Securities and Exchange Commission v. Carroll et al

Filing 186

MEMORANDUM OPINION AND ORDER by Judge John G. Heyburn, II on 3/21/2014; 174 Motion for Summary Judgment is DENIED. cc:counsel (TLB)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:11-CV-165-H

SECURITIES AND EXCHANGE COMMISSION

PLAINTIFF

V.
PATRICK M. CARROLL, et al.

DEFENDANTS

MEMORANDUM OPINION AND ORDER
The Securities and Exchange Commission (SEC) brought this civil action alleging
violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) by
Defendants Patrick M. Carroll, James P. Carroll, William T. Carroll, David Mark Calcutt,
Christopher T. Calcutt, David A. Stitt, John Monroe, and Stephen Somers. Defendants traded in
the securities of Steel Technologies, Inc. (STTX) in the month before the February 28, 2007
public announcement of its acquisition by Mitsui & Co. USA Inc. (Mitsui). The six Defendants
who worked for STTX have settled; the remaining two Defendants are David Stitt’s alleged
tippee, John Monroe, and Monroe’s alleged tippee, Stephen Somers.
Defendant Somers moved for summary judgment on the SEC’s claim against him. No
particular case or precedent is dispositive here. In the end, the resolution turns upon what
permissible inferences a reasonable jury might conclude from the evidence. For the reasons that
follow, the Court denies the motion.
I.
The Court will now briefly summarize the facts relevant to the SEC’s claim against
Somers.

STTX processes flat-rolled steel to specific requirements for customers in steel-

consuming industries. STTX is headquartered in Louisville, Kentucky and was traded on the

NASDAQ at all relevant times. Mitsui is the largest overseas subsidiary of Mitsui & Co., Ltd.,
headquartered in Tokyo, Japan.
There are three primary individuals involved in the SEC’s claim against Somers. The
alleged insider and initial tipper is David Stitt, who was General Manager of Sales for STTX’s
Northeast Region and based out of Pennsylvania at all relevant times. Stitt’s alleged tippee and
Somers’s alleged tipper is John Monroe, a Pennsylvania car sales manager. Monroe was friends
with both Stitt and Somers. Somers, the alleged remote tippee, co-owns Somers Brothers
Capital, LLC, a commodity trading advisor and commodity pool operator that he operated in
Pennsylvania.
The relevant events occurred in the week prior to STTX’s public announcement of its
acquisition by Mitsui.

Stitt reported to STTX’s Senior VP of Sales, Brad Goranson, and

President and COO, Michael Carroll, both of whom knew about STTX’s acquisition discussions
with Mitsui before Stitt traded. During February 2007, Goranson and Stitt communicated often,
sometimes daily. On Friday, February 23, Stitt was told that he must attend a special meeting at
STTX’s Louisville headquarters on Monday, February 26, either by Goranson or Fran Cooley
Adams, Executive Assistant to Michael Carroll. Stitt claims that he was not told the purpose of
the meeting, and both Goranson and Adams deny telling Stitt about the forthcoming acquisition.
Never before had Stitt been told to fly to Louisville for a meeting on such short notice without
also being told the purpose of the meeting. According to Goranson, the purpose of the meeting
was to inform company officers about Mitsui’s planned acquisition of STTX.
On February 23, Stitt had an unprecedented 19 telephone calls with STTX’s
headquarters, five of which occurred between 3:58p.m. and 4:22p.m. During one of these calls,
Stitt questioned Executive Assistant Julie DuChane about the purpose of the special meeting.

