Gordon v. Sonar Capital Management LLC et al
Filing
205
OPINION AND ORDER: For the foregoing reasons, the Court, by Order dated July 23, 2015, granted the Sonar Defendants' motion for summary judgment dismissing the Third Amended Complaint. In addition, because that ruling forecloses plaintiff' s fraudulent transfer and unjust enrichment claims, the Court now dismisses plaintiff's claims against the Investor Defendants as well. Accordingly, the Clerk of the Court is directed to enter final judgment dismissing the Third Amended Complaint in its entirety, with prejudice, and to close the case. (As further set forth in this Opinion and Order.) (Signed by Judge Jed S. Rakoff on 7/30/2015) (tro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------x
FILED
SIDNEY GORDON,
Plaintiff,
ll-cv-9665 (JSR)
- v OPINION AND ORDER
SONAR CAPITAL MANAGEMENT LLC,
et al.,
Defendants.
-------------------------------------x
JED S. RAKOFF, U.S.D.J.
Plaintiff Sidney Gordon 1 brings this suit against defendants
Sonar Capital Management ("Sonar"), the hedge funds for which
Sonar served as investment adviser (Sonar Partners, LP, Sonar
Institutional Fund, LP, and Sonar Overseas Fund, Ltd.
(collectively, the "Sonar Funds")), and former Sonar President
and CEO Neil Druker. 2 Plaintiff alleges that the Sonar Defendants
traded in securities issued by Sigma Designs, Inc.
("Sigma")
while in possession of Sigma's material nonpublic information,
in violation of the federal securities laws.
Co-lead plaintiff Jeffrey Tauber reached a separate settlement
with the Sonar Defendants. ECF No. 198.
1
2
Druker, Sonar, and the Sonar Funds are referred to collectively
as the "Sonar Defendants." Plaintiffs have also named as
defendants various investors in the Sonar Funds (the "Investor
Defendants"). The Court bifurcated proceedings in this case,
with trial against the Sonar Defendants to proceed first.
1
The Sonar Defendants moved for summary judgment on the
ground, inter alia, that plaintiff had insufficient evidence
that the Sonar Defendants knew or should have known that the
allegedly material nonpublic information about Sigma was
disclosed in breach of a fiduciary duty. The Court, by "bottom
line" Order dated July 23, 2015, granted their motion on that
ground. This Opinion and Order sets forth the reasons for that
ruling and, as a consequence (as explained below) , directs the
entry of final judgment dismissing the Third Amended Complaint
in its entirety.
The nature of plaintiff's allegations and the procedural
history of this action are set forth in the Court's previous
opinions in this case, familiarity with which is here presumed.
See Gordon v. Sonar Capital Mgmt. LLC, No. 11-CV-9665, 2015 WL
1283636 (S.D.N.Y. Mar. 19, 2015); Gordon v. Sonar Capital Mgmt.
LLC, No. 11-CV-9665, 2014 WL 3900560 (S.D.N.Y. Aug. 1, 2014)
i
Gordon v. Sonar Capital Mgmt. LLC, 962 F. Supp. 2d 525 (S.D.N.Y.
2013); Gordon v. Sonar Capital Mgmt. LLC, No. 11-CV-9665, 2012
WL 1193844 (S.D.N.Y. Apr. 9, 2012). In brief, plaintiff alleges
that, from 2006 to 2008, former Sonar Managing Director Noah
Freeman obtained nonpublic information regarding Sigma's advance
quarterly revenue figures from a consultant named Tai Nguyen,
who in turn obtained that information from a relative who worked
at Sigma (the "Disloyal Sigma Employee"). Plaintiff further
2
alleges that Freeman then shared that information with Druker,
who caused the Sonar Funds to trade on it.
A court may grant summary judgment only "if 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). In reviewing a motion for summary judgment,
the court must "resolve all ambiguities and draw all factual
inferences in favor of the nonmovant." Robinson v. Concentra
Health Servs., Inc., 781 F.3d 42, 44
(2d Cir. 2015)
(citation
and internal quotation marks omitted) .
Under the law of this Circuit, a remote tippee, in order to
be held liable for securities fraud, must know that the original
tipper disclosed market-sensitive information in breach of a
fiduciary duty and received some personal benefit from the
disclosure. See United States v. Newman, 773 F.3d 438, 450
(2d
Cir. 2014); United States v. Whitman, 904 F. Supp. 2d 363, 371
(S.D.N.Y. 2012), as corrected (Nov. 19, 2012), aff'd, 555 F.
