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LITIGATION AND ENFORCEMENT

FRAUD AND MANIPULATION-ND Ill: Allegations Concerning Transmission of Confidential Real Estate Information Sufficient to Allege Insider Trading

By Amy Leisinger, J.D.

The SEC's allegations concerning two individuals' insider-trading activities survived motions for summary judgment. In their motions for summary judgment, the defendants, Ralph J. Pirtle and Morando Berrettini, argued that the Commission did not adequately allege that the information exchanged between them constituted material, nonpublic information or that they acted with the requisite degree of scienter. However, the court determined, the defendants failed to demonstrate a lack of genuine issues of material fact (SEC v. Berrettini, Nov. 15, 2012, Dow, R.).

In 2005 and 2006, Pirtle was assigned to conduct due diligence analyzing how real estate issues should factor into acquisition decisions by his employer, Royal Philips, specifically concerning three medical services companies: Lifeline, Invacare, and Intermagnetics. To assist in his assignment, Pirtle contacted Berrettini to request general information about "market lease rates and market values" in certain geographic areas, which corresponded to the areas in which the companies were located. Familiar with Royal Philips' interest in medical services companies from reading periodicals, Berrettini researched publicly traded medical services companies in the geographic areas, which turned up the three companies. Following the conclusion of research for Pirtle and his additional research, Berrettini made well-timed trades in Lifeline, Invacare, and Intermagnetics and turned a substantial profit when Royal Philips acquired two of those companies.

According to the SEC, Royal Philips repeatedly told members of the due diligence team that information about potential acquisitions was confidential and that, if it became necessary to disclose confidential information, permission from other Royal Philips officials must be obtained. Pirtle did not get permission to share information with Berrettini. The SEC also alleged, and the defendants did not dispute, the Berrettini paid Pirtle more than $200,000 during the periods preceding and following the exchange of information in the due diligence process. In its complaint, the SEC argued that the defendants' conduct amounts to insider trading because Pirtle misappropriated information from his employer and tipped Berrettini, who traded on the tips. In support of its claim, the SEC argued that Berrettini's trades were not merely "educated guesses" and that Berrettini is admittedly not a sophisticated investor; the simpler explanation, according to the SEC, is that Pirtle tipped him, motivated by the above-mentioned alleged loans.

The defendants moved for summary judgment, insisting that Pirtle gave Berrettini only the information necessary to conduct real estate research and that Pirtle was just doing his job, which frequently involved relying on outside vendors. According to the motion, Berrettini then combined legitimate real estate research with public information about Royal Philips' interest in acquiring medical services companies, which gave him a "hunch" that Royal Philips was likely to acquire the companies. The defendants also argued that Berrettini's payments to Pirtle were legitimate loans, which Pirtle began repaying on time when the notes came due. The defendants emphasized that the payments both pre- and post-date the alleged illicit tips, which they argue shows a lack of a quid pro quo.

Exchange Act Rule 10b-5 makes it unlawful for any person to engage in any act or practice that operates as a fraud or deceit upon any person, and under the rule, a person is liable for insider trading when he obtains material, nonpublic information and then misappropriates that information with scienter, in breach of a relationship of trust, to make "secret profits." The court noted that summary judgment is proper where there is no genuine issue as to any material fact and that, in making this determination, it must construe facts and draw all reasonable inferences in the light most favorable to the nonmoving party. The party seeking summary judgment has the burden of establishing the lack of any genuine issue of material fact.

Pirtle conceded that he had a relationship of trust with his employer but argued that the SEC failed to sufficiently alleged breach of a duty, benefit, or scienter. He explained that his decision to use Berrettini as a consultant for due diligence was consistent with his usual business practices and that he only gave Berrettini basic geographic parameters needed to complete each assignment. However, the court noted, a reasonable jury could conclude that Pirtle never asked for the required permission to have Berrettini assist in the project and in doing so breached a duty to his employer. Moreover, the court continued, the SEC presented circumstantial evidence sufficient to establish an issue of material fact as to whether Pirtle shared material, nonpublic information with Berrettini, as the particular geographical areas of interest were confidential and that Berrettini, at least in part, found this information useful. Moreover, the court found, the SEC also alleged an issue of fact as to a "benefit" obtained in relation to the alleged tip by citing the existence of the loans between the defendants; a reasonable jury could conclude that inside information was given in exchange for loans.

The court also rejected the defendants' arguments that the SEC failed to adequately allege scienter. Pirtle conceded that he intentionally gave Berrettini at least some information that came from his participation on the due diligence teams, the court found, and "[i]t is a short step to the conclusion that Pirtle did so (at least) recklessly." The court also rejected Berrettini's argument that he used the information without the requisite degree of scienter on the basis of his own testimony is that without information from Pirtle, he could not have developed his "hunch" concerning the stock. Moreover, if Berrettini actually knew that he could not act on a direct tip about acquisition targets, as he admitted, a reasonable jury could conclude that he also knew or should have known that he could not act on a subtly disclosed tip, the court concluded.

This is Case No. 10-cv-01614.

FraudManipulation: IlllinoisNews: MegersAcquisitions

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