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DuChane possessed information about STTX’s acquisition that she received from Adams but
denied providing it to Stitt. At the end of the day, Stitt purchased almost $40,000 of STTX
stock, increasing his position in company stock from 2% to 17% of his overall 401(k) portfolio.
On Sunday, February 25 and Monday, February 26, there was a series of phone calls. On
Sunday at 1:40p.m., Stitt called his parents’ condo and had a 10-minute conversation. At
1:57p.m., Stitt called Monroe’s cell phone and had a 14-minute conversation. At 2:23p.m.,
Monroe called Somers’s cell phone and had an 18-minute conversation. The same minute
Monroe’s conversation with Somers ended, Monroe called his financial adviser Mr. Waldron.
On Monday, February 26 at 10:20a.m., Monroe called Somers at work and had a 10minute conversation.

At 10:36a.m., Monroe called Waldron again and had an 8-minute

conversation. Finally, at 10:45a.m., Monroe called Stitt.
At 3:48p.m. that day, Somers bought 2,000 shares of STTX stock. At the time he traded
the stock, Somers knew that Stitt worked for STTX, that STTX was publicly traded, and that a
duty of confidentiality generally applied to nonpublic information about acquisitions.

In

addition, Somers did not know of anyone else that Monroe knew of who worked at STTX.
At 4:00p.m., the Mitsui acquisition plan was announced to STTX senior sales personnel,
including Stitt, at the meeting in Louisville, Kentucky. Meeting attendees signed the Bluegrass
Confidentiality Agreement. On February 28, the acquisition was publicly announced. Between
speaking with Stitt and STTX’s public acquisition announcement, both Monroe and Stitt’s 75year-old mother purchased STTX stock. Somers sold his STTX stock 8 days after purchasing it,
generating a profit of approximately $20,000.
The content of the phone calls between the parties is disputed.

Because of the

significantly disparate characterizations of these telephone calls, the Court will quote deposition

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testimony directly. In his deposition, Monroe was asked what led to his decision to purchase
3,000 shares of STTX stock. He replied: “In a conversation that I had with David Stitt, the week
of the 20th . . . he was on a hunch that there was a possibility of Steel Technologies buying
somebody or somebody buying them . . . .” When Monroe was asked if Stitt told Monroe the
basis of his hunch, Monroe replied, “He was scheduled to travel out there for a meeting.” When
Monroe was asked if Stitt told Monroe what he thought the meeting was about, Monroe replied,
“He thought it could be . . . one, he could be getting canned, maybe they were buying something,
maybe they were getting bought. One of the three, guessing, speculating.”
Other deposition evidence pertains to Monroe and Somers’s conversation. Both men
admit to discussing STTX. When Monroe was asked if he passed on the information he got from
Stitt to Somers prior to February 26, Monroe replied, “Yes.” When Somers was asked what he
remembered about their conversation, Somers replied, “ . . . Monroe made mention of Steel
Technologies and said something to the effect that: Take a look at Steel Technologies. There
might be something going on at the company.” Somers also said that, to him, the fact that
“something was going on” with STTX, given Somers’s background, meant that “there’s
something that’s going to impact the share price.”
II.
Somers moves for summary judgment under Federal Rule of Civil Procedure 56, which
entitles a party to summary judgment where “the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). The movant must show that there is no genuine issue as to any material fact or that the
nonmoving party cannot prove an essential element of its case for which it has the burden of
proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322−23 (1986). Once accomplished, the

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nonmoving party can overcome summary judgment by controverting the movant’s argument
with specific facts. Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986).

The Court need not accept unsupported or conclusory allegations. Bell v. Ohio

State Univ., 351 F.3d 240, 253 (6th Cir. 2003). However, the Court must view the record and
make inferences from the alleged facts in the light most favorable to the nonmoving party.
Hawkins v. Anheuser-Busch, Inc., 517 F.3d 321, 339 (6th Cir. 2008).
III.
Section 10b of the Exchange Act makes it unlawful for any person “to use or employ, in
connection with the purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [SEC] may prescribe. . . .” 15
U.S.C. § 78j(b). SEC Rule 10b-5 further provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b–5 (2014). Trading on the basis of material, nonpublic information in
connection with the breach of a fiduciary duty violates Rule 10b-5. See Dirks v. SEC, 463 U.S.
646, 654 (1983).