App'x 98
(2d Cir. 2014). In a civil case such as this one, a
plaintiff may satisfy the latter part of this requirement by
proving that the defendant "knew or had reason to know" of the
benefit to the tipper. S.E.C. v. Obus, 693 F.3d 276, 288 & n.2
(2d Cir. 2012); S.E.C. v. Jafar, No. 13-CV-4645, 2015 WL
3604228, at *4 & n.2
(S.D.N.Y. June 8, 2015). Moreover, the
3
benefit may consist of giving a gift to a relative. Dirks v.
S,E,C,
I
1GJ
u.s,
G16, 661 (l;i6J)'
Defendants argue that plaintiff has no evidence that
Nguyen's information came from a Disloyal Sigma Employee, no
evidence of who any such person might have been (much less that
he or she was Nguyen's relative), and no evidence that any
person received any benefit from the disclosure of the
information. They rely on Freeman's deposition testimony, in
which he stated that Nguyen never told him who his contact at
Sigma was, or even that he had such a contact, see Affidavit of
Mark J. Hyland dated February 27, 2015 ("Hyland Aff.") Ex. 2,
53; that he merely "surmised" that Nguyen's information came
from a single contact and that he "guessed" that that contact
worked at Sigma, id. at 320-24; that, regarding Nguyen's contact
at Sigma, he "never knew who he was or what he did," id. at 51;
that he did not know whether Nguyen had a relative who worked at
Sigma, id. at 196; that he was "unaware" of any benefit received
by any Sigma insider, id. at 51-52; and that he had "no idea"
whether Nguyen obtained the Sigma information in an improper
manner, id. at 214-15.
Defendants further argue that the only evidence in the
record is contrary to the suggestion that the information was
improperly disclosed. Although Nguyen was convicted of insider
trading based on his trading on and sale to Sonar of inside
4
information regarding a company called Abaxis
th~t
Nguyen
employee
o~t~ined
trom
hi~ ~i~ter,
~
information
Thanh Ha Bao, an Abaxia
he was never charged with any illegal activity
relating to Sigma. See Hyland Aff. Ex. 4, at 6-7. Moreover, in
connection with his sentencing on that charge, Nguyen, through
counsel, denied having procured illegal tips from any company
other than Abaxis. Id. at 7; Hyland Aff. Ex. 5, at 9.
Plaintiff makes two arguments in an effort to rebut
defendant's showing.
First, plaintiff argues that Freeman's guilty plea in his
criminal insider trading case establishes defendants' liability
via the doctrine of collateral estoppel. That doctrine holds
that "once an issue is actually and necessarily determined by a
court of competent jurisdiction, that determination is
conclusive in subsequent suits based on a different cause of
action involving a party to the prior litigation." Montana v.
United States, 440 U.S. 147, 153
(1979). As a general matter, a
criminal conviction can have preclusive effect in a subsequent
civil proceeding relating to the same issues. See United States
v. Podell, 572 F.2d 31, 35 (2d Cir.1978).
In order to apply offensive collateral estoppel on the
basis of a prior criminal proceeding, a court must find that:
"' (1) the issues in both proceedings are identical,
(2)
issue in the prior proceeding was actually litigated and
5
the
actually decided,
litig~te
(3)
there was full and fair opportunity to
in the prior proceeding,
~nd
(4) the issue previously
litigated was necessary to support a valid and final judgment on
the merits.'" In re Adelphia Commc'ns Corp., No. 03-MD-1529,
2006 WL 2463355, at *3 (S.D.N.Y. Aug. 23, 2006)
(quoting United
States v. Hussein, 178 F.3d 125, 129 (2d Cir.1999)). Trial
courts have "broad discretion" in applying offensive collateral
estoppel and should decline to do so where it "would be unfair
to a defendant." S.E.C. v. Mattera, No. ll-cv-8323, 2013 WL
6485949, at *7 (S.D.N.Y. Dec. 9, 2013)
(quoting Parklane Hosiery
Co. v. Shore, 439 U.S. 322, 331 (1979))
In this case, the relevant background is as follows. On
February 7, 2011, Freeman was charged with (1) conspiracy to
commit securities fraud and wire fraud, and (2) securities
fraud. See Information, United States v. Freeman, ll-CR-116, ECF
Dkt. No. 1 (S.D.N.Y. Feb. 7, 2011)
(the "Information"). The
Information described an insider trading conspiracy pursuant to
which Freeman and others "obtained material, nonpublic
information ('Inside Information')
from certain co-conspirators
... who worked at publicly traded companies or hedge funds,
for
the purpose of executing profitable trades on the basis of the
Inside Information." Id. '
3. It further charged that Freeman
"obtained Inside Information from independent research
consultants who had obtained Inside Information from employees
6
-----~-------------------
at public companies," id.
