Securities and Exchange Commis v. Obu

Filing

OPINION, the district court judgment is vacated and remanded, by JMW, RR, SLC, FILED.[711849] [10-4749]

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10-4749-cv
SEC v. Obus

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UNITED STATES COURT OF APPEALS

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FOR THE SECOND CIRCUIT

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August Term 2011

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(Argued: November 18, 2011

Decided: September 6, 2012)

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Docket No. 10-4749-cv
-----------------------------------------------------x

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SECURITIES AND EXCHANGE COMMISSION,

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Plaintiff-Appellant,

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-- v. -NELSON J. OBUS, PETER F. BLACK, THOMAS BRADLEY
STRICKLAND,
Defendants-Appellees,
WYNNEFIELD PARTNERS SMALL CAP VALUE L.P., WYNNEFIELD
PARTNERS SMALL CAP VALUE L.P. I, WYNNEFIELD PARTNERS
SMALL CAP VALUE OFFSHORE FUND, LTD.,
Relief Defendants.

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-----------------------------------------------------x

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B e f o r e :

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WALKER, RAGGI and CARNEY, Circuit Judges.

The Securities and Exchange Commission (“SEC”) appeals from an

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order of the District Court for the Southern District of New York

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(George B. Daniels, Judge) granting summary judgment to defendants

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Nelson J. Obus, Peter F. Black, and Thomas Bradley Strickland on

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the SEC’s claims of insider trading in violation of section 10(b)

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of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and

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Rule 10b-5, 17 C.F.R. § 240.10b-5.

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established genuine issues of material fact with respect to its

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claims of insider trading under the misappropriation theory.

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VACATED and REMANDED.
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We hold that the SEC

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DAVID LISITZA (Mark D. Cahn, Michael
A. Conley, Mark Pennington, on the
brief), Securities and Exchange
Commission, Washington, DC, for
Plaintiff-Appellant.
JOEL M. COHEN, Gibson Dunn &
Crutcher LLP, New York, NY (Mary Kay
Dunning, Christopher Muller, Gibson,
Dunn & Crutcher LLP, New York, NY,
David Debold, Gibson, Dunn &
Crutcher LLP, Washington, DC, on the
brief), for Defendant-Appellee
Nelson Obus.
Mark S. Cohen, Sandra C. McCallion,
Jonathan S. Abernethy, Cohen &
Gresser LLP, New York, NY, for
Defendant-Appellee Peter F. Black.
Roland G. Riopelle, Sercarz &
Riopelle, LLP, New York, NY, for
Defendant-Appellee Thomas Bradley
Strickland.

JOHN M. WALKER, JR., Circuit Judge:
The Securities and Exchange Commission (“SEC”) filed this

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civil enforcement action against defendants Nelson J. Obus, Peter

29

F. Black, and Thomas Bradley Strickland alleging insider trading in

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violation of section 10(b) of the Securities Exchange Act of 1934,

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15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

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alleges that Strickland learned material non-public information in

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the course of his employment and revealed it to Black, his friend

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and a hedge fund employee, and that Black in turn relayed the

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information to his boss, Obus, who traded on the information.

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District Court for the Southern District of New York (George B.

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Daniels, Judge) granted summary judgment in favor of the defendants
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The SEC

The

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on both the classical and misappropriation theories of insider

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trading.

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material fact as to each defendant’s liability under the

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misappropriation theory, and therefore that summary judgment for

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the defendants was erroneous.

We hold that the SEC’s evidence created genuine issues of

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VACATED and REMANDED.

BACKGROUND
I.

Facts

8

We recite only those facts pertinent to this appeal.

9

non-moving party, the SEC is entitled to have all factual

10

inferences drawn in its favor.

11

Tech. Servs., Inc., 504 U.S. 451, 456 (1992).

12

As the

undisputed unless noted otherwise.

See Eastman Kodak Co. v. Image
The facts are

13
14

A.

15

In May 2001, Strickland worked as an assistant vice president

The Planned Acquisition of SunSource and GE Capital’s
Financing Bid

16

and underwriter at General Electric Capital Corporation (“GE

17

Capital”), a Connecticut-based company that provides corporate

18

financing.

19

Stmt.”) ¶¶ 3, 23-26, 82; Joint Appendix (“JA”) 351 27:13-17.

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spring, Allied Capital Corporation (“Allied”) had approached GE

21

Capital about financing Allied’s planned acquisition of SunSource,

22

Inc. (“SunSource”), a publicly traded company that distributed

23

industrial products.

24

Strickland was assigned to perform due diligence on SunSource as

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part of the GE Capital team working on the SunSource/Allied

Defendants’ Statement of Undisputed Facts (“Def. 56.1
That

JA 373 70:18-71:4; 301 93:14-94:23; 2301.

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financing proposal.

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59:24-60:12; 646 113:6-8.

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financial performance, but the parties dispute whether Strickland

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was authorized to gather information about SunSource’s management.

5

Def. 56.1 Stmt. ¶¶ 65-66; SEC’s Response to Defendants’ Joint

6

Statement of Material Facts (“Pl. 56.1 Resp.”) ¶¶ 65-66; 353-54

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31:4-32:5.

8
9

JA 299-300 88:2-89:5; 373 70:5-9; 454-55
His tasks included analyzing SunSource’s

In the course of his work, Strickland learned non-public
information about SunSource, including the basic fact that

10

SunSource was about to be acquired by Allied.

11

that he understood that Allied’s acquisition of SunSource was

12

confidential.

13

384 92:6-13.

14

Strickland received, was marked “Extremely Confidential.”

15

24.

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Capital’s employee code of conduct, which required employees to

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“safeguard company property [including] confidential information

18

about an upcoming deal.”

19

22.

20

containing the companies about which GE Capital and its employees

21

possessed material non-public information, and which were therefore

22

off-limits for securities trading.

23

123:11-124:3; 730 122:6-123:4; 2342-43.

24

not placed on the Transaction Restricted List until June 19, 2001,

25

after Strickland and the GE Capital team had completed their due

Strickland testified

JA 314 146:8-10; 379-80 83:6-85:14; 383 90:4-91:2;
Each page of the transaction’s deal book, which
JA 2308-

In addition, Strickland had reviewed and annually signed GE

JA 2270; see JA 314 148:10-22; 436 23:5-

GE Capital also maintained a transaction-restricted list,

4

Def. 56.1 Stmt. ¶ 72; JA 554-55
SunSource and Allied were

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diligence work and submitted a financing proposal to Allied.

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56.1 Stmt. ¶ 71.

3

policies, SunSource should have appeared on the Transaction

4

Restricted List at an earlier date, and whether it was among

5

Strickland’s responsibilities to add SunSource to the list.

6

56.1 Resp. ¶ 73; JA 371-72 67:14-68:7; 646 113:2-8; 730 123:1-9.

Def.

The parties dispute whether, under GE Capital

Pl.