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As the Court has previously discussed, the SEC’s action is based on the
classical theory of insider trading.1 To establish tippee liability as to Somers, the SEC must
prove that: (1) the tipper possessed material nonpublic information about the corporation, (2) the
tipper provided the information to him, (3) he purchased the corporation’s securities while
possessing that information, (4) he knew or should have known the information was provided in
violation of a relationship of trust, and (5) the tipper benefitted from the disclosure. SEC v.
Blackwell, 291 F. Supp. 2d 673, 696 (S.D. Ohio 2003) (citing SEC v. Warde, 151 F.3d 42, 47 (2d
Cir. 1998)). In addition, the initial tipper must have been an insider.
Somers argues that the SEC’s case against him fails because: (1) Stitt was not an insider,
(2) the SEC cannot show that material information was passed to Somers, (3) Somers did not
know nor should he have known that any information Monroe gave to him was improperly
obtained, (4) Somers did not act with the requisite scienter.
IV.
In order for Somers to be liable under a classical tippee insider trading theory, Stitt must
be found to have been an insider in February 2007.
There is no definitive test for defining an “insider” under 10(b) liability.2 Courts have
construed the term “insider” broadly, in substantially similar ways. The definition of “insider” is
not limited to persons who are directors and officers. See Locke v. Comm’r of Internal Revenue,

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See SEC v. Carroll, 3:11-CV-165-H, 2011 WL 5880875, at *4 n.2 (W.D. Ky. Nov. 23, 2011) (denying Somers’s
motion to dismiss and specifying that the SEC’s cause of action was brought under the classical theory of insider
trading liability). After the issuance of the Court’s November 23, 2011 opinion, the SEC amended its complaint to
provide that Stitt was not, in fact, a Vice President of Sales at STTX but rather a General Manager of Sales.
Although misappropriation theory could potentially apply more aptly now, where the status of Stitt as an insider is a
closer case, neither the SEC’s amended complaint nor its response to Somers’s motion for summary judgment
mentioned an alternative theory of relief under misappropriation theory. Therefore, the Court will construe the
SEC’s claim against Somers as arising solely under the classical theory of insider trading, consistent with its prior
opinion.
2
Section 16(b) of the 1934 Act defines “insiders” as directors, officers, and 10% shareholders, 15 U.S.C. § 78p, but
the definition under 10(b) is interpreted as more expansive. See Myzel v. Fields, 386 F.2d 718, 739 (8th Cir. 1967).

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65 T.C. 1004, 1008 (1976) aff'd sub nom. Locke v. C. I. R., 568 F.2d 663 (9th Cir. 1978). Nor is
it limited to employees of the corporation. SEC v. McGee, 895 F. Supp. 2d 669, 675 (E.D. Pa.
2012) (citing United States v. O’Hagan, 521 U.S. 642, 651–52 (1997)). Insiders are individuals
who have greater knowledge of the financial affairs of a corporation due to their position or
intimate association with the corporation. See In re Cady, Roberts & Co., 40 S.E.C. 907, 912
(1961); Myzel v. Fields, 386 F.2d 718, 740 (8th Cir. 1967).
As the Second Circuit articulated:
The essence of [Rule 10(b)-5] is that anyone who, trading for his own account in
the securities of a corporation has ‘access, directly or indirectly, to information
intended to be available only for a corporate purpose and not for the personal
benefit of anyone’ may not take ‘advantage of such information knowing it is
unavailable to those with whom he is dealing,’ i.e., the investing public.
SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir.1968) (quoting Cady, Roberts, 40
S.E.C. at 912). Put more succinctly, an insider is “anyone who has access to the issuer of stock
and thereby obtains nonpublic information.” Moss v. Morgan Stanley Inc., 719 F.2d 5, 10 n.8
(2d Cir. 1983); see also SEC v. Fox, 654 F. Supp. 781, 790 (N.D. Tex. 1986). The root of this
definition is the fiduciary duty an insider owes to the shareholders of the corporation. Blackwell,
291 F. Supp. 2d at 688 n.7 (citing O’Hagan, 521 U.S. at 652).
In the early filings of this case, Stitt’s February 2007 position at STTX was characterized
as Vice President of Sales for STTX’s Northeast Region, a title which would raise an inference
of insider status. However, it was later learned that Stitt was in fact General Manager of Sales
for STTX’s Northeast Region at the time of the relevant events.
In Somers’s motion for summary judgment, he argues that Stitt was not entrusted with
confidential information about the Mitsui acquisition until the 4p.m. meeting on Monday, nor
was he bound by confidentiality until he signed the Bluegrass Confidentiality Agreement at that