~
4, and that the Inside Information
had been "di5clo5ed or mi5appropriated in violation ot; (i)
fiduciary and other duties ... [and]
confidentiality ... " Id.
~
(ii) expectations of
5. The Information charged that the
conspiracy occurred "[alt various times from in or about 2006
through in or about 2010." Id.
~~
7-8.
The Information further charged that one of the overt acts
in furtherance of the conspiracy was the following:
On or about October 11, 2006, Hedge Fund A [Sonar]
purchased over 600,000 shares of a technology company
that trades over the NASDAQ ("Technology Company A")
[Sigma] based on Inside Information received from CC-2
[Tai Nguyen] .
Id.
~
11. It charged that Freeman "commit[ed] securities fraud,"
including by "caus [ing] Hedge Fund A [Sonar] ... to execute
securities transactions based in part on Inside Information
obtained about publicly traded companies." Id.
~
13.
Also on February 7, 2011, Freeman pled guilty to both
counts charged in the Information. In his allocution, he
admitted that:
In 2005 through 2010 I worked at two hedge funds. While
I was there, on several occasions I received information
from insiders at various companies. I caused those
insiders
to be paid for
their
information.
The
information was often detailed financial information
including revenues and, on some occasions, gross margins
and earnings per share that I understood constituted
confidential information of the companies and was
information it
would not want disseminated. The
insiders were often supplied by network firms ... I often
purchased or sold securities or recommended that hedge
7
funds at which I worked make such purchases or sales
based at least, in part, on the inside information I
received.
United States v. Freeman, No. ll-CR-116 (S.D.N.Y.), transcript
dated Feb. 7, 2011, at 17-18.
Plaintiff argues that, if Freeman were still a defendant in
this civil case, his guilty plea would estop him from contesting
his own liability for securities fraud. Because Freeman was a
Managing Director of Sonar at the relevant times, plaintiff
argues, his intent is imputed to Sonar, thereby establishing
Sonar's liability.
However, on the basis of the above, the Court is unable to
conclude either that that "the issues in both proceedings are
identical" or that "the issue previously litigated was necessary
to support a valid and final judgment on the merits." This
determination depends on a comparison between the facts set
forth in the Indictment and those alleged in the civil
Complaint. Mattera, 2013 WL 6485949, at *8.
Here, the criminal Information to which Freeman pleaded
guilty set forth only general allegations that Freeman engaged
in insider trading during the period of about 2006 to 2010. With
one pertinent exception, it does not provide sufficient detail
for the Court to determine whether the conduct that Freeman
admitted pertained to Sigma. The same is true of his plea
allocution. See supra. Moreover, the letter submitted by the
8
Government at Freeman's sentencing pursuant to Section 5Kl.l of
the United
St~tes
Sentencing Guictelines
m~kes cle~r tn~t freem~n
traded in the securities of numerous companies on the basis of
tips from at least eight people. 3 Declaration of Richard H. Weiss
dated May 12, 2015
("Weiss Deel.") Ex. M. Thus, for the most
part, it is impossible to determine whether Freeman's plea was
based on the specific trades alleged here.
The exception is one of the three overt acts charged, which
refers to a trade that Sonar made on October 11, 2006. See
Information
~
11. Although the Third Amended Complaint ("TAC")
does allege, as background, that Sonar purchased Sigma shares on
October 11, 2006, TAC
~
80, plaintiffs do not assert any claims
based on that trade. See TAC
~~
146-47 (defining "Seller Class"
as persons who sold shares of Sigma on certain dates between
July 13, 2007 and August 29, 2007, and between September 11,
2007 and November 28, 2007, and the "Buyer Class" as persons who
In fact, the Government's 5Kl.l letter stated that the parties
agreed not to include the dollar amounts attributable to
Freeman's trades in Sigma and Abaxis for the purpose of
calculating Freeman's Sentencing Guidelines range or criminal
forfeiture amount. Weiss Deel. Ex. M, at 4. The Government
explained: "Freeman accepted responsibility for engaging in
insider trading described here with respect to the trades in
Sigma Design and Abaxis. In the course of this conduct, however,
Freeman was unaware whether the tippers, who he believed were
Nguyen's relatives, received any benefit from Nguyen." When
asked about the latter sentence at deposition, Freeman clarified
that he knew that Nguyen's source at Abaxis was Nguyen's sister,
but he was not aware of the identity of Nguyen's source at
Sigma. Hyland Aff. Ex. 2, at 52-53.
