Securities And Exchange Commission v. Unifund Sal

Rule of Law:

When the SEC seeks a preliminary injunction, the required showing of 'likelihood of success' on the merits varies based on the onerousness of the relief sought, requiring a substantial showing for prohibitory injunctions against future violations, but a lesser showing for ancillary asset freeze orders to preserve funds for potential disgorgement.

Facts:

• In the summer of 1989, Rorer Group, Inc. (Rorer), a U.S. pharmaceutical company, began confidential merger negotiations with Rhone-Poulenc, S.A. (Rhone), a French corporation, which intensified in December 1989 and early January 1990.
• In mid-January 1990, prior to any public announcement of the merger discussions, unusually massive trading occurred in Rorer stock and options on the New York and American Stock Exchanges.
• On January 15, 1990, Rorer announced it was engaged in merger discussions with an unidentified company, causing its stock price to rise significantly, and an agreement in principle to merge with Rhone was announced three days later.
• Between January 4 and 12, 1990, Unifund SAL, a Lebanese investment company, purchased 40,000 Rorer shares and 810 Rorer call option contracts through Merrill Lynch's Beirut office, liquidating its position after the merger announcement for substantial profits.
• Between January 10 and 12, 1990, Tamanaco Saudi & Gulf Investment Group, a Panamanian investment company, purchased 600 Rorer call options through Compagnie Financiere Esperito Santo, a Swiss bank, making significant profits within a week of the merger announcement.
• Candid Peyer, a broker for Esperito Santo at Raymond Jones & Associates (a U.S. stockbroker), told SEC investigators he received a tip in mid-December 1989 from a close friend (an independent money manager in Geneva) to buy Rorer options, with the friend indicating the information was 'inside information' concerning a takeover.
• Unifund's principal, Ralph Audi, has familial and financial ties to Bank Audi, a Lebanese bank, and its Swiss affiliate, Bank Audi Suisse, which also purchased Rorer call options through Raymond Jones prior to the merger announcement.
• Ralph Audi’s attorney, Farid El Khoury, shares a surname with Amer Khoury, a Rhone executive responsible for promotion in the Near and Middle East, which the District Court noted as a 'potential connection' supporting an inference of insider access.

Procedural Posture:

• On January 17, 1990, the SEC filed a lawsuit against Unifund and other purchasers of Rorer stock in the District Court for the Southern District of New York and obtained a temporary restraining order (TRO).
• On January 30, 1990, at a hearing on the motion for a preliminary injunction, all defendants except Tamanaco agreed to a ten-day extension of the TRO; Tamanaco identified itself as a purchaser and insisted on proceeding.
• On February 2, 1990, the District Court (Shirley Wohl Kram, Judge) reserved decision as to Tamanaco and issued an order extending the TRO against all defendants until February 14.
• On February 9, 1990, the SEC renewed its request for a preliminary injunction and sought a hearing for February 13.
• On February 13, 1990, a hearing was held where the SEC presented evidence concerning Tamanaco; Tamanaco objected to expanding the record beyond the January 30 hearing but declined to offer its own evidence.
• On February 14, 1990, the District Court granted a preliminary injunction against Tamanaco.
• On March 1, 1990, following further hearings, the District Court entered a similar injunction against Unifund.
• On March 2, 1990, Judge Kram issued an opinion detailing the basis for the injunctions, finding a 'strong prima facie case' of violations and a likelihood of future violations.
• Unifund and Tamanaco appealed the preliminary injunction orders to the United States Court of Appeals for the Second Circuit.