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meeting. He further argues that Stitt was merely a regional salesperson, not part of STTX’s
leadership, who took no part in the company’s major financial decisions such as mergers and
acquisitions and would thus have no reason to be informed of the acquisition prior to the Monday
meeting. These facts support a valid and potentially persuasive argument on behalf of Somers.
The SEC, however, points out that, as an employee of STTX, Stitt had repeatedly agreed
to be bound by STTX’s Code of Business Conduct, which included provisions relating to
confidentiality and insider trading.

Moreover, Stitt’s job title is not conclusive as to his

insider/outsider status. Stitt testified at his deposition that his job responsibilities as General
Manager of Sales involved overseeing and managing the sales of the Northeast region. As Vice
President of Sales, the only specific difference in responsibilities Stitt cited was that the territory
he oversaw expanded to include Ohio.
Somers makes a viable argument that Stitt was not an insider, but not one conclusive as a
matter of law. Depending on the evidence at trial, the question of Stitt’s status could be subject
to future motions.

Under the current circumstances, Stitt’s status as an insider remains a

question for the jury.
V.
Next, Somers argues that the SEC cannot show that material information was passed to
him. The SEC must prove that: (1) Stitt possessed material nonpublic information, (2) Stitt
passed this information to Monroe, and (3) Monroe passed the information to Somers.
A.
Information is material “only if a reasonable investor would have viewed the
[information] as having significantly altered the total mix of information available.” Ashland,
Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461, 468 (6th Cir. 2011) (internal quotation marks and

8

citation omitted). Somers argues that the information in question was simply the fact that Stitt
was called to a meeting at company headquarters. The fact of the unusual meeting itself could
possibly be material. See SEC v. Happ, 392 F.3d 12, 22−23 (1st Cir. 2004) (scheduling of
unusual meeting on short notice, along with other information, was material); SEC v. Roszak,
495 F. Supp. 2d 875, 888 (N.D. Ill. 2007) (“Information about a potential merger, including
information that meetings are occurring relative to a potential merger, is often considered
material.”).
However, the SEC contends that more information than the existence of a meeting was
involved, namely, information about an acquisition or a potential or likely acquisition, which is
undoubtedly material. See SEC v. Michel, 521 F. Supp. 2d 795, 825 (N.D. Ill. 2007) (“Few
matters are considered more material than a corporation’s involvement in a possible merger or
acquisition.”); SEC v. Mayhew, 121 F.3d 44, 52 (2d Cir. 1997) (certainty is not required for
information about a potential merger to be material); Basic Inc. v. Levinson, 485 U.S. 224,
233−34 (1988) (rejecting the argument that pre-merger information is only material once there is
“agreement-in-principle” as to the price and structure of the transaction.) In addition, the SEC is
correct that the 60% increase in STTX’s share price immediately after the public announcement
of STTX’s acquisition by Mitsui provides strong evidence of materiality. See Michel, 521 F.
Supp. 2d at 825−26 (“Also significant to the materiality analysis is the fact that Blue Rhino's
stock price increased by 20 percent when the merger was publicly announced.”); Blackwell, 291
F. Supp. 2d at 689 n.9 (“After the public announcement . . . the price of Worthington stock
increased dramatically, giving rise to the clear inference [of materiality].”); United States v.
Mylett, 97 F.3d 663, 667 (2d Cir. 1996) (“[T]he sharp jump in NCR's stock price after a formal
acquisition announcement was made suffices to support a finding” of materiality.).

