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SEC v. Cherif

United States Court of Appeals for the Seventh Circuit

December 13, 1990, Argued ; April 29, 1991, Decided

Nos. 90-1688, 90-1805


 [*405]  CUMMINGS, Circuit Judge

The Securities and Exchange Commission ("SEC") brought this civil enforcement action against defendant Danny O. Cherif, alleging that Cherif had violated the antifraud provisions of the federal securities laws, in particular Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78n(e) (1988), and Rules 10b-5 and 14e-3 thereunder. 17 C.F.R. §§ 240.10b-5 and 240.14e-3 (1990). Section 21A of the Exchange Act allows the court to enjoin further violations of the securities laws upon a showing that defendant  [*406]  did in fact violate the laws or threatens to do so.  [**2]  15 U.S.C. §§ 78u(d) and (e) (1988). The district court entered an injunction preventing Cherif from future trading and freezing his assets. It also froze two accounts of nominal defendant Khaled Sanchou, Cherif's cousin. It was alleged that Cherif used Sanchou's accounts to facilitate his illegal trades and that the profits from Cherif's trading remained in Sanchou's accounts. Cherif and Sanchou both appeal.


This case, which raises for this Circuit issues of first impression in securities law, had its genesis in a simple, cunning scheme. Danny Cherif was employed by the First National Bank of Chicago ("First Chicago") in its International Financial Institutions Department from October 1979 until December 1987, when his position was eliminated as the result of an internal reorganization. When Cherif's employment with First Chicago ended, he kept his magnetic identification card. The card could be used to enter the First Chicago building if the building's security system recognized the card's owner as a current employee. Cherif's card remained activated after December 1987 because of a memorandum signed purportedly by the Senior Vice-President of the International Financial Institutions [**3]  Department and sent to the bank's data-entry department. The memo, dated January 26, 1988, stated that Cherif continued to work part-time on a special project for his department and asked that his identification card remain activated. In fact, the Senior Vice-President of Cherif's department had not written or signed the memo, and Cherif was not working on a special project for First Chicago. Cherif admitted later to William Bronec, Jr., who had been a co-worker at First Chicago, that he had reactivated his identification card "by means of false representations."

Using his identification card, Cherif was able to enter the First Chicago building on nights and weekends for over a year after his employment ended. Unbeknown to Cherif, the building's security system automatically recorded his comings and goings.

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933 F.2d 403 *; 1991 U.S. App. LEXIS 7772 **; Fed. Sec. L. Rep. (CCH) P95,912; 114 A.L.R. Fed. 785

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. DANNY O. CHERIF, Defendant-Appellant, and KHALED SANCHOU, Nominal Defendant-Appellant

Subsequent History:  [**1]  As Modified June 7, 1991. Rehearing Denied June 7, 1991, Reported at: 1991 U.S. App. LEXIS 11439.

Prior History: Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 89 C 4204 -- Charles R. Norgle, Judge.


injunction, trading, district court, misappropriation, insider, funds, nominal defendant, preliminary injunction, fiduciary duty, violations, securities law, non-public, Finance, argues, shareholders, transactions, entrusted, subject matter jurisdiction, confidential information, attorney's fees, modify, card, confidential, non-party, parties, certiorari denied, Fifth Amendment, stock, yacht, confidence

Civil Procedure, Remedies, Injunctions, Preliminary & Temporary Injunctions, Grounds for Injunctions, Public Interest, Appeals, Standards of Review, Abuse of Discretion, Governments, Fiduciaries, Securities Law, Civil Liability, Fraudulent Interstate Transactions, General Overview, Torts, Intentional Torts, Breach of Fiduciary Duty, Securities Exchange Act of 1934 Actions, Insider Trading, Misappropriation Theory, Classical Theory, Class Actions, Derivative Actions, Blue Sky Laws, Offers & Sales, Implied Private Rights of Action, Deceptive & Manipulative Devices, Criminal Law & Procedure, Fraud, Securities Fraud, Elements, Labor & Employment Law, Employment Relationships, Fiduciary Responsibilities, Business & Corporate Law, Agency Relationships, Fiduciaries, Types, Employees & Employers, Courts, Common Law, Duties & Liabilities, Knowledge & Notice, Termination, Conditions & Terms, Trade Secrets & Unfair Competition, Trade Secrets, Banking Law, Criminal Offenses, Bank Fraud, Business Torts, Fraud & Misrepresentation, Authority to Act, Evidence, Inferences & Presumptions, Entry of Pleas, Guilty Pleas, Statements as Evidence, Hearsay, Mergers & Acquisitions Law, Takeovers & Tender Offers, Subject Matter Jurisdiction, Jurisdiction Over Actions, Parties, Joinder of Parties, Compulsory Joinder, Necessary Parties, Regulators, US Securities & Exchange Commission, Penalties & Unlawful Representations, Capacity of Parties, Permissive Joinder, Real Party in Interest, Indispensable Parties, Pleadings, Amendment of Pleadings, Responses, Defenses, Demurrers & Objections, Waiver & Preservation of Defenses