Securities and Exchange Commission v. Dunn et al
Filing
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ORDER DENYING 52 Motion for Partial Summary Judgment. DENYING 54 Motion for Summary Judgment. The hearing set for 7/14/2011 is hereby VACATED. Plaintiffs 60 Motion in limine is GRANTED as to expert Charles R. Lundelius' opinions 1-3 and 8, and is DENIED as to opinions 4-7. Signed by Judge James C. Mahan on 6/30/2011. (Copies have been distributed pursuant to the NEF - SLR)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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SECURITIES AND EXCHANGE
COMMISSION,
2:09-CV-2213 JCM (LRL)
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Plaintiff,
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v.
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R. BROOKE DUNN and NICHOLAS
P. HOWEY,
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Defendants.
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ORDER
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Presently before the court is plaintiff U.S. Securities and Exchange Commission’s
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(hereinafter “SEC”) motion for partial summary judgment (doc. #52) to which defendant R. Brook
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Dunn has responded (doc. #56), and the SEC replied (doc. #59). Defendant Dunn has also moved
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for summary judgment (doc. #54), to which the plaintiff has responded (doc. #56), and the defendant
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has replied (doc. #61). Plaintiff has also filed a motion in limine to exclude testimony from the
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defendant’s expert (doc. # 60). Defendant has responded (doc. #65).
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Plaintiff SEC alleges that defendant Dunn, while he was a vice president at Shuffle Master,
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engaged in insider trading when he gave co-defendant Nicholas Howey confidential information
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regarding Shuffle Master’s impending negative announcement about its stock. Dunn gave Howey
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this information in exchange for tickets to the musical production Jersey Boys, which he and his wife
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planned to use on their anniversary trip. Howey, in turn, relied on this information and immediately
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James C. Mahan
U.S. District Judge
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sold all of his call options and virtually all of his stock in the company after weeks of heavy buying.
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Howey also bought 570 “put options”1 to cover his loss in case the stock price did decrease, which
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in fact occurred the next day when the public announcement was made. Consequently, on the day
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of the announcement, Howey sold all of his “put options” and gained a nearly $200,000 profit, which
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was abnormal for him (doc. #59).
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Based on the alleged events, the SEC asserts that defendants Dunn and Howey violated
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Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated
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thereunder, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5, as well as Section 17(a) of the Securities
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Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), by engaging in insider trading. The parties have
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filed competing motions for summary judgment on these claims.
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I.
Motions for Summary Judgment
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Summary judgment is appropriate when, viewing the facts in the light most favorable to the
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nonmoving party, there is no genuine issue of material fact, and the moving party is entitled to
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judgment as a matter of law. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir. 1996); FED . R. CIV .
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P. 56©. The moving party bears the burden of presenting authenticated evidence to demonstrate the
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absence of any genuine issue of material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323
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(1986); see Orr v. Bank of America, 285 F.3d 764 (9th Cir. 2002) (articulating the standard for
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authentication of evidence on a motion for summary judgment).
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When an insider, called a “tipper,” discloses material, nonpublic information to an outsider,
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called a “tippee,” the tippee has a duty to disclose material information or abstain from trading,
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which is “derivative” from that of the insider’s duty. Dirks v. SEC, 463 U.S. 646, 662 (1983). The
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elements of tipper/tippee insider trading are: (1) the tipper possessed material, nonpublic information
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regarding the issuer or a security; (2) the tipper disclosed the information to the tippee; (3) the tippee
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traded in the issuer’s securities while in possession of the information; (4) the tippee knew or should
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James C. Mahan
U.S. District Judge
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A call option is an agreement that gives an investor the right to buy a stock at a specified price within a
specific time period, while a put option is a similar agreement with a right to sell, rather than buy. A call option is
profitable when the underlying stock increases in price, whereas a put option is profitable when the underlying stock
decreases in price. See Doc. #52 at 6.
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have known that the information was disclosed in violation of a relationship of trust; and (5) the
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tipper benefitted by the disclosure to the tippee. Id. at 654–64.
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As a part of proving the elements of insider trading, §10(b) of the Securities Act of 1934 and
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Rule 10b-5, the SEC must prove that the tippee or insider acted with scienter. See Dirks, 463 U.S.
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at 674. Scienter is defined as an intent to deceive or defraud. Vucinich v. Paine, Webber, Jackson
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& Curtis, Inc., 739 F.2d 1434, 1435 (9th Cir. 1984). Scienter requires that the insider (or tippee, if
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the trader is not the insider) possess material, nonpublic information at the time of the trade, and that
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the material nonpublic information be used in a trade. SEC v. Ginsburg, 362 F.3d 1292, 1297 (11th
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Cir. 2004). Proof of knowledge of such information at the time of a trade gives rise to a strong
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inference of use. Id.
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An insider will be held liable under Rule 10b–5 for insider trading only where he fails to
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disclose material, nonpublic information before trading on it in order to make “secret profits.” Id.
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at 654. Furthermore, insider trading may be proven by direct or circumstantial evidence. See SEC
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v. Ginsburg, 362 F.3d 1292, 1298 (11th Cir. 2004); SEC v. Warde, 151 F.3d 42, 47–48 (2d Cir.
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1998). Insider trading in “suspicious amounts or at suspicious times” is probative of “bad faith and
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scienter.” In re Apple Computer Securities Litigation, 886 F.2d 1109, 1117 (9th Cir. 1989) (citation
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omitted).
