Securities & Exchange Commission v. Mayhew
121 F.3d 44, 1997 U.S. App. LEXIS 19770 (1997)
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Rule of Law:
Information from a corporate insider that confirms widespread public rumors about a potential merger is considered nonpublic and material under Securities and Exchange Act § 14(e) and Rule 14e-3. Liability for trading on such information attaches if, at the time of the trade, substantial steps have been taken toward the tender offer, regardless of a significant time lag between the tip and the public announcement.
Facts:
- Jonathan Mayhew, a full-time securities trader, was neighbors with Dr. Edmund Piccolino.
- From July 1989, Rorer Group, Inc. was in confidential merger discussions with Rhone-Poulenc S.A. (RPSA), while the financial press speculated that Rorer was a potential takeover target.
- Ralph Thurman, a senior Rorer executive, knew the merger was highly probable and hired Piccolino for consulting work related to the pending transaction.
- On November 15, 1989, Thurman told Piccolino that Rorer was in 'serious talks' with a merger candidate and that 'activity was under way,' expecting the conversation to remain confidential.
- Shortly after, Piccolino relayed the 'essence' of his conversation with Thurman to Mayhew, confirming that a Rorer insider had stated the company was in serious merger discussions.
- After having sold all his Rorer stock at a loss on November 8, Mayhew began heavily repurchasing Rorer securities on November 16, ultimately investing over $430,000.
- On January 15, 1990, Rorer publicly announced the merger talks, causing its stock price to increase significantly.
- Mayhew sold his Rorer securities for a profit of $255,550.01.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil enforcement action against Jonathan Mayhew in the U.S. District Court for the District of Connecticut.
- The SEC alleged violations of §§ 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3.
- After a bench trial, the district court (a court of first instance) found Mayhew liable for violating § 14(e) and Rule 14e-3, but not the § 10(b) claims.
- The district court ordered Mayhew to disgorge his profits of $255,550.01 plus interest and entered a permanent injunction, but did not assess civil penalties under the Insider Trading Sanctions Act (ITSA).
- Mayhew (appellant) appealed the liability finding to the U.S. Court of Appeals for the Second Circuit, and the SEC (appellee) filed a cross-appeal regarding the district court's failure to award civil penalties.
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Issue:
Does a person violate § 14(e) and Rule 14e-3 by trading on information received indirectly from a corporate insider that confirms public speculation that the company is in serious merger negotiations, when substantial steps toward a tender offer have already been taken?
Opinions:
Majority - Walker, Circuit Judge
Yes, a person violates § 14(e) and Rule 14e-3 under these circumstances. The court reasoned that the information Mayhew received was nonpublic, material, and in connection with a tender offer. First, the information was nonpublic because the insider's confirmation went beyond public rumor, transforming speculation into a high probability; it changed the 'total mix' of information and was not yet impounded in the stock price. Second, the information was material because a reasonable investor would consider confirmation of serious merger talks from an insider important in making an investment decision, a fact underscored by Mayhew's immediate and substantial investment. Third, the tip was 'in connection with' a tender offer because substantial steps—such as signing confidentiality agreements and holding high-level meetings—had already been taken by Rorer and RPSA, and the two-month lag between the tip and the official announcement did not sever this connection.
Analysis:
This case significantly clarifies the definitions of 'nonpublic' and 'material' information in insider trading law, particularly under Rule 14e-3. The court's holding establishes that an insider's confirmation of existing market rumors provides the requisite certainty and specificity to make that information nonpublic and material. This precedent broadens the scope of liability for tippees, making it more difficult to defend against insider trading charges by claiming the information was already part of public speculation. Furthermore, the ruling reinforces a flexible, facts-and-circumstances approach to the 'in connection with' requirement, rejecting a rigid temporal test and focusing instead on whether 'substantial steps' toward a tender offer had commenced.
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