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B.
Somers argues that without written evidence, records of the content of telephone
conversations, and confirming testimony from Stitt’s alleged sources of nonpublic information,
the SEC’s case fails. However, writings against interest, wiretaps, and other direct admissions
are not essential to the SEC’s case. Direct evidence is rarely available in insider trading cases,
since the tipper and tippee are usually the only witnesses to the exchange. The SEC is entitled to
prove its can through circumstantial evidence. Roszak, 495 F. Supp. 2d at 886−87; SEC v.
Ginsburg, 362 F.3d 1292, 1298 (11th Cir. 2004); SEC v. Sargent, 229 F.3d 68, 75 (1st Cir.
2000); SEC v. Singer, 786 F. Supp. 1158, 1164−65 (S.D.N.Y. 1992). But evidence of mere
contact with an insider followed by a trade is not enough to support an inference of liability.
SEC v. Rorech, 720 F. Supp. 2d 367, 410 (S.D.N.Y. 2010).
As a preliminary matter, the Court notes Somers’s innocent explanation for his trade in
STTX does not by itself justify summary judgment. See Roszak, 495 F. Supp. 2d at 887−88;
Ginsburg, 362 F.3d at 1301. “Innocent explanations offered by [] defendants are limited by the
inferences that must be drawn against them on their motions for summary judgment.” SEC v.
Van Wagner, 97 C 6826, 1999 WL 691836, at *4 (N.D. Ill. Aug. 25, 1999). The existence of
more than one plausible theory of fact is an issue for the jury to resolve.

The Court will not

credit one plausible version of the facts over another by making credibility determinations. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
Stitt consented to judgment without admitting fault. Still, circumstantial evidence in the
record is sufficient to support an inference that Stitt both possessed material, nonpublic
information and passed it to Monroe. On Friday, February 23, either Goranson or Adams, both
of whom knew about the impending Mitsui acquisition, told Stitt to report to headquarters for a

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meeting on Monday, the next business day. Never before had Stitt been told about such a
meeting without learning its purpose. Immediately afterward, an unusually large flurry of phone
calls took place between Stitt and headquarters—a total of 19 calls over one business day.
During one of those calls, Stitt asked DuChane, who knew about the forthcoming acquisition,
what the purpose of the meeting was. Immediately after concluding one of his calls with
headquarters, Stitt purchased $40,000 worth of STTX stock. Stitt had not made any transactions
in his 401(k) account in the previous 17 months, and he had just taken out a $20,000 loan the
previous month. Cf. SEC v. Musella, 748 F. Supp. 1028, 1039 (S.D.N.Y. 1989) (defendant’s
unusually large trade supported an inference of insider trading).

That purchase increased his

position in company stock from 2% to 17%. Two days later, on Sunday, February 25, Stitt
called both his mother and Monroe, both of whom purchased STTX stock prior to the public
announcement of the acquisition.
Further evidence supports both the SEC’s claim that Stitt possessed material, nonpublic
information and that he passed it to Monroe.