3
9
sold shares of Sigma on certain dates between December 20, 2007
~nd M~r~n
12 1 2006), rnerefore,
~t mo~t,
rreem~n'~
guilty
ple~
could estop defendants from denying liability for the October
11, 2006 trade, which is not relevant to plaintiff's claims. See
Podell, 572 F.2d at 36 ("The collateral estoppel effect of a
finding of guilt on a general conspiracy count is limited to the
essence of the conspiracy when it cannot be determined which
means were used to carry out the unlawful purpose of the
conspiracy.").
Second, plaintiff argues that the evidence in the record is
sufficient for a reasonable jury to find that Freeman knew or
should have known of the benefit received by the Disloyal Sigma
Employee. Regarding the identity of the Disloyal Sigma Employee,
plaintiff relies on a consensual recording that Freeman made in
January 2011, long after the conduct at issue in this case
concluded, as part of his cooperation with the U.S. Attorney's
Office. In that recording Nguyen stated that the "original Sigma
guy" was "a cousin of [his]." Declaration of Edward F. Haber
dated May 12, 2015 ("Haber Deel.") Ex. D. Asked at deposition
whether the Sigma source was a relative, Nguyen invoked his
Fifth Amendment privilege against self-incrimination. Weiss
Deel. Ex. Kat 85.
In fact, Nguyen's first cousin has a son named Phuong Vu.
Id. Ex. D at 16-17. Sigma's personnel files show that Phuong Vu
10
began working as a Staff Engineer at Sigma around April 2006,
reportinq to Tai Nguyen's brother,
H~o
Nguyen, and
wa~
employed
there until at least December 2009. Id. Ex. A. Plaintiff
contends that this evidence is a sufficient to infer that Phuong
Vu was the Disloyal Sigma Employee who disclosed Sigma's
confidential revenue figures to Tai Nguyen. 4
Plaintiff concedes that there is no evidence that Freeman
actually knew the identity of the Disloyal Sigma Employee or
that the Disloyal Sigma Employee received any benefit in
exchange for the inside information, urging instead that the
record evidence is sufficient to infer that Freeman should have
known these facts. Plaintiff further argues that Freeman knew
that the information he received from Nguyen was highly
accurate, that it always came in the same format, and that it
was of the type that companies usually keep confidential.
Plaintiff argues that these facts indicate that Freeman was
aware that the information likely originated from a source
inside Sigma.
It is true that the Second Circuit, in Newman, recognized
that "information about a firm's finances could certainly be
Plaintiff originally believed that the Disloyal Sigma Employee
was one of Tai Nguyen's brothers, Hao and Hien Nguyen, both of
whom worked at Sigma. However, having deposed both brothers,
plaintiff was unable to uncover any evidence that either of them
disclosed inside information to Tai Nguyen. See Affidavit of
Julia C. Spivack dated March 16, 2015 ("Spivack Aff.n) Exs. 1-2.
4
11
sufficiently detailed and proprietary to permit the inference
that the tippee knew that the information
~ame
trom
~n
inside
source." Newman, 773 F.3d at 455. However, the court further
observed that "even if detail and specificity could support an
inference as to the nature of the source, it cannot, without
more, permit an inference as to that source's improper motive
for disclosure." Id. Thus,
the evidence regarding the nature of
Nguyen's tips, even if it could support an inference that
Freeman knew that the information originated from inside Sigma,
is not a sufficient basis for a jury to conclude that he knew it
was disclosed in breach of a fiduciary duty.
For the latter proposition, plaintiff relies on two
assertions. First, Freeman testified that he knew that Nguyen
obtained inside information about Abaxis from his sister who was
employed there. Hyland Aff. Ex. 2, at 52-53. Plaintiff argues
that a jury could infer from this fact that Freeman knew that
Nguyen's business model was to procure inside information from
his relatives. Based on this, plaintiff argues, the jury could
further infer that Freeman should have known that Nguyen's
information about Sigma also came from a relative. That mental
state, plaintiff argues, supports the inference that Freeman
should have known that Nguyen's relative received some benefit
from disclosing the information to Nguyen. But this building of
12
inference upon inference, none of them more than speculative,
cannot meet plaintiff's
~urden,
5
The second assertion that plaintiff argues raises a triable
issue is that Freeman testified that, at some point, he
"guessed" that Nguyen's source at Sigma might be a relative:
Q.