7

B.

8

In the spring of 2001, Black, a friend of Strickland’s from

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The Alleged Tip from Strickland to Black

college, worked as an analyst at Wynnefield Capital, Inc.

10

(“Wynnefield”), which managed a group of hedge funds.

11

Stmt. ¶¶ 8-10, 12; JA 313 141:5-6; 933 23:10-19.

12

his due diligence research, Strickland learned from publicly

13

available sources that Wynnefield was a large holder of SunSource

14

stock.

15

Def. 56.1

In the course of

JA 312 138:9-140:19; 399-400 123:19-124:16.

On May 24, 2001, Strickland and Black had a conversation about

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SunSource.

17

taking place face-to-face; Black recalled a telephone conversation.

18

Def. 56.1 Stmt. ¶ 98; Pl. 56.1 Resp. ¶ 98.

19

defendants dispute what was said during this conversation.

20

Br. at 44 n.5.

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his opinion of SunSource’s management as part of Strickland’s due

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diligence work.

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third parties while performing due diligence, and that his practice

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during such inquiries was to avoid revealing details by stating

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only that GE Capital was potentially doing business with the

We note that Strickland remembered the conversation

The SEC and the
Def.

The defendants maintain that Strickland asked Black

Strickland testified that it was common to contact

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relevant company.

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142:4-24; 315 149:19-150:1; 336 233:13-234:16; 851-52 148:2-149:4.

3

The SEC maintains that Strickland revealed material non-public

4

information by telling Black that Allied was about to acquire

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SunSource.

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testimony that contacting large shareholders was not standard due

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diligence practice at GE Capital and that Strickland and Black

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discussed SunSource after GE Capital had completed its financing

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proposal.

Def. 56.1 Stmt. ¶¶ 100-102, 104-106; JA 313

Pl. 56.1 Resp. ¶¶ 100-102, 104-106.

The SEC relies on

JA 301 93:12-16; 463 77:2-6, 574 162:21-163:12; 745-46

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153:23-154:19; 2325-30.

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following Strickland and Black’s May 24 conversation, described

12

below, raise a strong inference that Strickland told Black about

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the SunSource/Allied acquisition.

The SEC further argues that events

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C.

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Obus was Wynnefield’s principal and Black’s boss.

The Alleged Tip from Black to Obus
Def. 56.1

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Stmt. ¶ 1; 934 24:2-16.

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with Strickland, Black relayed the information he had learned to

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Obus.

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1030 42:19-43:19.

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questions about SunSource’s management led Black to suspect (based

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on SunSource’s prior public actions) that SunSource was considering

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a transaction that would dilute existing shareholders.

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148:25-150:3.

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Obus.

Immediately after Black’s conversation

JA 852 149:21-150:2; 861-62 163:22-165:11; 981 118:15-25;
Black maintains that Strickland’s general

JA 852-53

Black testified that he conveyed this suspicion to

JA 852 149:21-150:3.

The SEC contends that Black told Obus

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that SunSource was about to be acquired by Allied.

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¶¶ 111-112.

Pl. 56.1 Resp.

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D.

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Later that same day, Obus called Maurice Andrien, SunSource’s

Obus’s Call to Andrien

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CEO.

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854 152:8-18; 1360 169:7-10.

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Obus regularly spoke to Andrien about the company.

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¶ 121.

Obus and Andrien gave different accounts of this phone

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call.

Obus testified that the information from Black led him to

Def. 56.1 Stmt. ¶ 122; JA 850 146:12-147:23; 853 150:4-12;
As a large SunSource shareholder,
Def. 56.1 Stmt.

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believe that SunSource was considering a transaction that would

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dilute the value of its public shares, and he called Andrien to

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voice his concerns.

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46:10; 1088 139:3-13; 1360-61 169:11-171:3.

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Obus informed him that Wynnefield had been tipped about SunSource’s

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imminent acquisition:

JA 853 150:4-23; 1030-31 43:20-23; 1032 45:20Andrien testified that

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[I]t was a very funny conversation. And he [Obus]
said that he never had a conversation like this
before, and didn’t know whether he should be having
it.

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21
22
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He said[,] I always knew you guys would sell
SunSource Technology Services [a subsidiary of
SunSource] if you could, but I never figured you’d
sell the whole company.

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25
26
27

And I said, Nelson, that’s just not the kind of
thing that I could ever discuss under any
circumstances with you. Whether we did, or we
didn’t, I just refuse to comment about that.

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29
30
31

He said, well, a little birdie told me that you guys
are planning to sell the company to a financial
buyer. I said, a little birdie; he said, a little
birdie in Connecticut.

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I said, a little birdie in Connecticut, and he said
--I might have even said[,] who would tell you
something like that. And he said GE.

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5

JA 1449 134:11-135:2; 1721-22 542:14-544:17.

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buyer” referred to a buyer planning to add SunSource to an

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investment portfolio, as opposed to a “strategic buyer” looking to

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acquire SunSource for its assets and business capabilities.

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1355 159:2-19.

The term “financial

JA

Black overheard what Obus said on the phone to

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Andrien.

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Obus said that a “guy” from “a big conglomerate in Fairfield” might

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be working with SunSource and that Obus hoped SunSource would not

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dilute shareholders.

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124:8.

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Consistent with Obus’s testimony, Black testified that

JA 853 150:4-12; 863 168:2-8; 983-84 123:19-

In any event, whether the Obus call to Andrien was as

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described by Black and Obus or as described by Andrien, Black was

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“shocked” to hear Obus make the call, and tried to signal Obus to

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stop talking.

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Obus hung up, Black said, “what are you doing? . . . You realize,

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you know, my friend is going to be fired.”

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Obus then became “ashen” and “very upset” because he realized “it

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was a kind of call that could be traced back to” Strickland.

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853 151:1-5; 1365-66 179:21-180:2.

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fired, Obus would offer Strickland a job at Wynnefield or would

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help Strickland find another job on Wall Street.

26

987 130:4-10.

JA 853 150:13-151:10; 862-63 165:25-167:7.

8

After

JA 853 150:13-151:3.

JA

Obus said if Strickland were

JA 853 151:6-10;

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E.

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On the same day that Obus spoke with Andrien, Andrien also

Weber’s Call to Andrien

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took a call from Alan Weber, a business acquaintance of Obus’s and

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another large investor in SunSource.

5

518:20-519:10; 1710 521:8-522:7.

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he hoped that SunSource would not be sold to a financial buyer--the

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same term Andrien recalled Obus using in his phone call.

8

125:16-23; JA 1716-17 533:5-535:2.

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Obus led Andrien to be “fairly certain” that news of the planned

JA 1140-43 226:7-229:15; 1709

On the call, Weber told Andrien

JA 1448

The two calls from Weber and

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SunSource/Allied acquisition had been leaked.

11

552:7.

JA 1724-26 549:21-

12

F.

