US v. Willis, S 89 Cr. 561 (MGC).

• Decision Date: 15 May 1990
• Docket Number: No. S 89 Cr. 561 (MGC).,S 89 Cr. 561 (MGC).
• Citation: 737 F. Supp. 269
• Parties: UNITED STATES of America, Plaintiff, v. Robert Howard WILLIS, Defendant.
• Court: U.S. District Court — Southern District of New York

737 F. Supp. 269

UNITED STATES of America, Plaintiff, v. Robert Howard WILLIS, Defendant.

No. S 89 Cr. 561 (MGC).

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

May 15, 1990.

Otto G. Obermaier, U.S. Atty., S.D.N.Y. by Henry Pittman, Kevin Czinger, Asst. U.S. Attys., New York City, for U.S.

Spengler Carlson Gubar Brodsky & Frischling by Edward Brodsky, Lawrence S. Hirsh, Jackie L. Gross, New York City, for defendant.

OPINION

CEDARBAUM, District Judge.

In a forty-six count indictment (the "Indictment"), defendant Robert Howard Willis is charged with securities fraud and mail fraud in connection with his purchases of common stock of the BankAmerica Corporation ("BankAmerica") in January and February of 1986. The defendant, a psychiatrist, is charged with having used material, non-public information acquired from a patient for profitable trading in the stock of BankAmerica. Dr. Willis is charged in Counts One through Twenty-Three with securities fraud in violation of Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j, 78ff, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Counts Twenty-Four through Forty-Six charge that Willis' conduct constituted mail fraud in violation of 18 U.S.C. §§ 1341 and 1342.

Dr. Willis has moved pursuant to Fed.R. Crim.P. 12(b) to dismiss all counts of the Indictment on the ground that the Indictment fails to allege any criminal offense. For the reasons discussed below, defendant's motion is denied.

THE INDICTMENT

In considering a motion to dismiss an indictment, I must assume the truth of the facts as alleged in the indictment. 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 facts as alleged in the Indictment may be summarized as follows.

Beginning in late October or early November 1985, Sanford I. Weill developed an interest in becoming Chief Executive Officer ("CEO") of BankAmerica. Between 1970 and 1981, Weill served as the CEO of Shearson Loeb Rhodes and several of its predecessor entities (collectively "Shearson"). In 1981, Weill sold his controlling interest in Shearson to the American Express Company, and between 1981 and 1985, he served as President of American Express. As part of his effort to become CEO of BankAmerica, Weill secured a commitment from Shearson to invest $1 billion in BankAmerica if he was successful in his negotiations with BankAmerica.

Throughout late January and February 1986, Weill attempted to meet with several of the directors of BankAmerica in order to discuss his proposals for BankAmerica. Until at least February 20, 1986, these contacts were not disclosed publicly. During the period in which Weill was attempting to negotiate with BankAmerica, the public information regarding BankAmerica was generally unfavorable. There were news reports that Moody's Investors' Service had downgraded $5.7 billion of debt owed by BankAmerica, that BankAmerica had incurred a loss of $178 million in the fourth quarter of 1985, and that BankAmerica had posted a net loss of $337 million for calendar year 1985.

On February 20, 1986, BankAmerica announced that Weill had sought to become its CEO but that BankAmerica was not interested in his offer. On February 20, 1986, BankAmerica stock traded on the New York Stock Exchange at prices ranging from 13 7/8 to 15 3/8 per share. The day after the announcement, BankAmerica stock traded on the New York Stock Exchange at prices ranging from 14 to 15½. During the five weeks preceding the announcement, BankAmerica stock had traded on the New York Stock Exchange at prices ranging between 12 and 14 7/8 .

Weill discussed his effort to become CEO of BankAmerica with his wife. Weill's wife was a patient of Dr. Willis.¹ Mrs. Weill discussed her husband's efforts to become CEO of BankAmerica with Dr. Willis prior to the public announcement of Weill's interest in Bankamerica. She also disclosed to Dr. Willis that Shearson had agreed to invest in BankAmerica if Weill succeeded in becoming its CEO.

From approximately January 14, 1986 until February 6, 1986, Dr. Willis disclosed to his broker this material, confidential information, and purchased BankAmerica common stock. Between those dates, Dr. Willis purchased a total of 13,000 shares of BankAmerica common stock for himself and his children at prices ranging from 12 1/8 to 14¾ per share. On February 21, 1986, after the public announcement of Weill's effort to become CEO of BankAmerica, Dr. Willis sold at a price of 15 3/8 per share all the BankAmerica common shares that he had purchased between January 14 and February 6, 1986. The total profit was approximately $27,475.79.

