "March 45" Amax stock call options in the name of QHDC.5 This purchase was made shortly after Reed had participated in a telephone conversation with his father. On the next business day, February 2, 1981, Reed purchased an additional four hundred "March 50" Amax call options in the name of QHDC. On the following day, Reed telephoned Ian K. MacGregor, a member of the Amax Board of Directors in an attempt to obtain further information concerning the likelihood of a merger between Amax and Socal.
The merger discussions continued through February and into early March 1981. On February 25, 1981, the Socal Board of Directors approved in principle a merger proposal pursuant to which Socal offered to acquire all outstanding Amax common stock in exchange for cash and Socal securities worth approximately $78.50 per Amax share. This offer was communicated in confidence to the chairman of the Board of Directors of Amax for consideration by the Amax Board. Information concerning the Socal offer was then disseminated to the members of the Amax Board of Directors, including Gordon Reed. At that time Gordon Reed was vacationing on the Island of Barbados.
On March 2, 1981, and again on March 4, 1981, after Gordon Reed had received news of the Socal offer, Reed spoke by telephone with his father. During those conversations, Reed received nonpublic, confidential information relating to the Socal merger proposal. This information was provided to Reed in confidence and with the firm expectation that Reed would respect this confidence. The relationship between Reed and his father was particularly close; the two men frequently discussed business affairs in the expectation that Reed would keep his father's confidences.6
This time, however, Gordon Reed's expectations of confidence were to be disappointed. On March 4, 1981, at 9:42 a.m. (Eastern Standard Time), immediately after the completion of a telephone conversation with his father, Reed placed a series of phone calls to the brokerage firm, Dean Witter Reynolds, Inc., in San Rafael, California, in an attempt to purchase Amax securities while he was in possession of nonpublic, confidential information concerning the Socal merger proposal. Later that morning, after contacting his securities broker, Reed purchased five hundred "March 50" Amax call options on the American Stock Exchange in New York City, at a total cost of $3,346.76.
On the following day, at a special meeting, the Amax Board of Directors considered the Socal merger proposal and determined not to support that offer. This decision of the Amax Board and the details of the Socal merger proposal were publicly disclosed for the first time on that afternoon.
On March 4, 1981, prior to the special meeting of the Amax Board of Directors and to the public disclosure of the Socal merger proposal, Amax common stock was trading at approximately thirty-eight dollars ($38.00) per share. On that same day, a contract for Amax "March 45" call options was trading at twelve and one half cents ($0.125) per share, and a contract for Amax "March 50" call options was trading at six and one quarter cents ($0.0625) per share. On March 6, 1981, the day following the public announcement of the Socal merger proposal, the price of Amax common stock increased from an opening price of thirty-eight dollars ($38.00) to fifty-seven ($57.00) per share. Similarly, the price of Amax "March 45" call options increased from twelve and one half cents ($0.125) to twelve dollars and twenty five cents ($12.25) per share, while the price of Amax "March 50" call options jumped from six and one quarter cents ($0.0625) to eight dollars and seventy-five cents ($8.75) per share.
On or about March 6, 1981, in an effort to capitalize on the salutary effect of the disclosures of the Socal proposal on the price of Amax securities, Reed sold the five-hundred "March 50" call options that he had purchased two days earlier. Reed's profit from this transaction amounted to approximately four hundred thirty-one thousand dollars ($431,000.00).7
Subsequently, on March 10, 1981, O'Connor & Associates, an options trading firm, commenced a civil class action against eighteen defendants, including Reed, in the United...
To continue reading
Request your trial
-
Bausch & Lomb Inc. v. Alcon Laboratories, Inc.
...information, he holds the property so acquired in constructive trust through the beneficiary. Id. See also United States v. Reed, 601 F.Supp. 685, 700 (S.D.N.Y.) ("A person who receives confidential information from another and misappropriates it for personal benefit is deemed to hold the p......
-
United States v. Santoro
...by employee of investment banking firm); United States v. Carpenter, 791 F.2d 1024 (2d Cir.1986) (financial reporter); United States v. Reed, 601 F.Supp. 685 (S.D.N.Y.) (son of corporate director), rev'd in part on other grounds, 773 F.2d 477 (2d The government argues that because personal ......
-
United States v. Winans
...theory has been found to support an indictment involving the tipping of corporate inside information. In United States v. Reed, 601 F.Supp. 685 (S.D.N.Y.1985), there was no allegation that the corporate insider tipped his son for personal gain. Since such a finding is essential to Dirks' de......
-
U.S. v. Chestman
...the basis of information obtained from patient, in breach of duty arising from relationship of trust and confidence); United States v. Reed, 601 F.Supp. 685 (S.D.N.Y.), rev'd on other grounds, 773 F.2d 477 (2d Cir.1985) (allegation that son breached fiduciary duty to father, a corporate dir......
-
Rounding the peg to fit the hole: a proposed regulatory reform of the misappropriation theory.
...(2d Cir. 1978) (Meskill, J., dissenting), rev'd, 445 U.S. 222 (1980)). (356) Id. (357) See id. at 566 (citing United States v. Reed, 601 F. Supp. 685 (S.D.N.Y) (holding that a son may breach a fiduciary duty to his father, a corporate director), rev'd on other grounds, 773 F.2d 477 (2d Cir.......
-
O'hagan Revisited: Should a Fiduciary Duty Be Required Under the Misappropriation Theory?
...lead to the revelation of confidential corporate matters to various family members."105 Judge Winter 97. Id. at 568. 98. Id. at 569. 99. 601 F. Supp. 685 (S.D.N.Y. 1985). 100. Chestman, 947 F.2d at 569; see also Reed, 601 F. Supp. 685 (S.D.N.Y. 1985). In Reed, the court held a fiduciary rel......
-
United States v. O'hagan: Defining the Limits of Fraud and Deceptive Pretext Under Rule 10b-5
...Id. 38. Chestman, 947 F.2d at 565. 39. Id. at 566. 40. Id. 41. See id. 42. 778 F. Supp. 205 (S.D.N.Y. 1991). 43. Id. at 209. 44. Id. 45. 601 F. Supp. 685 (S.D.N.Y. 46. Id. at 737. 47. Id. at 690. 48. See HOUSE COMM. ON ENERGY AND COMMERCE, INSIDER TRADING AND SECURITIES FRAUD ENFORCEMENT AC......
-
Defining Misappropriation: the Spousal Duty of Loyalty and the Expectation of Benefit - M. Anne Kaufold
...id.; Carpenter, 791 F.2d at 1028. 53. See, e.g., United States v. Chestman, 947 F.2d 551, 567 (2d Cir. 1991). 54. United States v. Reed, 601 F. Supp. 685, 706 (S.D.N.Y. 1985). 55. Id. 56. See, e.g., Chestman, 947 F.2d at 580. 57. O'Hagan, 521 U.S. at 652. 58. 947 F.2d 551 (2d Cir. 1991). 59......