13

On June 8, 2001, two weeks after the conversation between

The June 8, 2001 Trade

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Strickland and Black, a trader at Cantor Fitzgerald contacted

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Wynnefield offering 50,000 shares of SunSource at $5.00 per share.

16

JA 2231 70:5-71:8; 2249-50 107:5-108:23.

17

$4.75 per share, and ultimately purchased at that price a total

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block of 287,200 shares, about five percent of SunSource’s

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outstanding common stock.

20

216:1-7; 2231 70:5-71:8; 2249 106:4-107:23; 2407.

21

that he was unaware of the pending acquisition when he made the

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trade and that his decision to buy had nothing to do with

23

Strickland’s conversation with Black.

24

214:18-215:7; 1138 222:12-15.

25

represented about the same number of shares as Wynnefield had

Wynnefield counteroffered

JA 1126 201:11-16; 1130 208:2-6; 1134
Obus testified

JA 1132 211:9-17; 1133-34

The June 8, 2001 purchase

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bought in October 2000, the last time Obus believed he had seen

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such a large block of shares available for purchase.

3

201:7-16; 1127-28 204:15-205:5; 1137 221:5-7; 2407.

4

2001, Wynnefield sold 6,000 shares of SunSource.

JA 1126
On June 11,

JA 2407.

5

G.

6

On June 19, 2001, Allied publicly announced that it was

Allied’s Acquisition of SunSource

7

acquiring SunSource for $10.38 per share in cash or stock.

8

2344.

9

increase of $4.54 (or 91.5 percent) over the prior day’s closing

JA

SunSource’s stock closed that day at $9.50 per share, an

10

price.

11

purchase of SunSource stock nearly doubled in value (from the $4.75

12

purchase price to $9.50), producing a paper profit to Wynnefield of

13

over $1.3 million.

14

purchased another 150,000 shares of SunSource at prices over $9.40

15

per share.

JA 1856-57 812:15-814:21.

JA 2407.

Wynnefield’s June 8, 2001

On June 19 and June 20, Wynnefield

JA 2407.

16

H.

17

In June or July 2001, Obus contacted Andrien to ask when the

Obus’s Call to Russell

18

merger with Allied would close; Andrien referred Obus to Daniel

19

Russell, Allied’s CFO.

20

and

21

testified that he called to express his preference to be paid in

22

Allied stock, rather than in cash, and to ask that Allied extend

23

the closing date of the merger to lower Wynnefield’s tax

24

liabilities.

25

testified that Obus told him that Obus “was tipped off to the deal”

JA 1232 378:11-379:14; 1804 709:4-24.

Russell’s recollections of their phone call differ.

JA 1232 379:11-18; 1373-74 195:14-196:16.

10

Obus

Obus

Russell

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between Allied and SunSource, and when Russell asked what that

2

meant, Obus changed the subject.

JA 2190 202:6-204:1.

3

I.

4

In July and August 2002, the SEC subpoenaed Obus and Black

The 2002 SEC Subpoenas

5

about the SunSource trades.

6

2002, Strickland also received an SEC subpoena and contacted Black

7

to arrange a meeting.

8

told Obus about Strickland’s request to meet, realizing that

9

Strickland might want to discuss the subpoenas.

JA 2410-19; 2429-34.

On August 8,

JA 2420-28; 837-38 123:14-125:15.

Black

JA 849-50 144:22-

10

145:22; 998-99 153:10-154:10; 1093 147:6-19; 838 125:16-24.

11

and Black agreed that Black should try to avoid discussing

12

SunSource or the subpoenas and encourage Strickland to be truthful.

13

JA 1095 150:5-18; 1100 158:4-21; 1102 161:1-9; 1369 187:4-14; 1370

14

188:14-25.

15

Obus

At their meeting, Strickland told Black that he had informed

16

GE Capital’s counsel that he did not recall any conversation about

17

SunSource.

18

127:18.

19

SunSource in May 2001, before the acquisition was announced.

JA

20

317 159:18-23; 401 127:3-18; 867 174:11-17; 871 180:3-181:1.

When

21

Black told Obus about the meeting, Obus told Black to tell

22

Strickland about Obus’s conversation with Andrien, and to encourage

23

Strickland to tell GE Capital’s counsel about the May conversation

24

between Black and Strickland.

25

191:11; 1099-1100 157:16-21.

JA 315-16 152:25-153:19; 317 157:25-158:10; 401 126:3-

Black reminded Strickland that they had discussed

JA 999 154:25-155:9; 877-78 190:17-

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J.

2

After receiving the SEC’s subpoena related to SunSource, GE

GE Capital’s Internal Investigation

3

Capital conducted an internal investigation into Strickland’s

4

conduct.

5

interviewing Strickland and other GE Capital employees and thus did

6

not include statements from Andrien or Russell.

7

460 70:15-71:12; 487-88 125:22-126:9.

8

that while Strickland had “disclosed information outside of [GE

9

Capital] pertaining to” SunSource, JA 463 76:2-12, he “did not

JA 2408-09.

The internal investigation did not go beyond

JA 459 68:20-69:7;

The investigation concluded

10

discuss the nature of the specific transaction being contemplated,”

11

JA 2408.

12

GE Capital’s “confidentiality restrictions.”

13

the investigation, Strickland was denied a bonus and salary

14

increase, but was not terminated.

15

in his file stating that he should have consulted a manager or

16

counsel before discussing SunSource with a third party.

17

09; 459 69:9-24; 469 89:5-18.

18

of GE Capital said that the investigation concluded that Strickland

19

“made a mistake” but was “trying to do some underwriting” when he

20

called Black.

21

II.

22

Nevertheless, his conduct demonstrated a “disregard” of
JA 2408.

Following

A letter of reprimand was placed

JA 2408-

Testifying later, a representative

JA 490 131:8-14; 468-69 87:25-88:8; 487 125:7-9.

Prior Proceedings
The SEC filed a civil complaint against Strickland, Black and

23

Obus on April 25, 2006, that (as later amended on June 15, 2007)

24

alleged that the defendants were liable for insider trading in

25

violation of section 10(b) and Rule 10b-5 under both the classical
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and the misappropriation theories of insider trading.

2

classical theory, the SEC alleged that Strickland, through his work

3

for GE Capital, became a temporary insider of SunSource and owed a

4

duty to SunSource’s shareholders not to share material non-public

5

information about the company’s acquisition.

6

misappropriation theory, the SEC claimed that Strickland had a duty

7

to GE Capital, his employer, to keep information about SunSource’s

8

acquisition confidential, and that he breached that duty by tipping

9

Black.

10

Under the

Under the

The district court granted the defendants’ summary judgment

11

motion on both theories, SEC v. Obus, No. 06-civ-3150(GBD), 2010 WL

12

3703846, 2010 U.S. Dist. LEXIS 98895 (S.D.N.Y. Sept. 20, 2010), but

13

the SEC appeals only with respect to the misappropriation theory.

