July 1, 2008
9th Circuit Decides Misappropriation Case in Favor of SEC
In an important case on the scope of the misappropriation theory of inside trading under Rule 10b-5, the 9th Circuit held that a director of a corporation could be held liable when he purchased shares in another corporation because of information that he learned about that corporation in his capacity as director of the first corporation, even though the SEC did not establish that the director's corporation had promised the other corporation to keep the information confidential. Talbot sat on the board of Fidelity, which owned a 10% interest in Lending Tree. At a Fidelity board meeting Talbot learned that Lending Tree was going to be acquired (or might be acquired) by a third party at a very attractive price. Two days later, Talbot began purchasing Lending Tree shares, which he subsequently resold at a profit when a Lending Tree acquisition was announced.
The lower court granted summary judgement for defendant, because it interpreted the misappropriation theory as requiring a duty of confidentiality between Lending Tree and Fidelity as well as between Fidelity and Talbot. In contrast, the SEC agreed with the SEC that the misappropriation theory focused on the duty that Talbot owed to Fidelity to keep the information confidential and his secret violation of that duty. As a member of Fidelity's board of directors, Talbot was in a relationship of trust and confidence with Fidelity and could not use the information for his own personal benefit. The 9th Circuit's opinion relies heavily on Professor Barbara Aldave's influential Hofstra Law Review article that the Supreme Court also cited in the O'Hagan case.
However, the 9th Circuit did not agree with the SEC that the information about Lending Tree's acquisition was material as a matter of law and instead agreed with the district court that its materiality presented a genuine issue of material fact, since there was evidence that the acquisition talk was just a rumor. SEC v. Talbot (9th Cir. June 19, 2008).
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