Both Stitt and Monroe made inconsistent

statements to the SEC and the Financial Industry Regulatory Authority (FINRA), which can
evidence consciousness of guilt. See id. at 1040; Roszak, 495 F. Supp. 2d at 888. In addition,
Stitt’s Sunday conversation with Monroe lasted 14 minutes. Monroe admitted that Stitt and he
spoke about STTX and that Stitt told Monroe “he was on a hunch that there was a possibility of
Steel Technologies buying somebody or somebody buying them.” Monroe had previously
denied that he and Stitt discussed STTX at all.
Monroe’s subsequent actions provide additional circumstantial evidence that the
information passed from Stitt to Monroe was material. See SEC v. Binette, 679 F. Supp. 2d 153,
156 (D. Mass. 2010) (citing Tex. Gulf Sulphur Co., 401 F.2d 833, 851 (2d Cir. 1968) (“a major

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factor in determining whether [non-public information] was a material fact is the importance
attached . . . by those who knew about it.”) About ten minutes after speaking with Stitt on
Sunday, Monroe called Somers. The minute he hung up, Monroe called his financial advisor
Waldron to immediately open a new brokerage account to purchase STTX stock. He had never
before called his financial advisor on the weekend, and the two were not friends. Monroe spoke
to Waldron at 10:36a.m. on Monday, February 26, for 8 minutes, and Monroe called Stitt one
minute after his conversation with Waldron ended. That same day, Monroe’s financial advisor
made an unprecedented request that the normal account-opening procedures be waived so the
account could be opened immediately, and Monroe spent over 40% of his annual salary on a
$60,000 purchase of STTX.

Monroe described himself as an “infrequent trader” with no

investment strategy, and his purchase of STTX was his largest stock purchase ever.
From all of this evidence, a jury could reasonably infer that Stitt possessed material,
nonpublic information which he passed to Monroe. Similar circumstantial evidence has been
held sufficient to allow an inference of insider trading. See, e.g., Roszak, 495 F. Supp. 2d at 887
(tipper’s access to insider information, telephone contact with individuals who then called others,
and suspiciously timed trades by alleged tippees defeated defendant’s summary judgment
motion); Ginsburg, 362 F.3d at 1301 (calls from insider to father and brother and their
subsequent trades created tipper/tippee fact issue for jury); Warde, 151 F.3d at 47−48 (access to
insider information, telephone calls, and parallel trading was sufficient to support a jury finding
of tippee liability); Singer, 786 F. Supp. at 1166 (implausible reasons for suspiciously timed
trades among alleged tippers and tippees allowed for inference of insider trading); Van Wagner,
1999 WL 691836, at *3−4 (insider’s access to information and suspicious trading of his children
and friends precluded entry of summary judgment).

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Finally, Somers objects that the SEC has not identified the source of Stitt’s information,
nor has it demonstrated that the source received a personal benefit. However, the SEC need not
identify the exact person from whom Stitt learned inside information. It has satisfied its burden
by putting forth evidence of communications with potential sources of information along with
other evidence, such as timely and suspicious trading and contradictory explanations. See SEC v.
All Know Holdings, Ltd., 949 F. Supp. 2d 814, 818−19 (N.D. Ill. 2013). Further, since Stitt is the
alleged insider, the source of any alleged receipt of material inside information need not have
received a personal benefit. As described in the Court’s order on Defendants’ motion to dismiss,
the personal benefit requirement is satisfied as to Stitt due to his friendship with Monroe and as
to Monroe due to his friendship with Somers.
For these reasons, the SEC has presented enough evidence to support a finding that Stitt
possessed material, nonpublic information, which he passed to Monroe.
C.
Similarly, the SEC has produced enough circumstantial evidence to support an inference
that Monroe passed along material nonpublic information to Somers.
The circumstantial evidence is the following. Within 12 minutes of hanging up with Stitt
on Sunday, February 25, Monroe called Somers and had an 18-minute conversation. The same
minute he hung up the phone, Monroe called his financial advisor as described above. On
Monday, February 26, Monroe called Somers for ten minutes from 10:20-10:30a.m., a few hours
before Somers purchased STTX stock. Somers admitted to discussing STTX with Monroe
during their phone conversation. Monroe admitted that Stitt told him information that could be
characterized as information about a potential or forthcoming merger or acquisition at STTX,
and he further admitted to passing that information to Somers.