14

In the portion of its decision addressing that theory, the district

15

court held that, even assuming Strickland told Black material non-

16

public information about the SunSource/Allied deal, the SEC had

17

failed to establish a genuine issue of fact as to whether

18

Strickland breached a fiduciary duty to his employer, GE Capital.

19

2010 WL 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48.

20

district court based this finding on GE Capital’s internal

21

investigation, which concluded that Strickland had not breached a

22

duty to his employer, and on the fact that SunSource was not placed

23

on GE Capital’s Transaction Restricted List until after the

24

SunSource acquisition was publicly announced.

25

court further held that the SEC failed to establish facts
13

Id.

The

The district

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sufficient for a jury to find that Strickland’s conduct was

2

deceptive.

3

98895, at *47.

4

had not breached a duty, neither Black nor Obus could have

5

inherited that duty, and thus they also could not be held liable

6

under the misappropriation theory.

7

held that the SEC failed to present sufficient evidence that Obus

8

“subjectively believed that the information he received was

9

obtained in breach of a fiduciary duty.”

10

2010 U.S. Dist. LEXIS 98895, at *50-51.

2010 WL 3703846, at *14-15, 2010 U.S. Dist. LEXIS
Because the district court found that Strickland

11
12

Finally, the district court

2010 WL 3703846, at *16,

DISCUSSION
I.

13

Standard of Review
We review de novo the district court’s grant of summary

14

judgment.

15

2012).

16

that there is no genuine dispute as to any material fact and the

17

movant is entitled to judgment as a matter of law.”

18

P. 56(a).1

19

that a reasonable jury could return a verdict for the nonmoving

20

party.”

21

In reviewing a motion for summary judgment, “[t]he evidence of the

22

non-movant is to be believed, and all justifiable inferences are to

Huppe v. WPCS Int’l Inc., 670 F.3d 214, 217 (2d Cir.

Summary judgment is appropriate where “the movant shows

Fed. R. Civ.

A factual dispute is genuine “if the evidence is such

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

1

Rule 56 was amended in a non-substantive manner after the district
court granted summary judgment. We cite the current version of the
Rule.
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be drawn in [its] favor.”

2

II.

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Id. at 255.

Legal Background

3

A.

4

Insider trading--unlawful trading in securities based on

5

material non-public information--is well established as a violation

6

of section 10(b) of the Securities Exchange Act of 1934 and Rule

7

10b-5.

8

United States, 445 U.S. 222, 226-30 (1980); SEC v. Texas Gulf

9

Sulphur Co., 401 F.2d 833, 847-48 (2d Cir. 1968) (en banc); In re

The Misappropriation Theory of Insider Trading

See Dirks v. SEC, 463 U.S. 646, 653-54 (1983); Chiarella v.

10

Cady, Roberts & Co., 40 S.E.C. 907 (1961).

11

theory of insider trading, a corporate insider is prohibited from

12

trading shares of that corporation based on material non-public

13

information in violation of the duty of trust and confidence

14

insiders owe to shareholders.

15

second theory, grounded in misappropriation, targets persons who

16

are not corporate insiders but to whom material non-public

17

information has been entrusted in confidence and who breach a

18

fiduciary duty to the source of the information to gain personal

19

profit in the securities market.

20

U.S. 642, 652 (1997); United States v. Chestman, 947 F.2d 551, 566

21

(2d Cir. 1991) (en banc).

22

because the misappropriator engages in deception (as required for

23

liability under that section and Rule 10b-5) by pretending “loyalty

24

to the principal while secretly converting the principal’s

25

information for personal gain.”

Under the classical

Chiarella, 445 U.S. at 228.

A

United States v. O’Hagan, 521

Such conduct violates section 10(b)

O’Hagan, 521 U.S. at 653 (internal
15

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1

quotation marks omitted).

2

the deception be “in connection with the purchase and sale of any

3

security” is met because the information is “of a sort that [can]

4

ordinarily [be] capitalize[d] upon to gain no-risk profits through

5

the purchase or sale of securities.”

6

Falcone, 257 F.3d 226, 233-34 (2d Cir. 2001).

7

concerned only with liability under the misappropriation theory.

8
9

The requirement under section 10(b) that

Id. at 656; United State v.
This appeal is

One who has a fiduciary duty of trust and confidence to
shareholders (classical theory) or to a source of confidential

10

information (misappropriation theory) and is in receipt of material

11

non-public information has a duty to abstain from trading or to

12

disclose the information publicly.

13

was developed under the classical theory to prevent insiders from

14

using their position of trust and confidence to gain a trading

15

advantage over shareholders.

16

Dirks, 463 U.S. at 660.

17

the misappropriation context, but the disclosure component operates

18

somewhat differently.

19

on a fiduciary duty to the source of the information, only

20

disclosure to the source prevents deception; disclosure to other

21

traders in the securities market cannot cure the fiduciary’s breach

22

of loyalty to his principal.

23

Morgan Stanley Inc., 719 F.2d 5, 13 (2d Cir. 1983) (fiduciary duty

24

of disclosure to employer does not imply duty to disclose to the

25

public).

The “abstain or disclose” rule

See Chiarella, 445 U.S. at 227-30;

“Abstain or disclose” has equal force in

Because the misappropriation theory is based

O’Hagan, 521 U.S. at 655; see Moss v.

Under either theory, if disclosure is impracticable or
16

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1

prohibited by business considerations or by law, the duty is to

2

abstain from trading.

3

120 (2d Cir. 1993).

See United States v. Teicher, 987 F.2d 112,

4

B.

5

The insider trading case law is not confined to insiders or

Tipping Violations of Insider Trading Laws

6

misappropriators who trade for their own account.

7

and Rule 10b-5 also reach situations where the insider or

8

misappropriator tips another who trades on the information.

9

Dirks, 463 U.S. 646, the Court addressed the liability of an

Section 10(b)

In

10

analyst who received confidential information about possible fraud

11

at an insurance company from one of the insurance company’s former

12

officers.

13

some of his clients, and some of them, in turn, sold their shares

14

in the insurance company based on the analyst’s tip.

15

Court held that a tipper like the analyst in Dirks is liable if the

16

tipper breached a fiduciary duty by tipping material non-public

17

information, had the requisite scienter (to be discussed

18

momentarily) when he gave the tip, and personally benefited from

19

the tip.

Id. at 660-62.

20

defined:

it includes not only “pecuniary gain,” such as a cut of

21

the take or a gratuity from the tippee, but also a “reputational

22

benefit” or the benefit one would obtain from simply “mak[ing] a

23

gift of confidential information to a trading relative or friend.”

24

Id. at 663-64.

25

liable if he knows or should know that the information was received

Id. at 648-49.

The analyst relayed the information to

Id.

The

Personal benefit to the tipper is broadly

When an unlawful tip occurs, the tippee is also

17

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1

from one who breached a fiduciary duty (such as an insider or a

2

misappropriator) and the tippee trades or tips for personal benefit

3

with the requisite scienter.

