Securities & Exchange Commission v. Thrasher
2001 WL 303845, 2001 U.S. Dist. LEXIS 3506, 152 F.Supp.2d 291 (2001)
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Rule of Law:
A remote tippee may be held liable for insider trading when there is sufficient circumstantial evidence for a jury to find that the tippee knew or should have known the information was material, nonpublic, and disclosed in breach of a fiduciary duty, even if the tippee does not know the identity of the original insider or the tip contains some inaccuracies.
Facts:
- Hugh Thrasher, an executive vice president at Motel 6, was friends with and financially supported Carl Harris, who was dying of AIDS.
- In early 1990, a French company, Accor, began confidential discussions to acquire Motel 6.
- On May 21, 1990, Thrasher learned of Accor's interest in acquiring Motel 6.
- Thrasher subsequently informed Harris about the potential acquisition, allegedly as a gift of confidential information.
- Harris passed the information to his roommate, Jeffrey Sanker.
- Sanker told Jonathan Hirsh he had inside information about an upcoming tender offer for Motel 6, initially and falsely identifying the source as Harris's father on the Motel 6 board.
- Despite discovering the source's identity was false, Hirsh invested over $220,000 in Motel 6 securities and call options, earning substantial profits after the deal was announced.
- Hirsh paid Sanker $13,500 for the information after his successful trades.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Hugh Thrasher, Jonathan Hirsh, and others.
- The SEC's complaint alleged violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3.
- The SEC filed a Motion for Partial Summary Judgment seeking to establish certain elements of its claims as a matter of law.
- Defendant Jonathan Hirsh filed a Cross-Motion for Summary Judgment, arguing that the SEC could not prove the required elements for an insider trading violation.
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Issue:
Does sufficient circumstantial evidence regarding the materiality of tipped information, a remote tippee's knowledge of its nonpublic nature, and the original insider's breach of fiduciary duty create a genuine issue of material fact sufficient to preclude summary judgment in an insider trading enforcement action?
Opinions:
Majority - Keenan, District Judge.
Yes. Summary judgment for the defendant is precluded because the SEC presented sufficient circumstantial evidence to create genuine issues of material fact for a jury regarding each element of the insider trading claim. The court reasoned that even if some details of the tip were inaccurate, the core information about a pending merger at a substantial premium could be found material by a jury, especially under the probability/magnitude balancing test from Basic Inc. v. Levinson. Hirsh's own actions—investing a large sum and paying his tipper—are strong circumstantial evidence that he considered the information material. Furthermore, a jury could find Hirsh possessed the requisite scienter because his tipper, Sanker, explicitly told him the information was 'privileged' and from an 'inside source.' Under the 'knowing possession' standard, it is irrelevant whether Hirsh also traded on public rumors; possession of the information is sufficient. Finally, a jury could reasonably infer that Thrasher's disclosure to his friend Harris was a 'gift' of information intended for personal benefit, thus constituting a breach of fiduciary duty under Dirks v. SEC. A remote tippee like Hirsh need not know the specific identity of the insider to know or have reason to know that the information was disclosed improperly.
Analysis:
This case underscores the high bar defendants face in seeking summary judgment in insider trading cases involving remote tippees. The court's decision affirms that strong circumstantial evidence is sufficient to send a case to a jury, even when the chain of information is long and the credibility of intermediaries is questionable. It reinforces the Second Circuit's 'knowing possession' standard, making it difficult for defendants to argue they relied on public information if they were also in possession of a material nonpublic tip. The ruling highlights that questions of materiality, scienter, and the tipper's intent are classic factual inquiries reserved for the jury, not matters of law to be decided by a judge before trial.