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However, there is usually no automatic inference that an “insider is bailing out” independent
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of direct or circumstantial evidence: “when it is shown that an insider made a sudden sale of a
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significant portion of his holdings of his corporation's stock and that subsequently, material adverse
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information became public concerning the corporation which led to a significant drop in the price
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of the stock.” Freeman v. Decio, 584 F.2d 186, 197 n. 44 (7th Cir. 1978).
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Here, neither party can show that there is no genuine issue of material fact supporting its
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motion for summary judgment. The SEC alleges that because defendant Dunn was in dire need of
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Jersey Boys tickets for him and his wife, Dunn told defendant Howey, during a less than ninety-
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second phone call, about Shuffle Master’s impending announcement in exchange for tickets.
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Furthermore, the SEC alleges that Howey acted on this information when he decided to sell his call
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James C. Mahan
U.S. District Judge
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options and stock in the company three minutes later. Howey then sent Dunn tickets as a result of
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this information. However, neither the SEC nor Dunn can produce definitive evidence with regard
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to what was actually said during the ninety-second phone call to establish scienter or a lack thereof;
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instead, they merely rely on inferences.
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Defendant Dunn also argues that the alleged confidential information was not confidential
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because of Deutsche Bank’s report, which predicted the negative financial news. This report was
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issued nearly a week before Dunn’s conversation with Howey. Nonetheless, courts have usually held
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that these types of speculative reports are not as specific or certain as a tipper’s direct statements to
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a tippee. See Sec v. Mayhew, 121 F.3d 44, 50–51 (2d Cir. 1997); U.S. v. Mylett, 97 F.3d 663, 666
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(2d Cir. 1996) (suggesting that the tipper’s information to the tippee was substantially more specific
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than the Wall Street Journal’s speculative prediction).
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Whether Howey relied directly on what Dunn allegedly said, or instead on some other source
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when he made the trades, is also a matter of speculation. See Vucinich, 739 F.2d at 1435 (finding
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summary judgment generally inappropriate where mental state is at issue, unless no reasonable
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inference supports the adverse party’s claim) (citation omitted). Therefore, this court cannot say as
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a matter of law whether defendants Dunn and Howey committed these alleged offenses based upon
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the inferences derived from their telephone call. Instead, it should be up to the fact-finder to
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determine whether the alleged private information was discussed during the phone conversation and
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whether Howey acted upon this information when he made the trades a few minutes later.
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II.
Motion in Limine
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Also before the court is plaintiff SEC’s motion in limine (doc. #60) to exclude the entire
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testimony of defendant Dunn’s expert, Charles R. Lundelius, an accountant and a certified fraud
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analyst. The SEC alleges in its motion that opinions one through three and eight are not relevant
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because these opinions opine that it was not financially rational or logical for Dunn to tip Howey
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with material inside information in January 2007.
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Specifically, the SEC argues that it does not allege that Howey was provided with material
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inside information in January 2007. Instead, it is only concerned about the material information
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James C. Mahan
U.S. District Judge
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which was allegedly given in February of 2007. The SEC also alleges that these opinions are within
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the common sense of laypersons and therefore no expert is needed. See Elsayed Mukhtar v.
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California State University, Hayward, 299 F. 3d 1053, 1065 n.9 (9th Cir. 2002).
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Furthermore, the SEC alleges that opinions four, five, and seven should be excluded because
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Lundelius did not employ reliable principles and methodology to reach his conclusions. It also
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alleges that opinion six should be stricken because it is not relevant and is nothing more than an
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attempt to bolster and clarify Howey’s testimony.
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The court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993), held
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that under Federal Rule of Evidence 702, judges are assigned the “task of ensuring that an expert’s
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testimony both rests on a reliable foundation and is relevant to the task at hand.” Id. Further, the
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court held that “vigorous cross-examination, presentation of contrary evidence, and careful
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instruction on the burden of proof are the traditional and appropriate means of attacking shaky but
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admissible evidence.” Id. at 596; see Rock v. Arkansas, 483 U.S. 44 (1987).
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Here, the court agrees with the SEC in that opinions one through three and eight are not
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necessary and are hereby excluded. Lundelius’ testimony concerning “Project Blue Sky” and the
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January 2007 discussions are not relevant to the SEC’s claims against Dunn, because the SEC does
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not allege that Dunn made these material disclosures to Howey. However, with regard to opinions
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four through seven, the court is inclined to allow Lundelius’ testimony. Absent any clear evidence
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that Lundelius’ findings are unreliable or irrelevant, this court will not exclude these opinions. See
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Daubert, 509 U.S. at 580. The court reserves the ability to weigh the methods, conclusions, and
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expertise of the expert at the time of trial.
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Accordingly,
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IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that plaintiff SEC’s motion for
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summary judgment (doc. #52) is DENIED.
IT IS FURTHER ORDERED that defendant Dunn’s motion for summary judgment (doc.
#54) is DENIED.
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James C. Mahan
U.S. District Judge
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IT IS FURTHER ORDERED that the hearing set for July 14, 2011 is hereby VACATED.
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IT IS FURTHER ORDERED that plaintiff SEC’s motion in limine (doc. #60) is GRANTED
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as to expert Charles R. Lundelius’ opinions one through three and eight, and is DENIED as to
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opinions four through seven.
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DATED June 30, 2011.
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UNITED STATES DISTRICT JUDGE
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James C. Mahan
U.S. District Judge
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