4

tipping liability doctrine was developed in a classical case,

5

Dirks, but the same analysis governs in a misappropriation case.

6

See Falcone, 257 F.3d at 233.

See id. at 660.

The Supreme Court’s

7

C.

8

Liability for securities fraud requires proof of scienter,

9

Scienter

defined as “a mental state embracing intent to deceive, manipulate,

10

or defraud.”

11

(1976).

12

support a section 10(b) civil violation.

13

Court has yet to decide whether recklessness satisfies section

14

10(b)’s scienter requirement, see Matrixx Initiatives, Inc. v.

15

Siracusano, 131 S. Ct. 1309, 1323 (2011), we have held that

16

scienter “may be established through a showing of reckless

17

disregard for the truth, that is, conduct which is highly

18

unreasonable and which represents an extreme departure from the

19

standards of ordinary care,” SEC v. McNulty, 137 F.3d 732, 741 (2d

20

Cir. 1998) (internal citations and quotation marks omitted); see

21

SEC v. U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998)

22

(recognizing that eleven circuits hold that recklessness satisfies

23

the scienter requirement of section 10(b)).

24

requirement set forth in Hochfelder (and the recklessness variation

25

in McNulty) to apply broadly to civil securities fraud liability,

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12

Negligence is not a sufficiently culpable state of mind to

18

Id.

While the Supreme

We read the scienter

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1

including insider trading (under either the classical or

2

misappropriation theory), and to tipper/tippee liability.

3

e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 167-68 (2d

4

Cir. 1980).

5

tipping or trading, just as in securities fraud cases across the

6

board, the unlawful actor must know or be reckless in not knowing

7

that the conduct was deceptive.

8
9
10

See,

In every insider trading case, at the moment of

With this background, we turn specifically to the scienter
requirements for both tippers and tippees under the
misappropriation theory.

11

1. Tipper Scienter

12

To be held liable, a tipper must (1) tip (2) material non-

13

public information (3) in breach of a fiduciary duty of

14

confidentiality owed to shareholders (classical theory) or the

15

source of the information (misappropriation theory) (4) for

16

personal benefit to the tipper.

17

to the first three of these elements.

18

deliberately or recklessly, not through negligence.

19

tipper must know that the information that is the subject of the

20

tip is non-public and is material for securities trading purposes,

21

or act with reckless disregard of the nature of the information.

22

Third, the tipper must know (or be reckless in not knowing) that to

23

disseminate the information would violate a fiduciary duty.

24

the tipper need not have specific knowledge of the legal nature of

The requisite scienter corresponds

19

First, the tipper must tip
Second, the

While

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1

a breach of fiduciary duty, he must understand that tipping the

2

information would be violating a confidence.

3

As the Supreme Court and commentators have recognized, the

4

first and second aspects of scienter—a deliberate tip with

5

knowledge that the information is material and non-public--can

6

often be deduced from the same facts that establish the tipper

7

acted for personal benefit.

8

that the inquiry into the tipper’s scienter “requires courts to

9

focus on objective criteria, i.e., whether the insider receives a

10

direct or indirect personal benefit from the disclosure”); Donald

11

C. Langevoort, Insider Trading: Regulation, Enforcement, and

12

Prevention § 4.04[1] (1992 ed.) (“The requirement that the tipper

13

act with scienter . . . is effectively subsumed in proof that the

14

insider’s motive was personal benefit.”).

15

scienter is strong because the tipper could not reasonably expect

16

to benefit unless he deliberately tipped material non-public

17

information that the tippee could use to an advantage in trading.

18

The third aspect of scienter, that the tipper acted with knowledge

19

that he was violating a confidence, will often be established

20

through circumstantial evidence.

21

misappropriation itself is deceitful, O’Hagan, 521 U.S. at 653,

22

evidence that the tipper knowingly misappropriated confidential

23

information will support an inference that the misappropriator had

24

“a mental state embracing intent to deceive, manipulate, or

25

defraud,” Hochfelder, 425 U.S. at 193 n.12.

See Dirks, 463 U.S. at 663-64 (holding

The inference of

Because the act of

20

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Because a defendant cannot be held liable for negligently

2

tipping information, see Hochfelder, 425 U.S. at 193 & n.12,

3

difficult questions may arise when a tip is not apparently

4

deliberate or when the alleged tipper’s knowledge is uncertain.

5

The line between unactionable negligence and actionable

6

recklessness is not a bright one.

7

cannot avoid liability merely by demonstrating that he did not know

8

to a certainty that the person to whom he gave the information

9

would trade on it.

But, we have held that a tipper

“One who deliberately tips information which he

10

knows to be material and non-public to an outsider who may

11

reasonably be expected to use it to his advantage has the requisite

12

scienter. . . . One who intentionally places such ammunition in the

13

hands of individuals able to use it to their advantage on the

14

market has the requisite state of mind . . . .”

15

at 167.

16

establish tipper scienter.

17

94 (2d Cir. 2011) (approving jury instructions that allowed the

18

jury to consider “whether [the defendant tipper] deliberately

19

closed his eyes to what would otherwise have been obvious to him”).

20

By the same token, there is a valid defense to scienter if the

21

tipper can show that he believed in good faith that the information

22

disclosed to the tippee would not be used for trading purposes.

23

See id.

24
25

Elkind, 635 F.2d

Moreover, conscious avoidance can be sufficient to
United States v. Gansman, 657 F.3d 85,

Assume two scenarios with similar facts.

In the first, a

commuter on a train calls an associate on his cellphone, and,
21

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1

speaking too loudly for the close quarters, discusses confidential

2

information and is overheard by an eavesdropping passenger who then

3

trades on the information.

4

conversation is conducted knowingly within earshot of a passenger

5

who is the commuter’s friend and whom he also knows to be a day

6

trader, and the friend then trades on the information.

7

first scenario, it is difficult to discern more than negligence and

8

even more difficult to ascertain that the tipper could expect a

9

personal benefit from the inadvertent disclosure.

In the second, the commuter’s

In the

In the second,

10

however, there would seem to be at least a factual question of

11

whether the tipper knew his friend could make use of material non-

12

public information and was reckless in discussing it in front of

13

him.

14

benefited by making a gift of the non-public information to his

15

friend, or received no benefit because the information was revealed

16

inadvertently through his poor cellphone manners.

Similarly, there would be a question of whether the tipper

17

2.

18

Like a tipper, a liable tippee must know that the tipped

Tippee Scienter

19

information is material and non-public.

20

some level of knowledge that by trading on the information the

21

tippee is a participant in the tipper’s breach of fiduciary duty.

22

This last element of tippee scienter was addressed in Dirks, which

23

held that a tippee has a duty to abstain or disclose “only when the

24

insider has breached his fiduciary duty . . . and the tippee knows

25

or should know that there has been a breach.”
22

And a tippee must have

463 U.S. at 660

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(emphasis added).

