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SEC v. Rorech - 720 F. Supp. 2d 367 (S.D.N.Y. 2010)

Rule:

In the context of the misappropriation theory of insider trading, the SEC must prove that the insider misappropriated material nonpublic information in breach of a fiduciary duty, and that the insider acted with scienter. To establish liability as to an alleged tippee, the SEC must first prove that the insider is liable, and that the tippee knew that the insider provided him with material nonpublic information in breach of a fiduciary duty, and that the tippee therefore purchased securities. The SEC bears the burden of proof and must prove every element of its claim by a preponderance of the evidence. 

Facts:

Plaintiff Securities and Exchange Commission (SEC) filed a complaint alleging that defendants, a high-yield bond salesperson and a portfolio manager for a hedge fund, engaged in insider trading in credit-default swaps (CDSs) in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and 17 C.F.R. § 240.10b-5. The SEC brought the action under the misappropriation theory of insider trading. The CDSs were subject to § 10(b)'s antifraud provisions. Despite the SEC's allegations of the information passed by the salesperson to the manager during two cellular phone calls, there was no evidence of what was actually said on the calls.

Issue:

Were the defendants engaged in Insider Trading in credit-dafault swaps (CDSs)?

Answer:

No.

Conclusion:

The court found that ample evidence undercut the SEC's theory that defendants engaged in insider trading. The SEC set forth no evidence that the salesperson either received or shared with the manager any allegedly confidential information concerning his employer's recommendation. Any information the salesperson shared with the manager could not have been considered material because any information the salesperson possessed about the employer's alleged intention to recommend a holding company issuance was based on information in the market and was completely speculative. The information the salesperson could have shared with the manager was not confidential and the salesperson did not breach any duty to the employer. The SEC had not established that there was any deception, and the evidence showed the salesperson believed his conduct was entirely appropriate. The SEC failed to establish the necessary elements of its claim against defendants.

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