Dr. Willis purchased his position in BankAmerica common stock in twenty-three different transactions. Accordingly, the Indictment charges him with twenty-three counts of securities fraud (collectively "the 10b-5 Counts"). Since confirmations of the purchases were sent to Dr. Willis through the mails, he is also charged with twenty-three counts of mail fraud (collectively "the Mail Fraud Counts").

I. Misappropriation of Confidential Information as Securities Fraud: The 10b-5 Counts²

The novel facts of this Indictment make the securities fraud issue one of first impression, but the theory of the Indictment is not new. The Government is proceeding solely on a "misappropriation" theory of liability for securities fraud which is entirely different from the theory that was rejected by the Supreme Court in Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). The "misappropriation" theory, which has been developed by the Second Circuit, has been recognized by the Supreme Court, but not yet approved by a majority of that Court. See Chiarella v. United States, 445 U.S. 222, 235-37, 100 S.Ct. 1108, 1118-19, 63 L.Ed.2d 348 (1980); see also Carpenter v. United States, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987) (convictions under the securities laws affirmed without discussion by an evenly divided Court).

The Indictment charges that Dr. Willis breached the physician's traditional duty of confidentiality on which his patient was entitled to rely when he misappropriated for his personal profit material, non-public, business information confided to him by his patient for her psychiatric diagnosis and treatment, and that when Dr. Willis purchased BankAmerica securities on the basis of his patient's confidential information, he defrauded his patient in connection with the purchase of securities in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Central to the sufficiency of the Indictment, and central to the misappropriation theory of securities fraud, is a breach of fiduciary or similar duty of trust and confidence. It is difficult to imagine a relationship that requires a higher degree of trust and confidence than the traditional relationship of physician and patient. The "oath" of Hippocrates, which has guided the practice of medicine for more than 2,000 years, concludes with the following words:

Whatsoever things I see or hear concerning the life of men, in my attendance on the sick or even apart therefrom, which ought not be noised abroad, I will keep silence thereon, counting such things to be as sacred secrets.

15 The Encyclopedia Britannica 95a (1971). See also Hammonds v. Aetna Casualty & Surety Co., 243 F.Supp. 793, 801 (N.D.Ohio 1965) ("Almost every member of the public is aware of the promise of discretion contained in the Hippocratic oath, and every patient has a right to rely upon this warranty of silence."); MacDonald v. Clinger, 84 A.D.2d 482, 485, 446 N.Y.S.2d 801, 803 (4th Dep't 1982).

A. The Cases

The misappropriation theory was articulated by the Second Circuit in United States v. Newman, 664 F.2d 12 (2d Cir. 1981), aff'd after remand, 722 F.2d 729 (2d Cir.), cert. denied, 464 U.S. 863, 104 S.Ct. 193, 78 L.Ed.2d 170 (1983). In that case, the defendant, a securities trader, had received from employees of two investment banking firms confidential information concerning proposed mergers and acquisitions by the firms' clients. The defendant passed this information to two other individuals who purchased stock in companies that were merger and takeover targets. When the mergers and takeovers were publicly announced, the stock was sold for a substantial profit, and the profit was shared among the participants.

The district court dismissed the indictment, and the Second Circuit reversed. After noting that Rule 10b-5 does not require the defrauding of a buyer or seller of securities, Id. at 17, the court held that the misappropriation of the information from the investment banking firms constituted fraud within the meaning of Section 10(b) and Rule 10b-5.

In determining whether the indictment in the instant case charges a violation of Rule 10b-5, we need spend little time on the issue of fraud and deceit.

* * * * * *

In other areas of the law, deceitful misappropriation of confidential information by a fiduciary, whether described as theft, conversion, or breach of trust, has consistently been held to be unlawful. Appellee would have had to be most ingenuous to believe that Congress intended to establish a less rigorous code of conduct under the Securities Acts.

Id. at 17-18 (citations omitted).

Similarly, in SEC v. Materia, 745 F.2d 197 (2d Cir.1984), cert. denied, 471 U.S. 1053, 105 S.Ct. 2112, 85 L.Ed.2d 477 (1985), the Second Circuit affirmed the decision of the district court that ordered the defendant to disgorge profits from securities transactions that were based on confidential information misappropriated from his employer. In that case, as in Chiarella, the defendant was an employee of a financial printer who learned the identity of tender offer targets in the...