2

the tipper’s duty to abstain or disclose.

3

whether the Dirks rule is in conflict with Hochfelder’s holding

4

that negligence does not satisfy section 10(b)’s scienter

5

requirement because the “knows or should know” rule, repeated in

6

numerous Second Circuit cases,2 sounds somewhat similar to a

7

negligence standard.

8

(2010) (negligence requires foreseeability, which “concerns what

9

the actor ‘should have known’”).

In such a case, the tippee is said to “inherit”
The parties dispute

See Restatement (Third) of Torts § 3, cmt. g

We think the best way to

10

reconcile Dirks and Hochfelder in a tipping situation is to

11

recognize that the two cases were not discussing the same knowledge

12

requirement when they announced apparently conflicting scienter

13

standards.

Dirks’ knows or should know standard pertains to a

2

See, for example, SEC v. Warde, 151 F.3d 42, 47 (2d Cir. 1998)
(SEC must establish that tippee “knew or should have known that
[tipper] violated a relationship of trust by relaying [the]
information”); Falcone, 257 F.3d at 229 (tippee “assumes a
fiduciary duty” when “the tippee knows or should know that there
has been a breach” ( internal quotation marks omitted)); SEC v.
Monarch Fund, 608 F.2d 938, 942 (2d Cir. 1979) (distinguishing “the
tippee who knows or ought to know that he is trading on inside
information” from “the outsider who has no reason to know he is
trading on the basis of such knowledge”).
Our only case to vary from this formulation is United States
v. Mylett, 97 F.3d 663 (2d Cir. 1996). In Mylett we stated that a
tippee must “subjectively believe that the information received was
obtained in breach of a fiduciary duty.” Id. at 668. For that
proposition Mylett cited a statement from Chestman, 947 F.2d at
570, that the defendant tippee “knew” that the tipper had breached
a duty. An earlier discussion in Chestman, however, gives the
familiar Dirks “knows or should know” standard. 947 F.2d at 565.
In Mylett it was clear that the defendant “knew” that the tipper
“held a position of trust and confidence” at the company the tip
concerned, so there was no need for the court to examine the
“should know” standard from Dirks. 97 F.3d at 667-68.
23

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1

tippee’s knowledge that the tipper breached a duty, either to his

2

corporation’s shareholders (under the classical theory) or to his

3

principal (under the misappropriation theory), by relaying

4

confidential information.

5

on the tippee’s own knowledge and sophistication, and on whether

6

the tipper’s conduct raised red flags that confidential information

7

was being transmitted improperly.

8

intentional (or McNulty’s requirement of reckless) conduct pertains

9

to the tippee’s eventual use of the tip through trading or further

This is a fact-specific inquiry turning

Hochfelder’s requirement of

10

dissemination of the information.

11

established if a tippee knew or had reason to know that

12

confidential information was initially obtained and transmitted

13

improperly (and thus through deception), and if the tippee

14

intentionally or recklessly traded while in knowing possession of

15

that information.

Thus, tippee liability can be

16

D. Tipping Chains

17

One last question presented by this case is how a chain of

18

tippers affects liability.

19

uncommon, see, e.g., Dirks, 463 U.S. at 649-50; Falcone, 257 F.3d

20

at 227; United States v. McDermott, 245 F.3d 133, 135-36 (2d Cir.

21

2001); and follow the same basic analysis outlined above.

22

will be liable if he tips material non-public information, in

23

breach of a fiduciary duty, to someone he knows will likely

24

(1) trade on the information, or (2) disseminate the information

25

further for the first tippee’s own benefit.

Such chains of tipping are not

24

A tipper

The first tippee must

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1

both know or have reason to know that the information was obtained

2

and transmitted through a breach, and intentionally or recklessly

3

tip the information further for her own benefit.

4

must both know or have reason to know that the information was

5

obtained through a breach, and trade while in knowing possession of

6

the information.

7

conscious avoidance.

8

(S.D.N.Y. 1988) (finding scienter satisfied where the defendants,

9

tippees at the end of a chain, “did not ask [about the source of

10
11
12

The final tippee

Chain tippee liability may also result from
See SEC v. Musella, 678 F. Supp. 1060, 1063

information] because they did not want to know”).
*

*

*

To summarize our discussion of tipping liability, we hold that

13

tipper liability requires that (1) the tipper had a duty to keep

14

material non-public information confidential; (2) the tipper

15

breached that duty by intentionally or recklessly relaying the

16

information to a tippee who could use the information in connection

17

with securities trading; and (3) the tipper received a personal

18

benefit from the tip.

19

tipper breached a duty by tipping confidential information; (2) the

20

tippee knew or had reason to know that the tippee improperly

21

obtained the information (i.e., that the information was obtained

22

through the tipper’s breach); and (3) the tippee, while in knowing

23

possession of the material non-public information, used the

24

information by trading or by tipping for his own benefit.

Tippee liability requires that (1) the

25

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III. Application

2

Applying these standards to the defendants in this case, we

3

conclude that the SEC presented sufficient evidence to create

4

genuine issues of material fact as to Strickland’s, Black’s, and

5

Obus’s liability under the misappropriation theory.

6

A.

7

Turning first to Strickland, the SEC presented sufficient

Strickland

8

evidence to survive summary judgment.

9

Strickland, an employee of GE Capital, owed GE Capital a fiduciary

First, it is undisputed that

10

duty.

11

confidential information “qualifies as property” and “undisclosed

12

misappropriation of such information . . . by an employee

13

violate[s] a fiduciary duty”); Restatement (Third) of Agency § 8.05

14

(2006) (“An agent has a duty . . . not to use or communicate

15

confidential information of the principal for the agent’s own

16

purposes or those of a third party.”).

17

sufficient evidence that Strickland knew he was under an obligation

18

to keep information about the SunSource/Allied deal confidential,

19

including Strickland’s testimony that he knew it was confidential,

20

the deal book that had every page marked “Extremely Confidential,”

21

and Strickland’s annual review of GE Capital’s employee code of

22

conduct, which contained provisions on confidentiality.

23

defendants make much of SunSource’s absence from GE Capital’s

24

Transaction Restricted List until after the deal was publicly

25

announced, this fact is not determinative to our analysis.

See O’Hagan, 521 U.S. at 654 (holding that a company’s

26

Moreover, the SEC presented

While the

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1

Moreover, there is a separate question of fact whether it was

2

Strickland himself who should have added SunSource to the list at

3

an earlier date.

4

knew he owed GE Capital a duty to keep information about the

5

SunSource/Allied acquisition confidential and not to convert it for

6

his own profit.