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Somers’s story has been

inconsistent insofar as his ability to recollect the details of his conversation with Monroe.
Finally, Somers has admitted that he interpreted Monroe’s comments to indicate that something
was going to impact STTX’s share price.
The SEC must also prove that Somers used this information to make his purchase of
STTX stock. Somers argues that he had traded in STTX before, 1.5 years prior to his February
2007 trade, and he used a limit order rather than more aggressive investment techniques in his
February 2007 purchase. While Somers contends that he purchased the stock based on his own
research into publicly available information, that is but one plausible explanation of the facts.
Another reasonable set of inferences points to insider trading. Somers’s purchase could fairly be
characterized as unusual for him, as he had not traded in his personal brokerage account for a
year prior to this purchase. In addition, the fact that Somers sold his General Electric stock that
he had held for more than a year during the same trade could be construed to have provided
funds for his purchase of STTX. Overall, Somers’s February 2007 purchase of STTX stock was
four times greater in terms of shares and 276% greater in terms of money than any of his prior
purchases of STTX stock. Finally, Somers sold his STTX stock within 8 days of purchasing it.
Of course, the jury could instead credit Somers’s presentation of the facts. The jury
could find that Monroe merely told Somers to take a look at STTX, Somers researched STTX,
and he then made a purchase based on his independent research. Again, the task of the Court is
not to credit one version of the facts over another. That Somers can point to weaknesses in the
SEC’s case or an alternative plausible explanation of the facts does not require entry of summary
judgment in his favor.
In his motion for summary judgment and reply, Somers relies heavily on five cases:
Garcia, Horn, All Know Holdings, Goldinger, and Truong. SEC v. Garcia, 10 CV 5268, 2011

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WL 6812680 (N.D. Ill. Dec. 28, 2011); S.E.C. v. Horn, No. 10-cv-955, 2010 WL 5370988 (N.D.
Ill. Dec. 16, 2010); SEC v. All Know Holdings, Ltd., 949 F. Supp. 2d 814 (N.D. Ill. 2013); SEC v.
Goldinger, 106 F.3d 409 (9th Cir. 1997); SEC v. Truong, 98 F. Supp. 2d 1086, 1098 (N.D. Cal.
2000).

His reliance on these cases is, unfortunately, misplaced, as each is potentially

distinguishable in a significant way from the current case.
Garcia and Horn both found that it was not enough to identify suspicious trading and ask
the jury to infer that it was the product of insider trading. Garcia, 2011 WL 6812680, at *15;
Horn, 2010 WL 5370988, at *7. In Garcia, the SEC could not permissibly simply “theorize[]
that [defendant] Sanchez was informed of some unidentified information related to the proposed
acquisition, at an unidentified time, by an unidentified insider.” 2011 WL 6812680, at *15.
Similarly, Horn found that the SEC did not specify what confidential information the insider
possessed, and there was no corroborating trading by tippees. See 2010 WL 5370988, at *6-7.
Also similarly, for many of the All Know Holdings defendants, the SEC could not point to them
having had access to insider information or contact with an insider. See 949 F. Supp. 2d at 822.
By contrast, here the SEC has presented evidence, outlined more fully above, that Stitt
communicated with individuals who knew of a forthcoming acquisition, and he, Monroe, and
Somers had timely communications, closely followed by immediate, uncharacteristic, and
profitable trades in STTX. Further, Somers and Monroe admit to discussing STTX in their
telephone calls, with Monroe potentially admitting to passing on information about the
impending acquisition.
Goldinger, an unpublished disposition, found that the SEC’s evidence was too
speculative to support its case. See 106 F.3d at *3. In that case, Goldinger’s client, a Thrifty
shareholder, told Goldinger about a potential merger so that Goldinger could prepare to give her

15

financial advice later that day. Goldinger asked a colleague, Cohen, in the hallway if Cohen
knew anything about Thrifty. Cohen said no but became interested, researched Thrifty, found
heavy trading in the last week, and purchased Thrifty stock. Goldinger’s query to Cohen in the
hallway was not enough to support a prima facie misappropriation case. See id. Here, by
contrast, the information passed between Stitt, Monroe, and Somers could be far more
comprehensive, considering the deposition testimony outlined above.
Truong emphasized that, to prove tipper liability, the SEC must identify the information,
prove its materiality, and prove possession and use by the tipper. See Truong, 98 F. Supp. 2d at
1097.

