Securities & Exchange Commission v. Spivak
2016 U.S. Dist. LEXIS 90248, 2016 WL 3774196, 194 F.Supp.3d 145 (2016)
Rule of Law:
Under the misappropriation theory of insider trading, the 'personal benefit' element for tipper liability is satisfied when an insider makes a gift of confidential information to a trading romantic partner or friend with the intent that the tippee trade on that information, without requiring proof of a direct pecuniary exchange.
Facts:
- Vlad Spivak and Shirmila Doddi met in early 2011 at a dancing club and developed a romantic relationship that lasted through the end of 2011, communicating on a near-daily basis.
- Doddi worked as a financial analyst at Wells Fargo Bank and had access to nonpublic information about client companies, understanding her duty to keep such information confidential.
- Spivak, a day trader, was aware of Doddi's access to confidential information and repeatedly asked her for such information from her work, telling her that insider trading was 'not a big deal' and rarely led to capture.
- Doddi initially rejected Spivak's requests for nonpublic information, telling him she was not supposed to disclose it.
- In September 2011, Doddi learned through her employment that American Dental Partners, Inc. (ADPI), a Wells Fargo client, was potentially involved in a merger and acquisition transaction.
- On October 13, 2011, Doddi received a 'HIGHLY CONFIDENTIAL' email confirming JLL Partners, Inc. had agreed to purchase ADPI for $20 per share, with a public announcement expected in early November.
- Between October 6 and October 9, Doddi informed Spivak that ADPI was 'potentially going to be involved in a business-combination transaction,' and less than an hour after receiving the confidential email on October 13, she sent Spivak a text message 'confirming that a transaction involving ADPI was going to take place.'
- Doddi provided this nonpublic information to Spivak with the intention that he use it to purchase ADPI stock, thereby conferring a gift upon her romantic partner.
- Between October 10 and November 1, Spivak purchased 17,100 shares of ADPI stock in his own accounts and 8,060 shares in his mother's account, ultimately realizing profits of $222,357 from selling the shares after ADPI publicly announced the merger agreement on November 7.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil enforcement complaint against Vlad Spivak and Shirmila Doddi in the United States District Court for the District of Massachusetts.
- The complaint alleged one count against each defendant for insider trading in violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
- On January 20, 2016, a consented-to judgment was entered against Doddi.
- Spivak filed two separate motions to dismiss the claim against him pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6), arguing, among other things, that the complaint failed to allege Doddi received a personal benefit for tipping him.
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Issue:
Does a tipper receive a sufficient 'personal benefit' under the misappropriation theory of insider trading when she gifts material nonpublic information to a trading romantic partner with the intent that the partner trade on it, absent proof of a pecuniary or similarly valuable exchange?
Opinions:
Majority - Saylor, United States District Judge
Yes, a tipper receives a sufficient personal benefit for insider trading liability under the misappropriation theory when she makes a gift of confidential information to a trading romantic partner with the intent that the partner trade on that information. The First Circuit's controlling precedent, based on the Supreme Court's decision in Dirks v. SEC, holds that a personal benefit exists 'when an insider makes a gift of confidential information to a trading relative or friend.' This 'benefit' to the tipper need not be 'specific or tangible,' and a gift to a friend or relative is sufficient, as established in SEC v. Sargent and SEC v. Rocklage. The court found that the SEC's complaint plausibly alleged that Doddi, in a nearly year-long romantic relationship with Spivak, intended to benefit him by gifting him the confidential ADPI acquisition information, which he subsequently used to trade. The court distinguished United States v. Newman, noting its significant factual differences, including more attenuated tipping chains and less close relationships between tippers and tippees, and clarified that even under Newman’s interpretation, a 'meaningfully close personal relationship' coupled with an 'intention to benefit' the tippee is sufficient. The court further found sufficient allegations that Spivak knew or should have known of Doddi's breach, given their direct relationship, his knowledge of her access to confidential information and duty of confidentiality, her initial refusals, and his explicit attempts to downplay insider trading risks, as well as the requisite scienter.
Analysis:
This case reinforces the First Circuit's broad interpretation of the 'personal benefit' requirement in insider trading cases under the gift theory, aligning with Dirks and later affirmed by the Supreme Court in Salman v. United States. It highlights the circuit split that existed at the time this decision was rendered (between the Ninth Circuit's Salman and the Second Circuit's stricter Newman interpretation) and firmly rejected Spivak's reliance on Newman. By upholding that a 'gift to a trading friend or relative' is a viable theory for establishing personal benefit without requiring a tangible pecuniary quid pro quo, this decision broadens the scope of liability for insider trading, making it easier for the SEC to pursue cases involving close personal relationships. It underscores the importance of intent to benefit the tippee as a key factor in establishing the tipper's breach of duty.