7

Thus there is sufficient evidence that Strickland

More hotly disputed is whether the SEC presented sufficient

8

evidence to allow a jury to conclude that Strickland told Black

9

that SunSource was about to be acquired--i.e., whether the alleged

10

tip actually occurred.3

11

evidence that Strickland tipped Black; both maintained in

12

depositions that Strickland asked Black general questions about

13

SunSource’s management as part of his due diligence work, but

14

revealed nothing about a sale to Allied.

15

held that a tip needs to be established by direct evidence (indeed,

16

such a requirement would restrict successful tipping cases to those

17

in which at least one party cooperated with the government, or

18

where the government had a court-authorized surreptitious

19

recording).

20

found that the government had presented enough evidence to prove

21

the content of a tip beyond a reasonable doubt based only on

As is often the case, there is no direct

However, we have never

See McDermott, 245 F.3d at 139.

3

In McDermott, we

There is no dispute that if Strickland passed along such
information, it would have qualified as material and non-public.
Unannounced acquisitions are a prototypical example of material
non-public information. Basic Inc. v. Levinson, 485 U.S. 224, 23839 (1988); SEC v. Warde, 151 F.3d at 47 (the materiality of a
planned acquisition is “not open to doubt”).
27

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evidence that the tipper and tippee were having an affair and

2

frequently spoke to each other on the phone; the tippee greatly

3

increased her trading activities after the affair began; the tippee

4

frequently traded in stocks about which the tipper had confidential

5

information; the timing of the phone calls and trades was

6

consistent with tipping; and the tippee’s trades were profitable.

7

Id. at 138-39; see also Warde, 151 F.3d at 47-48 (pattern of phone

8

calls and trades can support an inference of tipping).

9

SEC presented the following evidence:

10

Here, the

(1) Strickland and Black, who were college friends, had a

11

conversation about SunSource on May 24, 2001, three days

12

after GE Capital submitted its financing proposal to

13

SunSource.

14

shareholders was not part of due diligence, and Strickland

15

himself had never done so in the past.

16

Strickland’s superiors stated that contacting

(2) Black immediately told his superior, Obus, about the

17

conversation, and Obus immediately called Andrien to tell

18

him, as Andrien testified, that he had heard from “a

19

little birdie in Connecticut” that SunSource was planning

20

to sell the company to a financial buyer.

21

asked who the little birdie was, Obus responded that it

22

was GE.

When Andrien

23

(3) Wynnefield purchased a large block of stock about two

24

weeks after the conversation by increasing a broker’s

25

offer of 50,000 shares to an actual purchase of 287,200
28

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1

shares.

2

announced, this investment nearly doubled in value.

3

(4) In a later conversation between Obus and Russell, Obus

4

told Russell that he had been “tipped off about the

5

[SunSource] deal.”

6

After SunSource’s acquisition was publicly

(5) Black and Strickland met to discuss the case immediately

7

after Strickland was subpoenaed by the SEC.

8

subsequently provided very similar accounts of the May 24

9

conversation (contradicted by the testimony of Andrien and

They

10

Russell).

11

told GE Capital’s counsel that he did not remember having

12

any conversation with Black about SunSource.

13

To be sure, the defendants challenge the credibility of much of

14

this evidence and point to other facts that suggest a more innocent

15

explanation.

16

required to credit the testimony relied on by the SEC and to draw

17

all inferences in its favor.

18

infer from the SEC’s evidence that Strickland did tell Black that

19

SunSource was about to be acquired.

20

Prior to the meeting with Black, Strickland had

However, on summary judgment, the district court was

A rational jury could reasonably

In addition, the SEC presented sufficient evidence for a jury

21

to find that Strickland knew the material non-public information

22

was “ammunition” that Black was in a position to use.

23

635 F.2d at 167.

24

fund that traded in stocks (sufficient knowledge in itself) and,

25

additionally, that Black’s hedge fund traded in SunSource shares.

See Elkind,

Strickland knew that Black worked for a hedge

29

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1

This evidence easily supports a finding of knowing or reckless

2

tipping to someone who likely would use the information to trade in

3

securities.

4

The district court relied on GE Capital’s internal

5

investigation to determine that Strickland breached no duty by

6

tipping Black, reasoning that the alleged victim of the breach of

7

fiduciary duty did not consider itself a victim.

8

3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48.

9

error, however, because the internal investigation was not

See Obus, 2010 WL
This was

10

indisputably reliable, and because its conclusions were

11

contradicted by other evidence.

12

based only on interviews with Strickland and other GE Capital

13

employees; it did not have the benefit of evidence from outside

14

sources such as Andrien or Russell, the primary witnesses relied on

15

by the SEC.

16

corporate interests that may or may not coincide with the public

17

interest in unearthing wrongdoing and affording a remedy.

18

finally, the conclusion of such an internal investigation cannot

19

bind a jury, which will make its own independent assessment of the

20

evidence.

21

that Strickland simply “made a mistake” and did not breach his duty

22

of confidentiality to GE Capital, or, that Strickland breached his

23

duty by tipping.

24

summary judgment.

GE Capital’s investigation was

More broadly, the GE investigation was motivated by

And

The jury, after reviewing the evidence, might conclude

That factual dispute cannot be resolved on

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Next, although the district court did not reach the issue, it

2

is readily apparent that the SEC presented sufficient evidence

3

that, if the tip occurred, Strickland made the tip intentionally

4

and received a personal benefit from it.

5

benefit” to include making a gift of information to a friend.

6

U.S. at 664; see Warde, 158 F.3d at 48-49 (the “close friendship”

7

between the alleged tipper and tippee was sufficient to allow the

8

jury to find that the tip benefitted the tipper).

9

undisputed fact that Strickland and Black were friends from college

Dirks defined “personal
463

Here, the

10

is sufficient to send to the jury the question of whether

11

Strickland received a benefit from tipping Black.

12

U.S. at 664.

13

respect to whether Strickland intentionally tipped Black.

14

is sufficient for a jury to conclude that Strickland intentionally

15

or recklessly revealed material non-public information to Black,

16

knowing that he was making a gift of information Black was likely

17

to use for securities trading purposes.

18

94.

19

See Dirks, 463

This same evidence creates a question of fact with
And it

See Gansman, 657 F.3d at

Finally, the district court erred by requiring the SEC to make

20

an additional showing of “deception” beyond the tip itself.

21

Obus, 2010 WL 3703846, at *15, 2010 U.S. Dist. LEXIS 98895, at *48-

22

50.

23

confidential information “deal in deception.”

24

the jury accepts that a tip of material non-public information

25

occurred and that Strickland acted intentionally or recklessly,

See

As explained in O’Hagan, employees who misappropriate

31

521 U.S. at 653.

If

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Strickland knowingly deceived and defrauded GE Capital.

2

36

all the deception that section 10(b) requires.

3

That is

The SEC thus presented sufficient evidence to establish a

4

genuine issue of material fact with respect to whether Strickland

5

tipped Black, whether Strickland knowingly or recklessly breached a

6

duty to his employer by doing so, whether Strickland knew there was

7

a high likelihood that the tip would result in the trading of

8

securities, and whether Strickland tipped for his own personal

9

benefit.