The fact that a defendant worked in an open cubicle environment and therefore

theoretically had the opportunity to view sensitive documents was not enough to support an
inference of insider trading. See id. at 1098−99. Here, of course, there was far more than an
open-cubicle environment. In addition, while Truong said that suspicious trading alone was not
enough to infer tipper liability, it specifically noted that the timing of sale could support an
inference of tippee liability. See id. at 1097 (citing SEC v. Adler, 137 F.3d 1325, 1341 (11th Cir.
1998)).
VI.
Finally, Somers argues that he did not know nor should he have known that any
information Monroe gave to him was improperly obtained. The Court will analyze this element
in conjunction with the requirement of scienter, as the intersection of these topics appears to have
caused confusion.
To satisfy the scienter requirement, the SEC must show that either knew or should have
known there has been a breach of fiduciary duty. Dirks, 463 U.S. at 660; Warde, 151 F.3d at 47.
That is, the tippee must have reason to know that “confidential information was initially obtained

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and transmitted improperly. . . .” SEC v. Obus, 693 F.3d 276, 288 (2d Cir. 2012). In addition,
the SEC must show that Somers tippee intentionally or recklessly traded while in knowing
possession of that information. See id.
The circumstantial evidence in this case is sufficient to support such inferences. Somers
knew Stitt from childhood, knew Stitt worked for STTX, did not know anyone else who worked
for STTX, and other that Stitt, did not know of anyone else that Monroe knew at STTX. He
knew that an employee of a publicly traded company is not permitted to disclose information
about an acquisition before it is made public, and he knew that a tippee cannot trade based on
that information. Somers had been a securities industry professional for many years, and he
knew about the laws relating to insider trading. A tippee’s sophistication supports an inference
of knowledge that the information was obtained in violation of the tipper’s fiduciary duty. See
Musella, 578 F. Supp. at 442; SEC v. Blackman, 3:99-1072, 2000 WL 868770, at *8 (M.D. Tenn.
May 26, 2000). Finally, Somers anticipated that the information he received from Monroe
would affect STTX’s share price. While this evidence is certainly open to more than one
interpretation, it is sufficient to support an inference of the requisite knowledge of breach.
The evidence in this case also supports a finding that Somers intentionally or recklessly
traded while in knowing possession of material, nonpublic information. Somers’s trade in STTX
was intentional. There is no evidence that Somers had a pre-existing plan to purchase STTX
stock, nor that someone else had discretion to trade in Somers’s account. Therefore, if the SEC
proves that Somers used material, nonpublic information in his trade rather than, for example, his
own independent research, this requirement will be met. See Obus, 693 F.3d at 288−89.

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VII.
This is a close case at several levels. It will likely turn on the credibility of the parties’
witnesses at trial. Based on the record, and construing all reasonable inferences in favor of the
SEC, a jury could reasonably find all of the elements required to impose insider trading liability
on Somers as a tippee under Rule 10(b)-5, namely, that: (1) Stitt was an insider, (2) Stitt
possessed material nonpublic information about STTX, (3) Stitt tipped Monroe, who tipped
Somers, (4) Somers purchased STTX’s securities while possessing that information, (5) Somers
knew or should have known the information was provided in violation of a relationship of trust,
and (6) Stitt and Monroe benefitted from the disclosure. Because of the numerous outstanding
issues of fact involved in this case, summary judgment is not appropriate.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Plaintiff Somers’s motion for summary judgment is
DENIED.

March 21, 2014

cc:

Counsel of Record

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