Did you have any reason to think that Tai Nguyen's
source at Sigma was a relative of his?
A. At one point - I don't remember when - I remember
Neil and I looked on Bloomberg at the Sigma, like,
employee list and noticed that lots of guys - lots
of people in finance had the same last name, which
led us to guess that it was - that one of those might
be his contact.
Q. Same last name as Tai Nguyen.
A. Right. But a very common Vietnamese name in a company
full of Vietnamese people.
Weiss Deel. Ex. B at 325. Plaintiff argues that, on the basis of
this testimony, a jury could conclude that Freeman "had reason
to know" that the Sigma source was Nguyen's relative, which, as
stated, might be sufficient in a civil case. Cf. Obus,
at 288. However,
693 F.3d
Freeman's testimony amounts to no more than
idle speculation that one of the many Nguyens who worked at
5
Plaintiff's evidence that the Sigma source was in fact Nguyen's
cousin Phuong Vu is also highly speculative. Although Nguyen
told Freeman, years later, that the "original Sigma guy" was his
cousin, there is no evidence that he was referring to Phuong Vu.
Nor is there any evidence that Phuong Vu, a staff engineer, had
access to detailed financial data of the sort that Nguyen
provided to Freeman. To the contrary, the only evidence in the
record indicates that he did not. Specifically, Nguyen's brother
Hao Nguyen, who was Phuong Vu's manager, testified unequivocally
that he did not have access to financial data. Spivack Aff. Ex.
1, at 67, 160, 201.
13
Sigma could have been the inside source. Moreover, if Freeman
believed that one ot the Nguyens listed on Sigma's website wao
the source, then, by plaintiff's own account, he was wrong.
Plaintiff argues that the source was Phuong Vu, who worked not
"in finance" but in the engineering department. Accordingly, the
above-quoted testimony cannot support the inference that Freeman
knew or should have known that the Sigma source was Nguyen's
relative.
6
Accordingly, the Court finds that there is no genuine issue
of material fact as to Freeman's (and by extension, any of the
Sonar Defendants') knowledge that the allegedly material
nonpublic information was disclosed in exchange for any benefit.
As discussed above, proceedings against the Investor
Defendants have not yet begun and therefore the Investor
Defendants did not have occasion to join in the Sonar
Defendants' summary judgment motion. However, plaintiff's claims
against the Investor Defendants are predicated entirely on his
claims against the Sonar Defendants. Specifically, plaintiff
asserts two causes of action: fraudulent transfer in violation
Because there is insufficient evidence to infer that Freeman
knew the original tipper and tippee were relatives, the Court
does not address the question of whether, under Newman, that
knowledge, standing alone, would support an inference that
Freeman knew that the tipper received some benefit. Compare
Newman, 773 F.3d at 452 with United States v. Salman, No. 1410204, 2015 WL 4068903, at *6 (9th Cir. July 6, 2015).
6
14
of Sections 5 and 6 of Chapter 109A of the Massachusetts General
Laws, and unjust enrichment under Massachusetts state law. Both
of these causes of action require plaintiff to prove the Sonar
Defendants'
liability as an element of his claims against the
Investor Defendants. Specifically, plaintiff's fraudulent
transfer claim asserts that the transfers from the Sonar Funds
to the Investor Defendants were fraudulent because they failed
to account for the Sonar Defendants' liabilities to plaintiff
and the putative class.
TAC~~
182-91. Plaintiff's unjust
enrichment claim asserts that the Investor Defendants received
unlawful profits from insider trading.
TAC~~
193-98. Because
the Court has determined that plaintiff cannot prove the Sonar
Defendants' liability for insider trading, his claims against
the Investor Defendants must also fail.
For the foregoing reasons, the Court, by Order dated July
23, 2015, granted the Sonar Defendants' motion for summary
judgment dismissing the Third Amended Complaint. In addition,
because that ruling forecloses plaintiff's fraudulent transfer
and unjust enrichment claims, the Court now dismisses
plaintiff's claims against the Investor Defendants as well.
Accordingly, the Clerk of the Court is directed to enter final
judgment dismissing the Third Amended Complaint in its entirety,
with prejudice, and to close the case.
SO ORDERED.
15
Dated:
New York, NY
July30, 2015
DS. RAKF;
16
U.S.D.J.
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