10

The district court therefore erred in granting summary

judgment to Strickland.

11

B.

12

Assessing Black’s tippee liability requires us to determine

Black

13

whether Black inherited Strickland’s duty of confidentiality.

14

Black’s liability therefore depends first on whether Strickland

15

breached a duty to his employer in tipping Black.

16

U.S. at 660.

17

sufficient evidence for a jury to so conclude.

18

See Dirks, 463

For the reasons already stated, we hold that there is

Next, the SEC must establish that Black knew or should have

19

known that Strickland breached a fiduciary duty when he passed

20

along the tip, see id. at 660, and thus inherited Strickland’s duty

21

to abstain or disclose.4

Black, a sophisticated financial analyst,

4

Here the duty to “disclose,” as applied to Black, would have
required Black to disclose his intention to trade to the source of
the information, GE Capital, because Black inherited Strickland’s
duty, which was owed by Strickland to GE Capital. As noted in our
previous discussion, if such disclosure was impracticable, Black’s
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1

testified that he knew Strickland worked at GE Capital, which

2

provided loans to businesses; that he knew Strickland was involved

3

in developing financing packages for other companies and performing

4

due diligence; and that information about a non-public acquisition

5

would be material inside information that would preclude someone

6

from buying stock.

7

that Black knew or had reason to know that any tip from Strickland

8

on SunSource’s acquisition would breach Strickland’s fiduciary duty

9

to GE Capital.

This is sufficient for the jury to conclude

See Warde, 151 F.3d at 48 (sufficient that tippee

10

knew that the tipper was a director of the company with which the

11

tip was concerned because a sophisticated party should know that

12

board members cannot convey material non-public information to

13

outsiders).

14

the jury find that Black deliberately lied to the SEC about his

15

conversation with Strickland.

16

Such a conclusion of course would be reinforced should

Because, according to the SEC, Black himself did not trade on

17

the SunSource information but instead tipped his boss, Obus, the

18

SEC must also present evidence that Black derived some personal

19

benefit from relaying the tip.

20

personal benefit set forth in Dirks, this bar is not a high one.

21

Based on the evidence that Black worked for Obus and that

22

Wynnefield traded in SunSource stock, a jury could find that by

23

passing along what he was told by Strickland, Black hoped to curry

In light of the broad definition of

duty was to abstain from trading or disseminating the information
further.
33

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1

favor with his boss.

2

reputational advantage as an example of a personal benefit).

3

jury could find that Black conveyed Strickland’s tip in order to

4

improve his standing with Obus, it could also find that Black acted

5

recklessly or intentionally in passing on the information.

6

Moreover, because Black was well aware that Wynnefield held

7

SunSource stock, the jury could find that he knew that there was a

8

reasonable expectation that Obus would trade in SunSource on

9

Wynnefield’s behalf while in possession of the tip.

See Dirks, 463 U.S. at 663 (citing

10

635 F.2d at 167.

11

If a

See Elkind,

send the question of Black’s liability to a jury.

The SEC thus presented sufficient evidence to

12

C.

13

As the final alleged tippee in the chain, Obus’s duty to

Obus

14

abstain or disclose is derivative of Strickland’s duty.

15

his liability depends first on Strickland having breached a duty to

16

GE Capital.

17

evidence on this issue.

18

had reason to know that the SunSource information was obtained

19

through a breach of fiduciary duty.

20

Black was aware of Strickland’s precise position at GE Capital,

21

there was not evidence that Obus had the same level of knowledge.

22

We need not decide if Obus’s bare knowledge that Strickland worked

23

for GE Capital (of which there was evidence), along with Obus’s

24

status as a sophisticated financial player, was enough for Obus to

25

have had reason to know that Strickland breached a duty to GE

Therefore,

As explained above, the SEC has presented sufficient
Next, the SEC must show that Obus knew or

34

While there was evidence that

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1

Capital by talking to Black.

2

evidence of Obus’s call to Andrien and his conversation with Black

3

about the call.

4

believed Black’s information was credible and thus knew that it

5

originated from someone entrusted with confidential information;

6

and (2) that Obus recognized that Strickland might lose his job as

7

a result of the information he had conveyed to Black, demonstrating

8

Obus’s knowledge that Strickland had acted inappropriately.

9

together, this evidence is sufficient to allow a jury to infer that

Here, there is the additional

From this, a jury could infer (1) that Obus

Taken

10

Obus was aware that Strickland’s position with GE Capital exposed

11

Strickland to information that Strickland should have kept

12

confidential.

13

recollections of the conversation with Black and the call with

14

Andrien would not permit the inference that Obus knew Strickland

15

had breached a duty.

16

the jury’s task to decide whose testimony to credit and what

17

conclusions to draw from that testimony.

18

The defendants counter by arguing that Obus’s

But when the evidence is conflicting, it is

Finally, the SEC must establish that Obus traded while in

19

knowing possession of material non-public information.

20

States v. Royer, 549 F.3d 886, 899 (2d Cir. 2008).

21

that the June 8, 2001 SunSource purchase was not unusual for

22

Wynnefield, that the trade was not initiated by Obus, and that Obus

23

sold back some of the SunSource shares before the Allied deal was

24

publicly announced.

25

Obus was in knowing possession of material non-public information

United

Obus argues

None of these facts are relevant to whether

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1

when he traded on June 8.

2

SEC’s evidence that Obus told Andrien and later Russell that he

3

bought the shares on a tip is sufficient for the jury to find that

4

Obus subjectively knew he possessed material non-public information

5

when he made the June 8 purchase, whether or not his purchase was

6

directly caused by his knowledge of the pending acquisition.5

7

id.

8

about whether Obus knew that Strickland had breached a duty to GE

9

Capital and whether Obus traded in SunSource stock while in knowing

See Teicher, 987 F.2d at 120-21.

The

See

Accordingly, the SEC has established genuine questions of fact

10

possession of the material non-public information that SunSource

11

was about to be acquired.

12

CONCLUSION

13

For the foregoing reasons, the district court’s order granting

14

summary judgment to the defendants is VACATED and the case is

15

REMANDED for further proceedings consistent with this opinion.

5

The district court suggested that Obus’s calls to Andrien might
insulate Obus from liability because the calls were “hardly
evidence of deception or stealth.” Obus, 2010 WL 3703846, at *15,
2010 U.S. Dist. LEXIS 98895, at *49. This misapprehends the duty
Obus inherited. If the SEC’s evidence is believed, Strickland
(and, derivatively, Black and Obus) owed a duty to GE Capital not
to use information about SunSource for personal benefit. See supra
n.4. Even if Obus had told Andrien that he was trading based on a
tip, it would have done nothing to absolve Obus of his inherited
duty to GE Capital, the source of the information. See O’Hagan,
521 U.S. at 654 n.6.
36