Wednesday, May 3, 2006
An earlier post (here) discussed an insider trading case in New York in which the live-in boyfriend looked at the deal documents his girlfriend brought home from her office and bought shares in the client-company involved in an extraordinary transaction. A slightly different situation arose in an SEC civil insider trading case filed in San Francisco involving Marnie Sharpe, who got the news from a "close friend" and almost immediately tipped her father about it. As described in the SEC complaint (here), Sharpe received the information from an executive at biotech company Renovis, Inc., and "Sharpe and the executive, both divorced, met socially and exchanged email, phone calls and text messages." The executive and Sharpe had dinner at which he said the company expected to receive the results of a clinical trial on its most advanced drug on May 2. Shortly after the executive received information on May 2 that the results were positive, Sharpe called the executive and asked about the test results. After initially resisting her requests for information, he told her that the results were positive and warned her not to disclose the information. The executive then called her back to reiterate the confidentiality of the information and, when she asked if she or her family could trade, the executive said "of course not."
At this point, Sharpe's relationship with the executive probably hit the skids because she immediately called her father, who liquidated mutual funds in his brokerage account to raise cash, and Sharpe wire transferred $10,000 to her father's account. The father even asked the broker whether a company could trace who was buying its stock. On May 3, 2005, the father purchased over 7,000 Renovis shares, apparently not knowing that the best way to trade on such inside information is to purchase out-of-the-money call options on the company's shares. On May 4, Renovis announced the positive clinical test results, and the stock nearly doubled, generating a $42,000 profit. Sharpe and her father settled the SEC case by disgorging the profits and each paying a one-time penalty of $42,000.
The SEC's theory that Sharpe breached her fiduciary duty in tipping her father was the pattern of sharing confidential information in the relationship with the executive. As described in the complaint, "During their friendship, Sharpe and the Renovis executive had a history, pattern or practice of sharing confidential work and personal information. They each expected the other to keep such exchanges confidential and, until May 2005, did so. Because of their close personal relationship and history of sharing confidences, the Renovis executive trusted Sharpe and expected her to keep information about his work confidential." This is not the type of classic fiduciary relationship that is the basis for an insider trading case under Chiarella or O'Hagan, but it is consistent with the SEC's definition of the "Duty of Trust or Confidence in Misappropriation Insider Trading Cases" in Rule 10b-5-2(b)(2). Whether that definition, which goes further than most judicial decisions have in describing the contours of the type of duty that can trigger insider trading liability, would hold up to a judicial challenge is an open question. While this case might have presented a good vehicle to address the scope of the fiduciary duty arising from a personal relationship, the San Jose Mercury News quotes the attorney for Sharpe and her father (here) as stating "[i]t is unfortunate that it is so expensive for people to defend themselves against government charges like these." The cost of settling was probably less than litigating the case, especially if it went up on appeal. But then, if you can't trust your girlfriend, who can you trust these days. (ph)