Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, July 31, 2015

Evidence failed to show knowledge of benefit to tipper

By Rodney F. Tonkovic, J.D.

Finding no evidence showing that a tippee knew that the original tipper received any personal benefit from disclosing confidential information, the district court sitting in Manhattan dismissed an action alleging insider trading. The plaintiff claimed that the defendants traded in the securities of Sigma Design, Inc. while in possession of Sigma's material nonpublic information, but the court concluded that there was no genuine issue of material fact that the tippee knew that the information was disclosed in breach of a fiduciary duty (Gordon v. Sonar Capital Management LLC, July 30, 2015, Rakoff, J.)

Background. Plaintiff Sidney Gordon alleged that a former managing director of Sonar Capital Management obtained material, nonpublic information about Sigma's advance quarterly revenue figures from a tipper. The tipper, a consultant named Tai Nguyen, in turn obtained this information from a relative who worked at Sigma. Freeman then shared the information with Sonar CEO Neil Druker, who caused the Sonar Funds to trade on it.

Judge Rakoff, citing U.S. v. Newman, noted that in the Second Circuit, a remote tippee must know that the original tipper "disclosed market-sensitive information in breach of a fiduciary duty and received some personal benefit from the disclosure." Sonar argued that Gordon had insufficient evidence that the defendants knew, or should have known, that the allegedly material nonpublic information about Sigma was disclosed in breach of a fiduciary duty. Specifically, Sonar asserted that there was no evidence about the source of Nguyen's information or that there was any benefit; Freeman testified that he merely "guessed" who Nguyen's contact at Sigma was and had "no idea" how the information was obtained. Additionally, while Nguyen was convicted of insider trading based on information obtained from his sister, who worked for a company called Abaxis, he was never charged with illegal activity related to Sigma.

The court denied class certification in this case in March 2015. Summary judgment in favor of Sonar was entered on July 23, 2015, and this order sets forth the reasoning behind that ruling and enters final judgment dismissing the complaint.

Collateral estoppel. Gordon first argued that Freeman's guilty plea in his criminal insider trading case established liability via collateral estoppel. There, the court found that Freeman traded in the securities of numerous companies on the basis of tips from at least eight people. Judge Rakoff, however, was unable to conclude that the issues in both proceedings were identical or that the issue litigated in the criminal action was necessary to support a valid and final judgment on the merits. The judge explained that the criminal information to which Freeman pleaded guilty set forth only general allegations that lacked sufficient detail to determine whether any of the relevant conduct pertained to Sigma.

No known benefit. Next, Gordon maintained that a reasonable jury could find that Freeman knew or should have known of the benefit received by Nguyen's relative. According to Gordon, there was sufficient evidence to infer that Nguyen's first cousin's son worked for Sigma and was the source of the confidential revenue figures. While Gordon conceded that there was no evidence that Freeman knew the source's identity, it was likely that he was aware that it came from a source inside Sigma.

In the Second Circuit, however, even if the confidential information was sufficiently detailed to allow an inference that the tippee knew it came from an insider, this would not permit an inference as to the source's motive. While Freeman testified that he knew that Nguyen obtained information about Abaxis from his sister, it was not permissible to build "inference upon inference" and infer that Freeman knew that it was Nguyen's "business model" to obtain inside information from relatives. Secondly, Freeman testified that he "guessed" that the source was a relative, but this was no more than "idle speculation," the court said.

The court accordingly found no genuine issue of material fact as to Freeman's (or any defendants') knowledge that the allegedly material nonpublic information was disclosed to Nguyen in exchange for a benefit. Additionally, because Gordon could not prove the Sonar defendants' liability, his claims for fraudulent transfer and unjust enrichment under Massachusetts state law against various investors in the Sonar Funds must also fail.

You heard it here first! Note: yesterday, Securities Regulation Daily covered the Practising Law Institute’s program on insider trading. While discussing the impact of Newman, Judge Rakoff noted his filing of the dismissal of this action.

The case is No. 11-cv-9665.

Attorneys: Brian C. Kerr (Brower Piven, A Professional Corporation) by Sidney Gordon. Mark Joseph Hyland (Seward & Kissel LLP) for Sonar Capital Management LLC.

Companies: Sonar Capital Management LLC

MainStory: TopStory FraudManipulation NewYorkNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.